Ladies and gentleman, thank you for standing by. Welcome to the Lennox International Q4 2008 Earnings Conference Call. At the request of your host, all lines are in a listen-only mode. There will be a question-and-answer session at the end of the presentation. As a reminder, this call is being recorded. I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead sir.

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full year 2008. I am here today with Todd Bluedorn, our CEO, and Sue Carter, our CFO. Todd will review highlights for the quarter and year and Sue will take you through the company's financial performance. In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed to GAAP measures. You can find a direct link to the webcast of today's conference call on our corporate website at www.lennoxinternational.com. We will archive the webcast on that site and make it available for replay. I would like to remind everyone that in the course of this call to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risk and uncertainties see Lennox Internationals publicly available filings with the SEC. Lennox disclaims any intention or obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. Now let me turn the call over to CEO, Todd Bluedorn.

Thanks Steve. Good morning and thank you all for joining us. 2008 was year of strong operational execution by Lennox in a market environment of unprecedented challenges. On the market side, it was the third straight year of double-digit declines in residential as new construction dropped due to historic lows and replacement market softened. We also start a commercial and refrigeration market soften significantly during second half of the year. Against this back drop Lennox executed on significant manufacturing rationalization, and cost reduction initiatives throughout 2008. Looking first at our manufacturing; we opened and ramped up our new low cost factory in Mexico. We concluded a consolidation on our hearth business with the closure of Lynwood, California facility and a transfer of manufacturing to our Union City, Tennessee facility. We executed on the consolidation of our Danville, Illinois refrigeration manufacturing into our Tifton, Georgia operations. We are consolidating manufacturing and other operations for both HVAC and refrigeration in Europe. And we continue with the move of our Australian refrigeration production to China. In December we also announced plans to exit seven unprofitable service centers in our Service Experts business. Looking at expense reductions, we reduced salaried headcount by 7%, SG&A was down 7% at constant currency and corporate expenses where lower by 37%. Reflected in our 2008 financial results is the market weakness with offsets from our manufacturing consolidations and cost reduction initiatives. Lennox was also able to improve product mix and pricing overall for 2008. For the full year, total company revenue was $35 billion; down 7%. At constant currency revenue was down 8%. Adjusted EBIT was $265 million was down 5%, adjusted EBIT margin was up 10 basis point to 7.6%. Adjusted EPS from continuing operations was $2.71 for the full year, up 8% from year ago. Cash…

Thank you, Todd. Good morning everyone. I'll provide some additional commentary on the business segments for the quarter and full year, starting with residential heating and cooling. In the fourth quarter revenue from our residential heating and cooling business was $299 million down 15%. While volume was down 22%, price was up 3% and mix improved 5%. Currency had a 2% negative impact. The volume decline compared to a year ago was driven by a significant drop in new construction and software replacement business, as consumers remained cautious in the economic environment. Segment profit was $27 million, down 12% with a margin of 9.1% up 30 basis points from the fourth quarter a year ago. For the full year sales on the residential segment were $1.5 billion, down 11% with and without currency impact. Volume was down 16%, mix was up 4% and price with up 2%. Segment profit was $146 million down 16%, with a margin of 9.8% down 60 basis points. As Todd mentioned the business continues to improve factory efficiencies and further reduces cost structure as 2009 looks to be the four straight year of a down market in residential. Turning to our commercial heating and cooling business; in the fourth quarter revenue for the commercial business was $189 million down 16%, volume was down 17%, product mix was up 2% and price with up 3%. Currency had a negative 5% impact. Segment profit was $20 million down 17% with a margin of 10.6%, down 30 basis points from the fourth quarter a year ago. Our U.S. commercial HVAC revenue was down mid-single digits at constant currency and the business was in a slight loss position for the quarter. Aggressive restructuring activities continue in Europe. In North America commercial HVAC volume was down due to the overall…

(Operator Instructions) And first on the line is Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hi. Good morning.

Hi Jeff. How are you?

Doing great. Just wanted to dig in on the guidance, great news on change from the December meeting. Obviously there are lot of challenges out in the market place. Can you give us a sense of any bias within the range based on what you are seeing near term either all in or within any of the specific businesses where you might see some upside or down side within some of the specifics?

I'll give a little bit a color. The markets are tough right now. When our daily sales in December and January at constant currency were down mid-teens, and as you suggested there's lots of moving pieces right now in the economy and in the end markets. Looking at full year we -- as I said during the script, we expect North America residential and commercial markets be down the high single digits to low double-digits. We expect both HVAC and refrigeration Europe, to be down in the low double digits. Now at the same time we continue to realize on a year-over-year basis price and mix and we continue to win in the market place and our commercial business and our refrigeration businesses, with share gains with new products. On the cost side you can see with the Blackville closure, as another example that we're continuing to aggressively take out factory costs, overhead and SG&A in response to the softening markets.

Okay and then I know 1Q is -- and I think you pointed to a tougher first half but I know 1Q is particularly light from a seasonality standpoint, do you expect to be profitable in the first quarter?

We don't give quarterly guidance, but I think you've got the gist to what I said during the script, which is both the combination of the markets being extremely difficult, the year-over-year comp on the markets will get easier as the year goes along. Given that the 20 million of material cost reduction and the 20 million of commodities as I suggested are backend loaded, and given the thinness on a normal year of what our profitability is in the first quarter; first quarters is going to be challenging.

Okay. Did you quantify what your commercial replacement business was up in the year? I think you just -- you had stated that it was up for '08?

We didn't put a percentage on it, we just said on an absolute basis it was up year-over-year and as you know in a unitary (ph) commercial market that was down 10, 11%, all replacement sales were actually up.

Okay. And then down -- I guess within the context of your commercial guidance, I mean how are you thinking about commercial replacements specifically?

There is a lot of uncertainty on the commercial market out there as you well know. When we think about our national account business where we have greater visibility, there are winners and losers and luckily for us one of our largest individual customer's is a winner and so we're optimistic about business with him for 2009. On the broader not in national account, not in retail segment it's a challenging marketplace right now. I think our advantage is that, we have traditionally had a lower replacement share than others. That we have been focused on it both with product that we have launched with distribution that we've built and focus on our sales force. So I think there's an opportunity for us in '09 to continue to gain share and replacement as we did in '08. So, even though the market continues to be challenging, we continue to be focused on replacement business.

Let me just ask in another way; have you seen any kind of paradigm shift on the commercial replacement side near term or people are deferring or is that kind of normal course of business?

Paradigm shift is maybe too dramatic. What we have seen may be is what would expect, which is those retailers who are under the most financial pressure are making short term trade off's. And so we've had some of our national account customers either extend or defer scheduled replacements and so you are clearly seeing some of that in the marketplace, which is what you'd expect to see. At the same time you see other players who are winning in the marketplace and understand the benefits of the P&L savings to them of upgrading to energy efficiency units and hopefully with incentives from the government, we see some of our customers accelerating some of the replacement programs. So it's a mixed bag, but there's clearly pressure -- downward pressure on some of our national account customers who aren't doing well in the market place.

Okay thanks I'll get back in queue.

Thanks Jeff.

(Operator Instructions). And we'll go to the line of Glenn Worthman (ph) Sidoti, please go ahead.

Yeah, good morning everyone.

Hi Glenn, how are you?

Doing pretty good. Can you just talk a little bit more about the potential benefits on the pending infrastructure or stimulus package?

Yeah you know, there's lots of moving pieces in the economy there might even be more moving pieces in any legislation coming out of DC. We think with our product line and or focus on the high end and energy efficiency we're well positioned for legislation that in sense incentivises end use markets like schools, like hospitals that's our product lines. So, we think we're well positioned to take some incremental opportunity if the things are passed.

And then just on the residential side, do you see a -- just a move down to some of your less expensive perhaps lower margin product as a risk given the tight credit markets and perhaps the cash poor stage of many households?

The phenomenon that we have been seeing and we've been seeing it for a year and half -- two years in our residential business; other -- as you all know unlike other industries we've been in, this is going to be our fourth year of our market being down double-digits in residential, so we have been here for a while. I mean what we are seeing is several effects, we have seen a move towards repair rather than replacement, as people make cash flow decisions, rather than economic decisions as they horde money and I think that continues. We also have seen a bifurcation of our business which is, we have certainly seen a move from the middle down as customers are cost conscious. At the same time we have seen a move up in our product line and you hear us talk about statistics of percentage of sales that are above 13 SEER, as we see customers who understand the energy efficiency story and wanted to upgrade to those product lines. So we've seen both effects going on in the marketplace right now.

Okay alright, thank you for your time.

Thanks

And with, we have do, we've a follow up from Jeff Hammond. Please go ahead.

Hi. Just a couple of things that I caught on the call, but I wanted some clarification, Sue could you run through the vacation accrual dynamic again and how that impacted earnings?

Sure. Sure, what we did is as we went through and rationalized our benefit policies the previous policy on vacation was that as of 12/31 our employees earn their vacation for the upcoming year. So what we've done is we've made a change to that which allows the employees to earn their vacation throughout the year in which we are in. So, the impact of that was a $9.1 million after-tax benefit to the company which was then allocated to all of the business based on the headcount of those businesses. So its in their segment result.

And that hit all in the fourth quarter?

It did hit all in the fourth quarter.

Okay. And it would be ratably by...?

Okay so.

But on the percentage of sales roughly?

I would say if you looked at the business, the two biggest businesses in terms of headcount for employees are going to be the residential and commercial business and then smaller amounts going to Service Expert and refrigeration. This is U.S. based employees where its applicable and then about 10% of its in corporate.

Okay. And then as we look to '09 you capture those -- is it just -- you get cost savings from this change or is and its rolled out ratably or what's the impact as we look at '09 from this change?

I think the impact is that as you look at '09 your employees earn the vacation, so its sort of a pace you go. They earn it as they go through each month. And so really from a cost perspective the only time you are truly going to have in your savings on a go forward basis is if someone leaves the company and you are not having that vacation expense. So it was more of a one time impact because of the 12/31 date and accruing for the full year.

Okay, thanks.

And we have question from line of Judy Marek (ph) with SunTrust, please go ahead.

Hi, thanks this is Judy for KTS (ph) SunTrust.

Hi, Judy, how are you?

Good, thanks. You've done a great job on controlling cost with corporate expense being down over the years. It seems like, the result came in 2008 below your guidance about $60 million and that's your guidance for 2009. Is that kind of the a run rate we should look at or it there a chance for more benefit like we saw this year or it'll be a little below that or flat year-over-year like this year-- like your 2008 result?

That, I would think about it is thank god (ph), we put the $60 million of guidance out there for 2009 because that's our best estimate of what that cost is going to be. When you look at 2008 and the results, there was obviously the budgetary controls that I talked about, the decreased spending, but there was also the piece that was compensation related with the annual and the long term incentives. As you go into an upcoming year you are going to reload some of those incentives particularly that one time on an annual basis. And that gives you the -- really the increase from the $54 million to the $60 million and so as, we think about it the $60 million is still 30% below what 2007 was, but having said all of that we're obviously always looking at our costs and for opportunities to reduce those costs.

Okay. Great thank you.

And we've question from line of Michael Coleman with Sterne, Agee. Please go ahead.

Good morning.

Hey Michael.

The Blackville facility closure, does that change, alter; accelerate your thinking in terms of the savings for the Mexico facility?

I think what it does Michael, is the savings that I talked about back in December of -- for our Mexico facility are as they are and these are incremental savings in addition to that.

Yeah. I guess, what I am looking at is would the savings for the Mexico facility though be even greater because of the Blackville savings. That is greater volume leverage that you are going to get from Mexico, relative to what previously might have been expected, with the inclusion of the Blackville volume?

Right. I understand the question. And again I'll answer it two ways; one is just mathematically for modeling you combine the two that's your savings. Now artificially we have to divide in terms of how we talk about it so yes, part of the 5 million annualized savings that we get from the Blackville closure is driven by the fact that's its going to be produced in Mexico. Yes that is true. But that savings was not in what we gave for guidance for the Mexico factory back in December.

Okay.

Let me give you non-financial answer. I think our announcement of Blackville and the movement of the production down to Mexico, underlies an operational truth, which is we have been extremely success in our ramp up and production in our Mexico facility. We started production on our product for sales in third quarter, we are now finishing up our fourth product line move into that facility from our previously announced movement to Mexico. Blackville will continue to put more volume in. As we have talked about the Mexico facility from the beginning, we've always talked about it as, we are doing this not for one or two product lines, this is to build our low cost assembly facility for the North America market and the Blackville announcement I think is just a validation that we're doing extremely well operationally in Mexico.

Okay, good. So following or post Blackville, how many facilities will you have producing residential equipment?

Our residential factories in North America at that point of time for the HVAC market will be three; so we'll be going from four facilities to three. We will continue to have Marshalltown, we'll obviously have our Mexican facility and we have a facility in Orangeburg, South Carolina that produces product for our allied businesses.

And that's a new facility?

No. That's an existing facility, it was acquired years ago through acquisitions. And as we announced in our Blackville announcement; some other product in Blackville move into at Orangeburg facility and the balance of the product is moving to the Mexico facility.

Okay. Good. The some source announcement on the product and so forth, I was wondering if you could kind of run through just some basics on that in terms of what the actual cost is to the consumer on a product like that. What the availability in terms of tax credits or rebates, in terms of incentives to the consumer, whether or not that accounts for utilities in there in renewable portfolio standards. Do you have any kind of overview for that?

Yeah, I one is in terms of the tax rebates state-by-state municipality-by-municipality different. And -- point one. Point two is sort of broadly speaking on the economics. About $2000 more on an average system for having the SunSource solar panels, and we think depending on the region it is economically a viable option and so what we found as you would expect, in places like California where the rebates are the greatest, we found we've heard lots of interest in this product. At the same time, SunSource using on the materially changed our resolve. I think SunSource reflects our focus as an industry innovator, our focus on having products that allows us to get the best dealers in the industry who want to be partnered with Lennox, and I think that's really the focus of SunSource.

Okay, great thank you.

And with I'll turn the conference over to Todd Bluedorn, please go ahead.

Thanks John. let me sum up Lennox had strong operational execution in 2008 and delivered solid results in the face of challenging and uncertain markets. 2009 end markets will be challenging. But we are focused on continuing to win in the marketplace. Our cost reduction and operational efficiency programs are on track, and we are accelerating activities where possible. All of us at Lennox remain focused on execution in 2009. Thank you all for joining us.

Ladies and gentlemen that does conclude your conference for today, thank you for your participation you may now disconnect