Lennox International, Inc. (LII)

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Lennox International, Inc. (LII)

Q3 2008 Earnings Call

October 22, 2008, 10.30 am ET


Todd Bluedorn - Chief Executive Officer

Susan Carter - Chief Financial Officer

Steve Harrison - Vice President of Investor Relations


Jeff Hammond - KeyBanc Capital Markets

Curt Woodworth - JP Morgan

Keith Hughes - Suntrust

Michael Coleman - Sterne, Agee



Ladies and gentleman, thank you for standing by. Welcome to the Lennox International Q3 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 like to turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead.

Steve Harrison - Vice President of Investor Relations

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the third quarter of 2008. I am here today with Todd Bluedorn, our CEO, and Sue Carter, our CFO. Todd will review highlights for the quarter 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'd 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 forward-looking statements are subject to risks and uncertainties. A list of these risks and uncertainties is included in our recent 10-K filing with the SEC, and includes the impact of higher raw material prices, our ability to implement price increases for our products and services, the impact of unfavorable weather and the possibility that a decline in new construction activity will depress the demand for our products and services. These risks and uncertainties could cause our actual results to differ materially from those we express to you today.

Before I turn the call over to Todd, I would also like to announce the date of our Annual Investment Community Meeting for analyst and institutional investors. It will be held the morning of December 17 in New York. Invitations in more details will follow. The event will also be webcast.

Now let me turn the call over to CEO, Todd Bluedorn.

Todd Bluedorn - Chief Executive Officer

Thanks Steve. Good morning and thank you for joining us. Strong operational execution by Lennox offset market headwinds in the third quarter. The company had strong cash generation and solid earnings performance, including record EPS on both an adjusted and GAAP basis. Total company revenue for the quarter was 974 million, 5% below the prior year. EBIT loss was 10.5%, up 30 basis points. EPS on an adjusted basis was $1.10, up 17%. On a GAAP basis, EPS was $0.96, up 9%. Revenue was impacted by 9% decline in volume. Although volume was down across all our segments in the third quarter, we began to see the benefit of our mid year price increases across every segment.

Lennox continues to win in the marketplace with its innovative and high energy efficiency products. Let me give you a few examples. In residential, our Lennox high efficiency products of 14C and above were up about 10 percentage points from year ago to approximately 30% of shipments. We have also announced an innovative product called SunSource, which is the industry’s first integrated solar assisted residential heating and cooling system. This product will be available to the public in the first quarter of 2009.

In our commercial business, I am pleased to say that we continue to win major new national accounts. In the first nine months of this year, we have signed up 23 new national accounts. This is on top of the 29 we signed up last year for a total of 52 in less than two years. The energy efficiency gain from our new unitary roof top systems such a Strategos is a major reason for this success that presents a compelling opportunity for these new customers.

Like our commercial business, our refrigeration business continues to gain additional shares in the market as well. So far in 2008, we have won significant new business with such customers as Albertsons’s, Harris Teeter, Publix and Tesco Fresh And Easy.

Let me now turn to our cost reduction and operational efficiency initiatives. They are all on track. Salary headcount is down 6% from year ago. Corporate expenses are down more than 40% year to date. Overall, SG&A adjusted for FX is down 5% year to date. In the September quarter, we began producing for sale out of our Mexico facility. The ramp up has gone exceedingly well and we are on schedule.

We have now completed the transfer of two refrigeration manufacturing lines from our Australian facility to our China facility and our plans are proceeding on schedule there. Regarding our move of refrigeration product lines from Danville to Tipton, we approximately halfway through the move and are on cost and schedule.

Among our new rationalization initiatives, we are in the process of closing refrigeration manufacturing facility near Madrid by the end of 2008 and will service the Spanish market from our one remaining facility near Barcelona. In commercial HVAC, we are in a process of optimizing our Northern European structure to reduce costs and increase the focus on our customers. Back office operations are being centralized into one location in the Netherlands while sales and service operations remain close to the customer in each of the respective countries. Total annualized savings from these two new activities is expected to be more than $4 million starting at 2009. Our strategic initiatives to rationalize our operations and manufacturing footprint around the world continues, where possible we are pulling in future activities.

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