Lennox International, Inc. (LII)

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Lennox International, Inc. (LII)

Q4 2012 Results Earnings Call

February 5, 2013 9:30 AM ET

Executives

Steve Harrison - Vice President, Investor Relations

Todd Bluedorn - Chairman and CEO

Joe Reitmeier - Chief Financial Officer

Analysts

Sanjay Shrestha - Lazard Capital Markets

Keith Hughes - SunTrust

Jeff Hammond - KeyBanc Capital Market

Drew Pierson - J.P. Morgan

Rich Kwas - Wells Fargo Securities

Jane Zhao - Morgan Stanley

Rob Wertheimer - Vertical Research Partners

Glenn Wortman - Sidoti & Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Fourth Quarter 2012 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.

Steve Harrison

Good morning. Thank you for joining us for this review of Lennox International’s financial performance for the fourth quarter and full year of 2012. I’m here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier. Todd will review key points for the quarter and year, and Joe will take you through the company’s financial performance and outlook.

Financial results discussed today have been adjusted for discontinued operations related to the company’s previously announced plans to divest the Service Experts business. In the earnings release we issued this morning, we have included the necessary reconciliation for the financial metrics that will be discussed to GAAP measure.

You can find a direct link to the webcast of today’s conference call on our 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 understand 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 risks and uncertainties, see Lennox International’s publicly available filings with the SEC. Lennox disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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

Todd Bluedorn

Thanks Steve. Good morning, everyone, and thanks for joining us. 2012 was year of strong earnings growth and cash generation for the corporation. We continue to make key strategic investments position us for strong performance in 2013 and beyond.

And the uneven market conditions of 2012, the company grew revenue 5% at constant currency. Adjusted EPS from continuing operations was up 20% to $2.70. GAAP EPS from continuing operations was up 26% to $2.63.

The company’s performance in 2012 was led by our residential business, with revenue up 9% and profit up 17%. Residential margins expanded 50 basis points from year to 7.5%.

With North America residential HVAC market, shipments up 2% in 2012, we clearly gained share with strong double-digit growth for the year. We made significant gains in replacement market, while also capitalizing on recovery of the residential new construction market in 2012.

Equipment revenue from residential new construction was up nearly 30% for the year. And our commercial businesses, we had strong operational performance in the face of flat market conditions in 2012.

In refrigeration revenue was flat at constant currency with profit up 6%. Refrigeration margin expanded 80 basis points to 10.4% for the year. Commercial HVAC equipment and services, revenue was up 3% at constant currency, with profit up 14%, commercial margin was up 140 basis points to a record 12.7% for the year.

Turning to the fourth quarter, an overarching comment to make is that momentum continued with revenue growth and strong operational performance across all our businesses, while profit was impacted by higher incentive compensation as planned and previously discussed.

The higher incentive compensation stems from performance targets achieved or exceeded in 2012, compared to 2011 when incentive compensation was significantly lower. The impact was $23 million for 2012 overall and about two-thirds of that impact was in fourth quarter alone.

Company revenue was up 6% at both actual and constant currency. Adjusted EPS from continuing operations was $0.56, compared to $0.55 in the prior year quarter. GAAP EPS from continuing operation was $0.52, compared to $0.56 in the fourth quarter a year ago. Total segment margin was 6.2%, compared to a 7% in the prior year.

At constant currency, residential revenue was up 9%, commercial revenue was up 5% and refrigeration revenue was up 2%.

Residential we continue to capitalize on growth in residential new construction with equipment revenue up 30% for the fourth quarter. Replacement equipment revenue was up low single digits in the quarter.

Commercial growth was primarily driven by non-national account business, while we continue to see national account orders pushed down into 2013 due to the political and economic uncertainties in the fourth quarter. This business appears to be solidifying in the first half of 2013.

I’d also like to note that our commercial equipment business signed 29 new national accounts in 2012, tying the record year of 2007. This is an indication of national account customers continue to select Lennox for leading high energy efficiency rooftops, advanced controls, outstanding distribution and delivery, and customer, support and service.

In refrigeration for the fourth quarter, revenue growth was led by greater than 20% growth in Asia-Pacific and high single-digit growth in South America from the successes we are seeing with our growth -- growth initiatives in both these regions.

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