Lennox International, Inc. (LII)

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Lennox International, Inc. (LII)

Q4 2008 Earnings Call

February 05, 2009 10:30 AM ET

Executives

Steve Harrison - Vice President of Investor Relations

Todd M. Bluedorn - Chief Executive Officer

Susan K. Carter - Chief Financial Officer

Analysts

Jeffrey Hammond - Keybanc Capital Markets

Michael Coleman - Sterne Agee

Presentation

Operator

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.

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 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.

Todd M. 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 generation for the year was strong. Cash from operations was a 183 million, capital spending was 62 million; free cash flow was a 121 million for the year which at 99% of net income was inline with our business model goal for free cash flow to be the same levels net income.

The company returned 344 million to shareholders in 2008; to share repurchases of $331 million and dividend payments of approximately $33 million. Lennox has $285 million remaining on an existing $300 million share repurchase program. The program has no set end date and is available to be used on an opportunistic basis. Our balance sheet remained strong with debt to EBITDA ratio of 1.3, well within our target range of 1 to 2. We are well positioned with our balance sheet to sustain and enhance our premium position.

Now turning to the fourth quarter results. Revenues for Lennox were 746 million down 15% or down 10% at constant currency. Adjusted EBIT margin was up 20 basis points to 6.7%. Adjusted earnings per share from continuing operations was $0.52, down from $0.55 in the year ago quarter. On a GAAP basis earnings per share from continuing operations were $0.21, down from $0.59 in the year ago quarter, on an impairment of equity investment and the warranty program gain in the fourth quarter last year.

Despite a difficult environment in 2008, and our strong focus on cost reduction rationalizing operations, Lennox continue to make transformational investments and innovate. In residential Lennox continue to enhance its premium position in the market. Our mix of Lennox High Efficiency products of 14 SEER and above grew more than 10 points from the fourth quarter a year ago.

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