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Lennox International, Inc. (LII)
Q3 2009 Earnings Call
October 21, 2009 10:30 am ET
Steve Harrison – Vice President of Investor Relations
Todd M. Bluedorn – Chief Executive Officer & Director
Robert W. Hau – Chief Financial Officer & Executive Vice President
Jeffrey Hammond – KeyBanc Capital Markets
Stephen Tusa – JP Morgan
Robert Wertheimer – Morgan Stanley
Keith Hughes – SunTrust Robinson Humphrey
Glenn Wortman – Sidoti & Company
Previous Statements by LII
» Lennox International Q4 2008 Earnings Call Transcript
» Lennox International, Inc. F3Q08 (Qtr End 09/30/08) Earnings Call Transcript
» Lennox International, Inc. Q1 2008 Earnings Call Transcript
Welcome to the Lennox International Q3 2009 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.
Thank you for joining us for this review of Lennox International’s financial performance for the third quarter of 2009. I’m here today with Todd Bluedorn, CEO and Bob Hau, CFO. Todd will review key points on the quarter and Bob will take you through the earnings financial performance. In the earnings release we issued this morning we have included the necessary reconciliation to 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 risks and uncertainties see Lennox International’s publically 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.
Before I turn the call over to Todd I would like to announce the date of our annual investment community meeting will be held the morning of December 16th in New York. Please mark your calendars. Invitations and more details will follow. The event will also be webcast. Now, let me turn the call over to CEO Todd Bluedorn.
Todd M. Bluedorn
Before I begin I’d like to introduce Bob Hau who is our new CFO here at Lennox. Bob joins us this month after 22 years at Allied Signal and Honeywell, most recently as CFO for Honeywell’s $13 billion revenue aerospace group. Bob is off to a great start and we’re very happy to have him here.
Robert W. Hau
I’m glad to be here and I’m looking forward to working with Todd and the rest of the leadership team here at Lennox. I also look forward to working with you in the investment community and I’ll have a chance to meet many of you in person during upcoming road shows and conferences as well as the analyst day in December.
Todd M. Bluedorn
Let’s turn to the third quarter and look at our operational and financial results. End markets remain difficult in the third quarter as expected but strong execution enabled Lennox to generate a record $118 million in free cash flow, up 18% from a year ago. For the first nine months of the year, free cash flow is up more than 75%. Gross margins increased for the second straight quarter up 170 basis points year-over-year in the third quarter to 29.8%. Gross margin improvement was driven by lower component costs from our global sourcing initiative, savings from manufacturing rationalization and lower commodity costs. The cost reduction actions we have taken over the last year are providing clear benefits and additional restructuring activities are underway as end market conditions remain challenging.
Let’s talk about the residential market. Looking at AHRI data for North America residential, unit shipments in the third quarter were down 9% year-over-year compared to a 13% decline in the second quarter. In replacement business we estimate year-over-year decline in the mid single digits for the industry in the third quarter. Cool weather in July was offset by a relatively warm August and September. Consumers remain cautious in this economic environment.
On the new construction side, the year-over-year rate declines have continued to slow. The National Association of Home Builders estimated single family housing starts to be down 20% year-over-year in the third quarter compared to the 37% year-over-year decline in the second quarter. On a seasonally adjusted basis, single family housing starts are up six out of the last seven months. While we are optimistic that residential new construction has bottomed, we remain cautious due to the expiration at the end of November of the government tax credit up to $8,000 for new home buyers.
In commercial, AHRI industry data for North America commercial unitary market shows unit shipments down 30% year-over-year in the third quarter. We saw similar dynamics in the European HVAC market. In refrigeration we saw the rate of decline in refrigeration slow driven by recovery in [inaudible] Asia and some stabilization in the North American market.
Looking at our financial results in this market environment, overall revenue was $750 million down 20% in constant currency and down 22% in actual currency. Adjusted earnings per share from continuing operations was $0.72 compared to $1.10 in the record third quarter a year ago. On a GAAP basis earnings per share from continuing operations was $0.59 versus $0.96 in the third quarter last year.