Lennox International, Inc. (LII)

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Lennox International (LII)

Q3 2013 Earnings Call

October 21, 2013 9:30 am ET

Executives

Steve L. Harrison - Vice President of Investor Relations

Todd M. Bluedorn - Chairman and Chief Executive Officer

Joseph William Reitmeier - Chief Financial Officer and Executive Vice President

Analysts

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Robert Wertheimer - Vertical Research Partners, LLC

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

James Picariello - KeyBanc Capital Markets Inc., Research Division

Samuel H. Eisner - Goldman Sachs Group Inc., Research Division

Aditya Satghare - Lazard Capital Markets LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Q3 2013 Earnings Call. [Operator Instructions] And as a reminder, today's call is being recorded.

With that being said, I'll turn the conference over to the Vice President of Investor Relations, Mr. Steve Harrison. Please go ahead, sir.

Steve L. Harrison

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the third quarter of 2013. I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier. Todd will review key points for the quarter, and Joe will take you through the company's financial performance and outlook.

Financial results in prior periods have been revised to reflect sold businesses in discontinued operations. 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 of 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.

We 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 publicly available filings with the SEC. The company 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. It will be the morning of Wednesday, December 18, in New York City. Please mark your calendars. Invitations and more details will follow. The event will also be webcast.

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

Todd M. Bluedorn

Thanks, Steve. Good morning, everyone, and thanks for joining us. The company's strong business momentum continued in the third quarter with 8% revenue growth at constant currency and earnings per share from continuing operations up 34% from prior year quarter. Both adjusted and GAAP EPS from continuing operations were $1.30, which set a new record for GAAP EPS for Lennox International. Total segment profit margin expanded 190 basis points and also set a new record at 11.9%.

The company's growth continue to be led by our Residential business, but we also saw an acceleration in our Commercial business in the third quarter, and Residential revenue is up 13% at constant currency and segment profit grew 51%. New construction revenue was up high-single digits. And for the second quarter in a row, we were pleased to see Replacement business grow even faster at 13%. As most of you know, Replacement business contributes more than 75% of Residential segment revenue and has a richer product mix than new construction.

For a third quarter in a row, we saw a step up in 14-plus year shipments from the prior year quarter. These high-efficiency systems were 38% of Residential cooling product shipments in the third quarter, up 3 points from the third quarter a year ago. Within minimum efficiency 13 SEER equipment shipments, low-end R-22 equipment continued to trend down from a year ago. Replacement revenue growth was strong in the third quarter despite cooling degree days being down a double-digit percentage from last year in the key summer months of July and August.

We continue to see some of the pent-up demand, built up over the last year, start to flow back and contribute to robust Residential growth. However, I would note that pent-up demand relates to cooling products as a result of elevated repair rates on compressor bearing units over recent years. Gas furnaces are typically replaced and not repaired. So we do not expect to see the same impact from pent-up demand in the winter months as we have seen in the summer months. What we do expect to see through the winter, however, is ongoing market share gains as we continue to win dealers over to Lennox with our expanded distribution network, innovative HVAC systems and controls, and strong dealer support. The fourth quarter is off to a solid start.

In our Commercial business, revenue is up 8% at constant currency and profit was up 21%. Segment margin had a record 16.4%. In North America, revenue was up double digits at constant currency in the third quarter. As expected, we realized a pickup in National Account equipment revenue growth on the strength of new National Account business. We continue to win in the marketplace with 29 new National Accounts last year and 15 more so far this year, including 9 in the third quarter. Our Lennox National Account Services business continue to see a specially strong growth as we leverage our National Account relationships.

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