Lennox International, Inc. (LII)

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Lennox International Inc. (LII)

Q2 Earnings Call

July 26, 2011 9:30 am ET

Executives

Steve L. Harrison – Vice President, Investor Relations

Todd M. Bluedorn – Chief Executive Officer

Robert W. Hau – Chief Financial Officer

Analysts

Jeffrey Hammond – KeyBanc Capital Markets

Adam Samuelson – Goldman Sachs

Rich Kwas – Wells Fargo Securities

Keith Hughes – SunTrust Robinson

Joshua Pokrzywinski – MKM Partners LLC

Robert Barry – UBS

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Lennox International Q2, 2011 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’d now like to turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead.

Steve L. Harrison

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the second quarter of 2011. I’m here today with Todd Bluedorn, CEO, and Bob Hau, CFO. Todd will review the key points on the quarter and Bob 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 statements are subject to numerous risk and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risk 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 CEO, Todd Bluedorn.

Todd M. Bluedorn

Good morning and thank you all for joining us. Let me take you through a few key points on the second quarter and our current view on market conditions. And then Bob will discuss the financial results in more detail and the outlook.

As you saw in our earnings release this morning, the second quarter was disappointing for our residential equipment and service businesses, while Commercial and Refrigeration had solid quarters.

Overall, total company revenue quarter was up 7% from the prior year quarter including The Kysor/Warren acquisition. Excluding the acquisition, in a constant currency, revenue was down 2%. EBIT margin was down 230 basis point for the company overall as reported with Kysor/Warren. Margin was impacted by lower volume and mix, higher raw and component commodity cost and a lower favorable annual warranty adjustment in last year. Positive offsets included price productivity initiatives and lower SG&A.

Adjusted EPS from continuing operations was $0.84 versus $0.97 in the second quarter a year ago. GAAP EPS from continuing operations is $0.83 versus $0.86 in the prior year quarter. Looking at the quarter for each businesses let me start with residential. Revenue was down 5% at constant currency and segment margin was down 430 basis points to 8.4%; lots of dynamics in this market.

As you all know, the consumer environment was weak in the quarter with a lot of uncertainty is reflect in the economic data. Jobs remained the major concern and consumer confidence dropped in both May and June. Weather was unfavorable compared to last year with cooling degree days down 8% in May and 9% in June. For the quarter overall, cooling degree days were down in every region except one, the West South Central. In key swing regions in North and East, cooling degree days were down more than 20% for the quarter.

In our residential new construction business, the homebuyer tax credit, this is much of 8,000, not being a place this year had a negative impact. Single-family housing starts saw a strong growth in the first half of 2010 driven by the homebuyer tax credit, were down about 15% in the second quarter of this year.

New construction now only accounts for about a fifth of our residential business. In our residential replacement business, there were several factors negatively impacting our volume and mix, that’s down from the federal tax credit for high efficiency equipment, no longer being available this year at the $1,500 level as well as a shift to R22 drive charge units.

Let me spend a few minutes on these points. In the second quarter this year, we saw far less HVAC system sales especially as the selling season progressed in June. One reason for this to give you a simple example is that last year consumers would buy a 14 share condensing unit and then the qualify for the tax credit by a premium high efficiency furnaces and get the furnace (inaudible) we have price.

This year without the $1,500 tax credit incentive, consumers are more often just replacing their cooling or condensing outdoor unit. This is evident in the mid-teen drops in the industry furnace shipments year-over-year in second quarter.

Another reason is that there is a shift ongoing to R22 drive charge units. Although some consumers are buying an R22 condensing unit there is an alternative to repairing compressor which is what we had hoped. Often times consumers are going the R22 route instead of buying the new R410A cooling equipment with the outdoor condensing unit, the indoor coil and other parts and supplies necessary for the change over to the new refrigerant equipment. R22 was 17% of our cooling product shipments in the second quarter, up from 1% last year.

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