Lennox International, Inc. (LII)

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Lennox International Inc. (LII)

Q4 2011 Earnings Call

February 2, 2012 9:30 a.m. ET

Executives

Steve Harrison – VP, IR

Todd Bluedorn – CEO

Bob Hau – CFO

Analysts

Jeffrey Hammond – KeyBanc Capital Markets

Adam Samuelson – Goldman Sachs

Josh Pokrzywinski – MKM Partners

Robert Barry – UBS

Adam Samuelson – Goldman Sachs

Stephen Tusa – JPMorgan

Nigel Coe - Morgan Stanley

Keith Hughes – SunTrust Robinson Humphrey

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Q4 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 conference is being recorded.

I’d 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 2011. I’m here today with Todd Bluedorn, CEO, and Bob Hau, CFO. Todd will review the key points for the quarter and year, 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 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 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 to call over to CEO Todd Bluedorn.

Todd Bluedorn

Thanks Steve. Good morning and thank you for joining us. Let me touch on several key points and Bob will take you through the financial details for the quarter and the year.

2011 marked the second consecutive year of growth in unit shipments in North America for the HVAC industry but a significant mix down and fewer system sales in the residential market. Commodity headwinds running ahead of pricing increases, and the fragile customer macro-economic environment weighed on overall financial results for the year.

We aggressively reduced the company’s cost structure further in 2011, while still continuing to make transformational investments as we position the company for improved growth and profitability in challenging markets. We continued to ramp up our Mexico manufacturing facility, source more components from Asia, and engineered our costs to reduce our product platforms, moved further into material substitution, including aluminum for copper, and leveraged R&D resources with our new India technology center, to mention a few examples.

We also focused on driving shareholder value with the disciplined use of free cash flow for dividends, share repurchases and acquisitions, while maintaining a strong balance sheet. For the company overall in 2011, revenue was up 7%. Excluding the impact of the Kysor/Warren acquisition, revenue was flat at actual currency and down 2% at constant currency.

Our residential equipment and service businesses faced a tough year-over-year comparison to 2011. The residential market was down in dollar value from a significantly lower mix of business without the $1500 U.S. tax credit for high efficiency equipment in place and with the re-emergence of minimum efficiency condensing units based on the old R-22 refrigerant. Both of these developments contributed to a decline in furnace shipments and fewer complete HVAC system sales.

Consequently, our residential revenue was down 5% and service experts revenue was down 10%. Segment margins for the year were down 370 basis points in residential to 5.26% and down 300 basis points in service experts to slightly above breakeven.

In our commercial and refrigeration businesses, we had a strong year. At constant currency, commercial revenue was up 10% and refrigeration revenue was 5% on an organic basis adjusted for Kysor/Warren and the strategic exit of the third party coil business in Australia.

Commercial margin increased 20 basis points to 11.4%. Refrigeration margin , excluding the impact of the Kysor/Warren acquisition and the first year of ownership, was up 170 basis points to 12.8%. For the year, adjusted EPS from continuing operations was down 15% and GAAP EPS was down 21%.

Turning to the fourth quarter. Company revenue was down 1%. Excluding Kysor/Warren, the revenue was down 7% with a neutral currency impact. Total segment profit margin was 5.5%, down 90 basis points. Adjusted EPS was down 7% in the fourth quarter versus a year ago. Our GAAP EPS was down 37%.

GAAP EPS was impacted by $9.5 million charge for asset and goodwill impairment in our Hearth business. Hearth is a business within our residential segment that is highly tied to new construction. With single family homes starts at the lowest on record in 2011 and the business in a loss position, we had impairments in the fourth quarter. Moving forward, we are pursuing strategic alternatives for Hearth.

The business, which includes fireplace, systos (ph) and ventilation equipment, is considered non-core to Lennox International. Hearth was about 6% of residential segment revenue in 2011, or about 2.5% of total company revenue.

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