Lennox International, Inc. (LII)

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Lennox International, Inc. (LII)

Q1 FY08 Earnings call

April 23, 2008, 10:30 AM ET

Executives

Karen Fugate - VP

Todd M. Bluedorn - CEO

Susan K. Carter - CFO

Analysts

Jeffrey Hammond - KeyBanc Capital Markets

Michael Coleman - Sterne, Agee & Leach

Presentation

Operator

Ladies and gentleman thank you for standing by and welcome to the Lennox International Q1 2008 Earnings Conference Call. At the request of the 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 like to turn the conference over to Karen Fugate, Vice President of Investor Relations. Please go ahead.

Karen Fugate - Vice President

Good morning. Thank you for joining us for a review of Lennox International's financial performance for the first quarter of 2008. I am here today with Todd Bluedorn, our CEO, and Sue Carter, our CFO. Todd will review highlights for the quarter and Sue will take you through the company's financial performance.

In the earnings release we issued this morning, we have included the necessary reconciliations, the financial metrics that will be discussed to generally accepted accounting principle measures. You can find a direct link to the webcast of today's conference call on our corporate website at www.lennoxinternational.com, will archive to website on the site and make it available for replay.

I'd also 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 forward-looking statements are subject to risks and uncertainties. A list of this risks and uncertainties is included in our recent 10-K filing with the SEC, includes the impact of higher raw material prices, our ability to implement price increases for our products and services. The impact of unfavorable weather and a possibility that a decline in new construction activity will depress the demand for our products and services. These risks and uncertainties could cause our actual results to differ materially from those we express to you today.

I will now turn the call over to Todd Bluedorn.

Todd M. Bluedorn - Chief Executive Officer

Thanks Karen. Good morning and thank you for joining us. As we expected, difficult residential new construction in replacement markets challenged our first quarter results. However, disciplined cost reductions, combined with strong performance on our North America Commercial and Refrigeration businesses, helped offset the headwinds.

Total company revenue for the quarter was $767 million, 3% below prior year. EBIT loss was 2%, down 40 basis points. And our earnings per share on an adjusted and GAAP basis were $0.10.

Our focus on cost containment across enterprise remains a priority and is reflected in a 40% reduction in our corporate expenses.

We made progress in our restructuring initiatives launched last year. The refrigeration facility in Danville made significant progress to date. And our refrigeration facility in New Zealand and the heart facility in Linwood were substantially completed in the first quarter. Annual pretax costs savings associated with these closures are expected to yield $10 million annually beginning in 2009.We are not done on right sizing our factory footprint. And you can expect to hear more from us in this area in the future.

Cashes and operations of $33 million is a significant improvement over prior year usage of $75 million. If you recall, due to the seasonal nature of our business, we consumed cash in the first half of the year and generate cash in the back half.

We continue to buyback shares to our 500 million share repurchase program and during the quarter spend $173 million for a program to-date completion of 75%. We now anticipate we will complete the program in the second quarter of 2008, a full quarter ahead of schedule.

Our balance sheet remains strong, with debt of $402 million for debt-to-EBITDA ratio of 1.2. We continue to have significant capacity to utilize our balance sheet strength of expense to sustain our premium position.

Before I turn it over to Sue, I'd like to wrap with our thoughts on the remainder of the year. Given the continued softness in the residential market, we are revising our full year revenue growth assumptions from 2% to 5% to flat to 2%. By accelerating plans to increase operational efficiencies and reduce cost, we believe these volume challenges can be addressed.

We expect to meet our full year earnings expectations and reaffirm our guidance of $2.85 to $3 on an adjusted basis and $2.73 to $2.88 on a GAAP basis.

Now I will turn it over to Sue.

Susan K. Carter - Chief Financial Officer

Thank you Todd. Good morning everyone. I will provide some additional commentary on the business segments for the quarter, starting with Residential Heating and Cooling.

Revenue in our Residential Heating and Cooling business decreased 9% to $329 million. While our volume was down 15%, price was flat and mix improved by 4%. Sales mix to our higher efficiency premium product grew 6% or 6 points sequentially, offsetting some of the volume pressure.

Segment profit was $13 million, down $7 million with a margin of 4%. Contributing to lower segment profit we wrote off customer accounts receivable of $3 million more in the first quarter of 2008 as compared to 2007 due to weakness in the sector and overall U.S. economy. Although the residential new construction and replacement markets continue to soften, the business is aggressively reducing its cost structure.

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