Lennox International, Inc. (LII)

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Lennox International Inc. (LII)

Q3 2012 Earnings Call

October 22, 2012 9:30 am ET

Executives

Todd Bluedorn – Chairman, Chief Executive Officer

Joseph Reitmeier – Chief Financial Officer

Steve Harrison – Vice President, Investor Relations

Analysts

Robert Barry – UBS

Steve Tusa – JP Morgan

Jeff Hammond – Keybanc Capital Markets

Keith Hughes – SunTrust

Rich Kwas – Wells Fargo Securities

Josh Pokrzywinski – MKM Partners

Sanjay Shrestha – Lazard Capital Markets

Glenn Wortman – Sidoti & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Q3 2012 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. Please go ahead, sir.

Steve Harrison

Good morning. Thank you for joining us for this review of Lennox International’s financial performance for the third quarter of 2012. I’m here today with Todd Bluedorn, Chairman and CEO, and Joe Reitmeier, CFO. Todd will review the key points on the quarter and Joe will take you through the company’s financial performance.

In the earnings release we issued this morning, we have included the necessary reconciliation for the financial metrics that will be discussed to GAAP measure. You can find a direct link to the webcast of today’s conference call on our website at www.lennoxinternational.com. We’ll archive the webcast on that site and make it available for replay.

In addition, on the website you will find revised 2011 and 2012 quarterly earnings statements and 2007 through 2011 annual earnings statements that show the effect of the Service Experts business moving to discontinued operations and the move of the Lennox National Accounts Services business to the commercial business segment. On the call today, unless otherwise noted, the discussion and financial results will be based on continuing operations after the movement of these businesses.

We’d like to remind everyone that in the course of this call, to give you a better understand 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 the call over to Chairman and CEO, Todd Bluedorn.

Todd Bluedorn

Thanks Steve. Good morning everyone and thank you for joining us. Let me take you through a few key points in the third quarter and then Joe will discuss the financial results in a bit more detail in our outlook.

Total company revenue in the quarter was up 3% at constant currency led by 9% growth in our residential business. FX had a negative 2% impact in the quarter. Volume and price were up and mix was down. Total segment profit margin expanded 150 basis points to 10% in the third quarter. Adjusted EPS from continuing operations was $0.97, up 23%. GAAP EPS from continuing operations was also $0.97, up 47%.

Free cash flow year-to-date through September was 36 million compared to a negative 28 million in prior year period. We’ve purchased 35 million of stock in the quarter and plan a minimum of 50 million for the full year. In the third quarter, we also announced an 11% increase in our quarterly dividend to $0.27 per share. This is a 30% payout ratio, at the midpoint of our 2012 guidance.

In our residential business, segment profit was up 20% on the 9% revenue growth. Residential continued to capitalize on the significant growth opportunities in new construction for us in the third quarter with equipment revenue up more than 25%. Equipment revenue from replacement business was up high single digits. For the third quarter in a row, equipment sales outpaced replacement parts and supplies.

Our residential business continued to see some downward mix pressure in the quarter. There were several reasons for this: first, new construction continued to grow faster than replacement business, and new construction tends to have a higher mix of minimum efficiency systems. Second, we continue to have some mix-down within our cooling products to more minimum efficiency. Overall, 13 SEER shipments increased two points above the prior quarter to 65% of cooling product shipments. And finally, a relatively warm month of September led to more cooling and less heating product shipments than in the prior year quarter; however we saw continued good news in our 22 shipments. They were down in the quarter, and we now expect them to be flat to slightly down from a year ago on a full-year basis. You see this in our revenue growth numbers are we are doing better on system sales from a year ago.

Pulling together all these pieces, we have faster growth in new construction versus replacement, continued mix-down in replacement, flat to slightly down R22, and higher overall residential revenue. Our guidance for mix headwind has increased from $15 million up to $20 million for the full year.

In the third quarter, residential continues its strong performance and has significantly outpaced the market this year. October is off to a good start but seasonally it is the lightest month of the fourth quarter for shipments. With weather turning cooler across North America and heating season setting in, we are focused continuing the momentum we have seen this year in residential.

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