Lennox International's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Lennox International, Inc. (LII)

Q2 2012 Earnings Call

July 24, 2012 09:30 a.m. ET

Executives

Steve L. Harrison – VP -IR

Todd M. Bluedorn – Chairman & CEO

Joseph W. Reitmeier – CFO & EVP

Analysts

Stephen Tusa – JPMorgan

Jeffrey D. Hammond – KeyBanc Capital Markets

Sanjay Shrestha – Lazard Capital Markets

Joshua Pokrzywinski

Keith Brian Hughes – SunTrust

Rob C. Wertheimer – Vertical Research

Richard M. Kwas – Wells Fargo Securities

Claire Diesen – Morgan Stanley.

Adam Samuelson – Goldman Sachs.

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Lennox International Q2 2012 Earnings Conference Call. (Operator Instructions).

I would now like to turn the call over to our host, Mr. 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 second 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 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 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 the call over to Chairman and CEO, Todd Bluedorn.

Todd Bluedorn

Thanks, Steve. Good morning and thank you for joining us.

Before I begin, I’d like to introduce Joe Reitmeier, our CFO effective earlier this month. Joe has been the CFO of our Commercial Heating & Cooling business since 2007. Joe is a CPA with an MBA from Case Western Reserve University. Joe is a proven leader with a record of success at Lennox and he will bring a seasoned business perspective to the LII leadership team.

So an official welcome as CFO, Joe.

Joseph Reitmeier

Thanks, Todd.

Good morning, everyone. Glad to be with you here today, and I look forward to working with Todd and the rest of the leadership team as CFO. I also look forward to working with everyone in the investment community, and I’ll have a chance to meet many of you in person at our upcoming conferences.

Todd Bluedorn

Great. Thanks, Joe.

Let me take you through a few key points on the second quarter and then Joe will discuss the financial results in more detail and our outlook for the balance of the year.

Total company revenue in the quarter was up 4% at constant currency led by 11% growth in our Residential business. The company overall had 2 points of negative impact on revenue from FX in the quarter. Volume and price were up and mix was down.

Total segment profit margin expanded 20 basis points to 8.5% in the second quarter. Adjusted EPS from continuing operations was $0.96, up 12%. GAAP EPS from continuing operations was $0.93, up 9%.

Cash generation was strong, with free cash flow $18 million better than second quarter last year and $133 million better in the first half than the same period a year ago. In addition to our quarterly dividend payout, we are set to repurchase a minimum of $50 million of stock in the second half of this year.

In our Residential business, segment profit was up 19% on the 11% revenue growth. Residential capitalized on the significant growth opportunities in new construction for us in the second quarter as well as in the replacement market, where we saw above average temperatures in the quarter but comparable overall to the second quarter last year.

Equipment revenue from residential new construction was up more than 30% in the second quarter. Equipment revenue from replacement business was up mid-teens. For the second quarter in a row, equipment sales outpaced parts, supplies and accessories.

R22 shipments were comparable to what we saw last year in the second quarter, but R22 shipments spike up in the key summer months of June, July and August, and we still expect R22 shipments to be up year-over-year. Overall, we saw 13 SEER shipments increase 2 points about the prior year quarter to 68% of cooling product shipments. So based on the second quarter and so far in July, we continue to expect about $15 million of headwind to EBIT from Residential mix in 2012.

Overall, it was another nice quarter for Residential. We’ve been outpacing the market and continue to aggressively move forward with our strategic initiatives for growth. We’re off to a strong start to the third quarter on continued strength in residential new construction, and July has been hot. That being said, the month of September makes up one-third of the quarter for the industry, and this is a transitional period to the heating season. Some caution is warranted with the consumer confidence still fragile and the political and economic uncertainties ahead in the second half of the year.

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