Lennox International Inc (LII) 2002 Q4 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Ladies and gentlemen, thank you for standing by, good morning and good afternoon and welcome to the Lennox International fourth quarter and full year 2002 earnings release.

  • Now at the request of your host, all lines are in a listen-only mode, however there will be a question and answer session at the end of today's presentation. As a reminder, this conference is being recorded and if you require any assistance press zero then star. I will like to turn the call over to Bill Moltner, Vice President of Investor Relations. Go ahead sir.

  • Bill Moltner - Vice President of Investor Relations

  • Thank you for joining us. This morning our CEO Bob Schjerven will review for the fourth quarter and full year 2002 and provide highlight of some key accomplishments for the year. Rick Smith our CFO will take you through financial performance by business segment and address key income statement and balance sheet items.

  • Before we wrap up today’s call with Q&A, Bob will comment on our outlook for 2003. We are broadcasting live on the internet and direct link to the webcast is provided on our corporate website www.LennoxInternational.com . This call will be archived and available for replay through February 13th.

  • Before we begin, I would like to remind everyone that during the course of this call to give you a better understanding of our performance, we will be making certain forward-looking statements including our outlook for the companies earnings are subject to risks and uncertainties, a list of these risks and uncertainties are included in our publicly available filings with the S.E.C. and could cause our actual results to differ materially from those we express today. I would like to turn the call over to Bob Schjerven.

  • Bob Schjerven - CEO

  • Good morning. 2002 was a good year for Lennox International. This was a year in which we demonstrated a dramatic improving our financial performance. We took aggressive action to sharpen focus on our core businesses and at the same time we laid a strong foundation to take advantage of future growth opportunities.

  • Sticking to our key business principles, leading our industry in product innovation, expanding and enhancing our products and service offerings, carefully building and managing our brands. LII achieved significant improvement in many key performance areas, most notably operating margins and earnings.

  • Let me summarize our performance last year. All the comments I'm about to make on the full year and fourth quarter exclude those restructuring charges not included in cost of goods sold and other non-recurring items and adjusts 2001 data for FAS142 treatment of goodwill amortization, unless otherwise noted, as detailed in the pro forma net income and segment operating income reconciliation tables in our press release.

  • Favorable weather supported our domestic residential businesses in 2002. Yet demand from our commercial customers for heating, cooling and refrigeration equipment and services remained soft. Total company sales for the year were just over $3 billion down 3% from 2001. With foreign exchange benefiting revenues by less than 1%.

  • Sales in the company's core businesses however, were down less than 1% in constant currencies slightly stronger than our most recent guidance. International sales, those outside the U.S. and Canada generated 13% of total Lennox International revenues. Higher sales volumes in our heating and cooling and refrigeration businesses as well as lower cost structures across all our operations supported operating margin expansion of 150 basis points.

  • In 2002 our operating margin was 4.2% compared with 2.7% in 2001. Full year operating income of $126 million was up 51% from the amount earned the prior year.

  • EBITDA increased 25% to $183 million. Our net income exclusive of a non-recurring items was $57 million compared with $26 million last year. Diluted earnings per share were $.96 versus $.46 per share last year. On GAAP basis our reported net loss per share for the year was $3.23 compared with a net loss per share of $.75 in 2001.

  • Now, taking a closer look at the fourth quarter of 2002, Lennox Internationals reported total revenue decreased 3% to $704 million in the fourth quarter. Company-wide sales in our core businesses in constant currencies however were up 2%.

  • Quarterly operating income was $13 million up from an operating loss of $8 million last year.

  • Operating margin expanded 300 basis points to 1.9%.

  • EBITDA was $24 million versus $7 million in the same quarter one year ago.

  • Net income was $5 million compared with a loss of $8 million in the year ago period. Earnings per share for the fourth quarter was $.08 compared with the loss per share of $.14 for the same quarter one year ago.

  • Foreign exchange benefited earnings per share in the fourth quarter by a penny.

  • On a GAAP basis our reported net income per share in the fourth quarter was 8 cents compared with GAAP net loss per share of 72 cents in the fourth quarter 2001.

  • Before Rick takes you through our business segment operating results, I think it's important to touch on some of Lennox International's key accomplishments in 2002.

  • First, we took no further action, rather we took further action to focus on our core strengths in the heating, ventilation, air-conditioning and refrigeration industry allowing us to channel our energy and resources into areas which we have clear competitive advantages and strong potential for profitable growth. We entered into a joint venture of Outokumpu, [inaudible] Finland, taking a 55% interest in our heat transfer segment a components business allowing us to focus on improving our effectiveness and providing value added branded products and services in our core markets.

  • We made progress lowering the costs structures in our core businesses. In 2002, we completed the extensive rationalization program that we began two years ago. Involved several manufacturing, sales and distribution facilities. In that time, we have closed plants in France, Netherlands, Australia and Canada and we have sold, closed or merged underperforming service expert dealer service centers. We also exited several non core and under performing product lines in Asia, Australia and South America.

  • Lennox International has aggressively implemented lean manufacturing techniques throughout our manufacturing operations to lower costs and in the past two years our total company wide head count has been reduced by 26%.

  • In 2002, we continue to concentrate on our balance sheet and our progress at deleveraging the company. With our disciplined approach to capital expenditure, diligent working capital management and improved earnings, we generated a record free cash flow of $190m allowing us to reduce our total debt by $138 million from the end of 2001. In the past 24 months, we have lowered our debt by over $310 million.

  • Service experts direct to consumer business realize several important operational improvements. They showed profitable results for the year. Thanks to better labor management, lower overhead, and improved pricing segment operating margins rose 275 basis point to 2.6% in 2002, excluding the benefit from FAS142 accounting.

  • Our combined dealer service center EBIT margin improved to 7.8% from 3.9% in 2001. Careful management of SG&A costs both at the corporate and dealer service center level resulted in a reduction of $21 million or 7% from 2001 to 2002.

  • Our procurement costs aggressively we reduced suppliers of parking supplies from 30 to 7 and we also implemented a new fleet management program. Effectively centralizing procurement, leasing, fuel, maintenance, and driver safety.

  • In residential heating and cooling business, successful marketing of the Dave Lennox signature collection of residential home comfort products, doubled the share of revenues Lennox Industries gets from its top of the line equipment.

  • Lennox also met the growing demand for indoor air quality products with the revolutionary pure air system, cleaning the air in homes better than any other system on the market today.

  • We became the first heating and cooling manufacturer to partner with the indoor air quality association in a program to increase consumer awareness of the indoor air quality issues and we continue to grow our distribution through an a exclusive arrangement signed with [Trade Winds] LLC, a subsidiary of [Roscoe] Inc., a leading heating and cooling equipment distributor, we have been selected to manufacture the whirlpool line of air conditioning and heating equipment which Trade Winds is licensed to distribute.

  • Thanks to our lean manufacturing initiatives we are able to manufacture the Whirlpool product without adding capacity. Positioning us well for continued growth on our return on invested capital and adding further value for our shareholders.

  • We also enhance our popular L series line of commercial heating and cooling systems including higher efficiencies on our standard efficiency models. These actions were instrumental in the U.S. department of energy naming Lennox a joint provider of commercial heating and air-conditioning equipment providing significant third party confirmation that we are indeed one of the best manufactures for energy efficient commercial equipment.

  • In our refrigeration segment, we improved operating margins in everyone of the geographic markets we serve. In the domestic market we recorded top line growth in all major product lines and achieved EBIT margins in the mid teens while picking several points in market share, in part due to the successful launch of our new [procubed] packaged refrigeration units.

  • 11 new commercial refrigeration product platforms were introduced in 2002 and 1/3 of our revenues were derived from products introduced in the past three years. We gain new customers, sales growth, and market share in Brazil and Europe. Thanks to enhanced global coordination of our strategies, supply chain, best practices and information technologies.

  • Successful consolidation of our refrigeration production facilities in France further stream lined our manufacturing operations.

  • 2002 was clearly a productive year for Lennox International. We performed in line with our recent guidance while forging the structure of a strong focused company poised to deliver growth and enhance shareholder value going forward.

  • Rick Smith, our CFO will now provide some additional detail on the performance of each of our key businesses.

  • Rick Smith - CFO

  • Thanks Bob, again for comparability purposes my comments on our segment performance in quarter four will exclude restructuring charges not reported in the cost of goods sold, and does adjust last year's data for the FAS142 goodwill accounting change.

  • Let's start with the heating and cooling business. Revenues in heating and cooling rose 6% in the quarter to $398 million. Segment operating income more than doubled to almost $34 million from about $15 million last year. And operating margins rose to 8.4% from 3.9% fourth quarter of 2001.

  • Getting into the pieces, the residential and commercial pieces of the heating and cooling business, residential revenues increased 8% in the fourth quarter of 2002 at $284 million. This was supported by seasonally favorable weather but we also had very good acceptance of the Dave Lennox signature collection products and we had exceptionally strong performance by our [Ducane] and [ADP] operating units.

  • Residential heating and cooling segment operating income for the quarter increased $27.5 million from $10.3 million last year. With operating margins expanding 580 basis points to 9.7%. The higher volumes I mentioned and better factory performance both contributed to this improvement.

  • On a commercial side, revenues in heating and cooling were flat at $114 million. That was down 4% when adjusted for foreign exchange.

  • Segment operating income increased to 35% $6.1 million. And operating margins expanded 143 basis points to 5.3%.

  • The downsizing of under performing operations in the Asia Pacific market and an improved product mix in North America were primary contributors to this improvement. Turning to service experts, reported sales for service experts declined 3%. Primarily and I think a lot of you remember this, we had one fewer week of operations this week's fourth quarter compared to last year's fourth quarter due to calendar shift. Adjusting for that change, same source sales, stores open both periods fourth quarter this year and last actually increased 2% continuing the positive trend we saw earlier this year.

  • Service experts in the fourth quarter of 2002 had an operating loss of $2.1 million. The results were negatively impacted by approximately $4.6 million in increased expenses due to a change in estimations around our self insured insurance costs, but that loss in the quarter of $2.1 million does mark a substantial improvement as we have seen in every other quarter this year for service experts over the segment operating loss which was $5.9 million reported a year ago.

  • The refrigeration segment as Bob said had a very strong quarter and year. Revenue in the quarter rose 8%, 3% in constant currencies, we have a fair amount of business here, outside North America.

  • Segment operating income was $8.5 million. Up 86% from last year. Operating margins increased to 9.4% this year from 5.4 in last year's fourth quarter. That improved performance was achieved across-the-board in everyone of our global refrigeration operations which we internally break down to into the Americas, Europe and Asia Pacific.

  • Finally for those of you who looked closely at the press release, we do show corporate revenue of approximately $1 million. That's revenue that was generated by a residual piece of our heat transfer business. This was not included in the joint venture transaction with Outokumpu and does not fit with our strategic focus and so is being wound down.

  • I want to review a couple items below the operating income line and balance sheet. Starting with interest expense in the quarter, interest was down $1.8 million to 6.8. That reflected reduced debt levels, which more than offsets, slightly higher average rates in 2002 we increased the proportion of fixed rate debt to our total.

  • As Bob said earlier the progress reducing debt has been significant. At year-end 2002, total debt on the balance sheet short and long was $380 million. That was a full $138 million lower than at the same point the previous year.

  • Working capital management was a major contributor in 2002, all these programs produced exceptional results. Inventories at the end of the year for example were down 22%but service levels we think were unaffected. And total working capital as a percent of sales was down 330 basis points to just a shade under 20%, the best performance LII has ever achieved.

  • The debt to total capital ratio at year end was 45.6%. And if we go back to 2001 and adjust those numbers for the impact of FAS142, the goodwill accounting standard and the resulting impairment, that debt to capital ratio would have been 55.1%. So we had just about a 10 point drop.

  • Our target for that debt to capital ratio has a center point of 50% and we feel that 2002's continued debt reduction was appropriate given the current business environment.

  • Corporate expenses increases approximately $5 million in quarter four. Primarily attributable to higher performance related items, profit sharing and incentive programs, that due to the improved LII performance. But we also had higher insurance costs and some up front expenses to implement the cost reduction programs we're counting on in 2003.

  • Tax rate in 2002 was down to 40.1 percent on the adjusted income from operations. Again disregarding the one-time items apples-to-apples that was down from a number north of 50% in 2001. The decline in the tax rate was due to a favorable mix of income by geography and the benefit in 2002 of not having to have the goodwill amortization that we had in 2001.

  • Capital expenditures were $3 million for the quarter. $23 million for the full year 2002. That compared with $4 million quarter four of 2001 and $17 million for full year 2001.

  • Finally, I do want to mention the company's outlook for 2003 that Bob will provide in a moment does reflect, among other things an update of our pension assumptions. For 2003, our discount rate assumption is 6.75% down from 7.5%. And our expected return is at 8.75% down from 9.50%. And with that, I would like to turn the call back over to Bob if I could. Thank you.

  • Bob Schjerven - CEO

  • Thanks, Rick. Coming off a record year for residential equipment shipments and with the timing of economic recovery still unclear to us, we expect our revenues in core businesses in 2003 to be relatively flat. However, our earnings are anticipated to improve based on our continued focus on cost reduction and the full year effects of other actions taken in the course of 2002.

  • For the full year 2003, we expect earnings per share will be in the rang of $1.10 to $1.20 per share. That will be a 15 to 25% improvement over this year's results. We also expect continued strength in our free cash flow in 2003 approximately equal to our net income. Now at this point, Rick and I would be pleased to address any questions that the listeners may have.

  • Operator

  • Certainly and thank you Mr. Schjerven. If you do have any questions or comments we invite you to queue up, just press the one on your telephone key pad. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue by pressing the pound key.

  • To queue up press the one on your touch tone phone.

  • Representing McMahon Securities, the first question comes from Jay Glassman.

  • Jay Glassman - Analyst

  • If you could give me year-end balance on the revolver? How much is available on the revolver and how much accounts receivable [inaudible] is outstanding at the end of the year as well?

  • Rick Smith - CFO

  • This is Rick Smith, let me jump in Bob, and field that one if I could, let me start with securitization program, that was $99 million at year-end 2002. On the revolver we had no usage on the revolver at year-end 2002. We had a number of letters of credit issued under it. But the availability was something in the order of $225m to $250 million at year-end 2002.

  • Jay Glassman - Analyst

  • Thank you very much.

  • Operator

  • And thank you very much Mr. Glassman. Next representing Southwest Securities we go to the line of Kit Case.

  • Kit Case - Analyst

  • First could you talk about market share in the heating and cooling markets?

  • Bob Schjerven - CEO

  • Sure, I would be glad to. On the heating and cooling residential side, we are slightly above 13% market share as we compare our data with the data of ARI and other sources as well. And on the commercial side, if you look at that on a domestic basis, it's probably around 14% for the commercial air-conditioning products, that's about 9% on a world wide basis.

  • Looking at refrigeration, we deem that we are pretty close to 35% market share domestically. In the third market probably something a tad north of 12% on a global basis.

  • Excuse me as far as service experts, that's relatively unchanged compared to what we reported before. On that highly fragmented $40 billion market, probably [inaudible] less of 2%.

  • Kit Case - Analyst

  • How does the market share in residential and commercial heating and cooling compare to last year?

  • Bob Schjerven - CEO

  • I would say reasonably flat. One of the things we saw in the course of this last year in residential was that there certainly was more strength located in the residential new construction side of the ledger than what you found in the replacement side. And we are, the total company, a bit more skewed than what the market is towards replacement. So as far as actual number of units, we probably faded our positions maybe slightly if at all for those reasons.

  • Kit Case - Analyst

  • Do you expect your market share to increase next year?

  • Bob Schjerven - CEO

  • Absolutely, I guess one of the things that is always a precursor to that is the attractiveness of the product offering and the ability to sell that through the immediate steps you have going to the final consumer. Lennox Industries as a brand, last year, introduced ten new products to the market. Three of which had leadership claims. Just now emerging in the marketplace is the fact that this year 2003, Lennox International has brought 25 new products to the marketplace, four of which have clear leadership claims substantiated by outside third parties. We are quite bullish on the market share. But from an overall marketplace standpoint, I think like a lot of folks on this end of the telephone would tell you, the market conditions, the uncertainty that’s out there, not only impacts capital decisions that companies are making, but capital decisions that consumers are making as well.

  • Are these new products bringing in new dealers or are you trying to restrict that and keep that at the same level?

  • Bob Schjerven - CEO

  • There's no question in my mind, I should tell you, I just attended last week the national sales meeting we have for the Lennox International side for all our sales people. I think there's no question amongst that group of 500 + selling professionals there will be additional dealers who will seek to come to that brand because of the advantages that the Lennox product now brings in a number of areas and because of, quite frankly, a little bit of unrest amongst other brand dealers out on the marketplace at this time.

  • Kit Case - Analyst

  • One housekeeping, how many shares outstanding fully diluted did you all have?

  • Rick Smith - CFO

  • Just bear with us for a second on that, if you would please.

  • 63 gross, 3 in treasury , 59 and a fraction just shy of 60 if you are working on your model. We can get a more precise number to you offline. But I think that will work in terms of order of magnitude.

  • Kit Case - Analyst

  • Also you had restructuring recovery gain on about $788,000. Was that just where the restructure costs you recovered a little more than what you thought?

  • Rick Smith - CFO

  • Yeah, as most of those on the call know, we really have three programs that are in various stages of completion. Two that were announced in 2001, one was announced in the third quarter of 2002.

  • And you know, some of those estimates you put way up in front. Some involve asset dispositions and try to be careful in doing that. That is simply, that credit in fourth quarter 2002, a reflection of chewing up some of those estimates as those programs get executed.

  • By the way, I think we will continue to have modest amounts in 2003. Again, no new restructurings announced. But what I'm saying is there may be modest financial impact as we continue to wind down some of those programs, some of which are fairly complicated in the various jurisdictions around the world that Bob touched on where we have taken those actions.

  • Kit Case - Analyst

  • Is that included in your guidance?

  • Bob Schjerven - CEO

  • The guidance, again we want to keep that apples and apples, we want to talk about the core operations of the company so that would be x the restructuring.

  • Kit Case - Analyst

  • Thanks.

  • Operator

  • And thank you very much Mr. Case. To ask a question press the one on your touch tone phone. Representing Credit Suisse First Boston we have a question from Michael Regan. Go ahead.

  • Bob Schjerven - CEO

  • Good morning. Good morning Michael.

  • Michael Regan - Analyst

  • When we think about the incremental cost of insurance at service dilutions, the $4.6 million is that a catch up accrual for something that should have been spread out over the whole year, or is this an incremental cost per quarter for that business?

  • Rick Smith - CFO

  • Michael, it's Rick Smith. More the former than the latter. I think it's a reflection of a timing of when we do our actuary report. We brought a lot more rigor to that process and what we will do different for 2003 is that we’re going to take a look at that again in a very actuarial sense. Every quarter, but that quarter is not anything you should annualize by any means more on the operations front, we are also going to do some thing to better manage that.

  • I think as you know we set up captive insurance company to help deal with all the different insurance risks and the relatively firm market around those. We have some people now in the operating companies. We've had terrific experience in the manufacturing business with loss prevention, professionals we are now going to make sure that service experts has exactly that same capability internal to its operation. So that would be kind of a longer answer to your basic question, but more the former, than the latter.

  • Michael Regan - Analyst

  • Okay, Bob, this has been a devil of a business to forecast on a quarterly basis. And I would call the loss in the quarter disappointing even -- well the modest profit without the adjustment of the insurance a disappointment just given the margins that you reported in the second and third quarter.

  • If I go back to '99 when service dilutions -- June and September quarter margins in high 5% range you were able to do 4% margins in the fourth quarter. So what went wrong? And, it just feels as an outsider that you did not make the progress again in service experts that you expected or honestly need to make to have that strategy work.

  • Bob Schjerven - CEO

  • That's certainly a fair question, Michael, and let me try to not cover you up with a lot of words, but perhaps add a bit of perspective to the question.

  • First of all, in the course of 2002, we have been doing a number of things to drive, and we have done this successfully to drive down in all the centers the complete financial packages and operating system that's we have spoken to several times before. Also, additionally, driving down the organizations, the planning models that we've talked about that enables them to do an improved job with forecasting their business and also managing the labor. And also in this particular business, about a third of your expense is very definitely in the labor side. What we have also accomplishing during the same period of time has been to begin the focus in two particular areas. Moving away from a number of the commercial new construction operations there, which is after all is not the main event, if you will, for that.

  • We did see in several commercial centers, new construction centers in the fourth quarter a couple issues that created a bit of a head wind. But also what we have intentionally done which has impacted a bit our top line has been on residential new construction to be a bit pickier, I guess is the word I would use in terms of extremely low margin business.

  • I spent three days with all the general managers, some two or two and a half weeks ago at a quarterly general managers meeting. Involved in the break out sessions were a great deal of best practice sharing and training sessions and it was a great time for me to speak individually with these people one-on-one. There was no question, to be honest with you, I wish you could have been there. The level of improvement that these folks are seeing. And the enthusiasm they got from [improvements] in terms of revenue, as well as contribution margin on a going forward basis.

  • Again, on a full year basis, if you look at what they did at the center level, we saw them improve EBIT margins, nearly double them from 3.9% to 7.8%, and that trend, I would predict would continue as we move into next year. And that's certainly the kind of targets we set forward for these people.

  • Also if you look at the fourth quarter, that's not particularly the most robust quarter for that type of business. Any time you've got that kind of reciprocality in a business, in the lower quarter, you certainly are exposed a bit more to certain things like the commercial new construction comments I made a moment earlier.

  • Michael Regan - Analyst

  • Longer term, Bob, at what point does the organization make the decision, or sit down and say, all right, is this strategy working or not, and then decide whether or not to continue with it?

  • Bob Schjerven - CEO

  • For my part, Michael, I would say the organization has definitely made that decision. And if you look at the earlier comments that we have made around the ultimate ability of this business to be a double digit EBIT business and then to grow from a position of strength, there's no question in our minds that we have the capability of doing that.

  • Michael Regan - Analyst

  • How do you go from 2.5% margins to double digit EBIT?

  • Bob Schjerven - CEO

  • The first thing you do is you take your center margins up to everyone operating the north of ten percent double digit. We already have 36% of the centers operating at that level and the rate of improvement on the other centers now that all these measures have been taken, we have a better (inaudible) of general managers than we have seen before. But more importantly they have the tools and are working the tools to create that improvement at the center level. The second thing that gets you at that is to be able to spread and even though we reduced the corporate fixed expense we have driving the organization, certainly as we begin to take the top line up, you will see the absorption go up for that. We will still get to the double digits.

  • Michael Regan - Analyst

  • Relative to corporate expense, and I apologize if you talked about it and I missed it, but in the quarter, your corporate expense of $27.3 million was almost 4% of sales which is way out of line with where it's been and seem to be $15 million higher than I expected. Anything unique going on there?

  • Bob Schjerven - CEO

  • A couple of things, let me have Rick give you specifics.

  • Rick Smith - CFO

  • In the fourth quarter the corporate expense was up, as I mentioned, more at the summary level, we did have higher insurance costs, these are of corporate nature, not operating nature. And a fair amount of higher charges for incentive based programs. We've got a profit sharing plan and a series of short-term incentive programs which map the overall corporate objectives. In addition we did spend some money in the fourth quarter to get a jump start on our cost reduction program, Bob touched on some of those. These are programs that are run centrally but for the benefit of the businesses led by our Chief Technology Officer. These go to things like our procurement activities, the supply chain effort, that we have had under way and are accelerating.

  • It's really a whole host of things, but a lot of it would be a reflection of our 2002 performance and lead to better future performance.

  • Michael Regan - Analyst

  • Thank you, very much.

  • Bob Schjerven - CEO

  • Thank you,

  • ))Operator: Thank you Mr. Regan. With that Mr. Schjerven and our host panel, I will turn the call back over to you.

  • Bob Schjerven - CEO

  • To close, I think it's important to understand that we feel Lennox International is well positioned for the future.

  • Continued performance improvements in our core businesses are generating the cash needed to take advantage of the important opportunities down the road. While a stronger balance sheet provides more flexibility for growth initiatives. We're pleased with the progress we made in 2002 and we look for continued improvement in the year ahead. Thank you for taking the time to be with us this morning.

  • Operator

  • Ladies and gentlemen, your host is making today’s earnings conference available for digitized replay in one week. It starts at 1 p.m. February 6th all the way through 12 am February 13th. Please access AT&T’s service by dialing 320-365-3844 at the voice prompt enter today’s conference ID671379. And that does conclude today’s earnings release for this quarter. Thank you for your participation as well as using AT&T's executive teleconferencing service. You may now disconnect.