Lennox International Inc (LII) 2007 Q1 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to the Lennox International first-quarter 2007 earnings conference call.

  • (OPERATOR INSTRUCTIONS).

  • As a reminder, this conference is being recorded.

  • I would now like to turn the conference over to Bill Moltner, Vice President of Investor Relations.

  • Bill Moltner - VP, IR

  • Thank you.

  • Good morning.

  • Thank you for joining us for this review of Lennox International's financial performance for the first quarter of 2007.

  • We are pleased to have our new CEO, Todd Bluedorn, on the call today.

  • As I believe most of you know, Todd joined Lennox International earlier this month, and I will turn the call over to him in a moment.

  • While Todd will comment on management's outlook for 2007 in his remarks, Sue Carter, our CFO, will handle most of today's call, taking you through the Company's financial performance for the quarter, including business segment detail and key income statement and balance sheet items.

  • In the earnings release we issued this morning, we have included the necessary reconciliation of the financial metrics that will be discussed as generally accounting principle measures.

  • We will wrap up today's call as is customary with a Q&A session.

  • 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 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 these risks and uncertainties is included in our publicly available filings with the SEC and includes the impact of higher raw materials prices; our ability to implement price increases for our products and services; the impact of unfavorable weather; and the 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 that we expressed to you today.

  • I will now turn the call over to Todd Bluedorn.

  • Todd Bluedorn - CEO

  • Thanks, Bill.

  • Good morning, everyone.

  • It is good to be here.

  • It has been three weeks since I joined Lennox International, and I wanted to share with you some of my preliminary observations.

  • I knew going in that I was joining a company with industry-leading products, strong brands and an intense focus on customers.

  • More importantly, I believe there was plenty of opportunity for future growth.

  • I have been busy getting to know our people and coming up to speed on the business.

  • In the short time I have been here, it is clear to me that LII is an organization committed to providing the finest quality products and services for the markets we serve.

  • I see that we truly value our distribution relationships.

  • I also see that while a lot of hard work has resulted in a trend of improved financial performance, we still have a ways to go to realize our full profit generation potential.

  • Our workforce is energized and motivated and with a very strong balance sheet that provides a solid platform of growth.

  • From my vantage point, the future looks extremely promising.

  • To be sure, the conditions we face in the first quarter of this year were difficult.

  • Yet they were not totally unexpected.

  • As you may recall, when the Company last gave guidance, we indicated a slow start to the year, particularly in our Residential businesses and consequently expected Q1 earnings to be below those of 2006.

  • This proved to be true.

  • Yet it is important that you know that our earnings were in fact slightly ahead of the Company's internal plan.

  • Like I said, we expected Q1 to be tough.

  • I'm going to let Sue review the quarter, but let me comment on our outlook for the balance of the year.

  • Looking ahead to the rest of 2007, our management team is focused on maneuvering through the challenges we are facing in the marketplace.

  • We certainly acknowledge a lack of momentum in Residential demand so far this year in the erosion and the outlook for housing starts.

  • But we remain cautiously optimistic the upcoming cooling season will provide more normal replacement demand, which, as you know, represents the bulk of our sales.

  • And the outlook for the demand in the Commercial Heating and Cooling and Refrigeration markets we serve is very much on track with our expectations.

  • Our hedging programs provide some protection from the recent spike in commodity prices, and we continually review our pricing structures to address increases in input costs.

  • As you know, Q1 is clearly our seasonally softest quarter, but with the most important part of the year still ahead, we are reaffirming our guidance of diluted earnings per share for 2007 in the range of 2.5 to 2.6.

  • This EPS range is supported by a projected total company revenue growth of 6% to 8%, an improvement in our Company's segment profit margin of 50 basis points or more.

  • With that, here is Sue to take you through the numbers for the first quarter.

  • Sue?

  • Sue Carter - CFO

  • Thank you, Todd.

  • Good morning.

  • Our total Company sales for the first quarter declined 2% or 3% adjusted for foreign exchange to $791 million.

  • Our reported net income of $9 million or $0.12 per diluted share was down from $21 million or $0.28 per share the previous year.

  • Adjusting for $1 million in after-tax restructuring charges related to our consolidation activities in South Carolina, our adjusted net income for Q1 of this year was $10 million or $0.14 per share.

  • In last year's first quarter, adjusted net income, accounting for unrealized gains on open futures contracts and restructuring charges, was $19 million or $0.26 per share.

  • Cash used in operations was $75 million, and the Company invested $10 million in capital expenditures, resulting in a free cash outflow of $85 million for the quarter.

  • As you are probably aware, due to the seasonal nature of our business, it is typical for us to consume cash in the first half of the year and generate cash in the back half.

  • We continue to expect our capital expenditures for the year to be approximately $80 million, driven by carryover costs from 2006 for warehousing in South Carolina as part of our consolidation program and the plant expansion in our domestic heating and cooling business investments to support new products and several IT projects.

  • In the first quarter, we used $14 million to buy back 408,000 shares of LII stock, leaving us with 3.2 million shares remaining on the current repurchase authorization.

  • Since we initiated the stock repurchase program late in 2005, we have used $183 million to buy back stock.

  • We ended the first quarter with $145 million in debt, and our balance sheet remains in excellent shape, reflected in our total debt to cap ratio of 15%.

  • Now looking closer into each of our business segments for the first quarter, industry unit shipments of Residential Heating and Cooling equipment declined by an estimated 30% in the quarter as last year's Q1 got a final boost from the 13 SEER transition activity, and end market demand for furnaces has been soft this year.

  • Revenue on our Residential Heating and Cooling segment decreased 14% to $361 million.

  • While our volume was down about 23%, we did achieve price and mix improvement of approximately 5% and 4% respectively.

  • Our flagship Lennox branded product performed very well relative to the market with a revenue decline in the mid single digits, but decreases were more accentuated in our two-step brands and our Hearth Products business.

  • Segment profit decreased to $20 million from $42 million last year.

  • While price improvement did offset higher commodity cost in the quarter and the organization focused on cost control, we could not sufficiently offset lower volume, which was the primary driver of reduced earnings.

  • The impact of the volume decline, including its negative impact on factory efficiency, was particularly evident in our Hearth business, which is more exposed to Residential New Construction than our HVAC productline.

  • Also in the quarter, to account for the influence of higher commodity prices on replacement parts, we booked a $4 million adjustment to warranty reserve in our Residential Heating and Cooling business.

  • Sales in our Commercial Heating and Cooling segment were strong, advancing 18% in Q1 to $163 million.

  • Volume growth and price each contributed about 7% to the topline, while mix and foreign exchange contributed approximately 1% and 3% respectively.

  • Domestic sales were up in the low teens with growth in sales to both national accounts and contractor customer.

  • Sales were even stronger in Europe where the topline was up approximately 20% in constant currency, resulting in improved operating performance in this region.

  • Segment profit increased from $8 million last year to $9 million this year, attributable to the improved results in Europe, as well as lower variable freight costs domestically due to our regional distribution center initiative.

  • Price improvement did not fully offset higher commodity costs in the first quarter, but we expect improved traction in pricing in the back half of the year.

  • The expansion of our Stuttgart, Arkansas facility is on track for completion by the end of the year.

  • On the product innovation front, to address key opportunities in environmental sustainability, Lennox has designed a new line of high-efficiency package rooftop units that surpasses the current United States and Canadian government efficiency requirements for Commercial HVAC equipment.

  • Wal-Mart expects to start installing these units during the third quarter of this year.

  • Despite the soft Residential end market, Service Experts performed well with sales increasing 2% to $144 million.

  • Volume added about 1 percentage point to the topline as did a combination of price and mix.

  • As could be expected, revenue mix shifted away from New Construction, and a more stable and profitable service and replacement business represented about 80% of first-quarter sales.

  • The segment launched shrink to $4 million from $7 million in the prior year's quarter.

  • Service Experts was able to hold fixed expenses flat and leverage the sales growth for results improvement.

  • In our Refrigeration segment, revenue rose 12% to $141 million, driven by strong sales growth in Europe and South America.

  • The 12% sales increase consisted of 5% volume growth, 2% in price and a 5% benefit from foreign exchange.

  • Segment profit for the quarter was relatively flat at $12 million.

  • Price increases have taken hold in Europe, but we have yet to see the full benefit from our pricing actions domestically and in the Asia-Pacific region.

  • In the domestic market, demand has been relatively soft in the supermarket and cold storage segment, offsetting solid demand from wholesale, OEMs and national account channels.

  • In Europe strong sales growth of approximately 20% in constant currencies reflected improved demand in mature markets, as well as continued growth in Central and Eastern Europe.

  • Our working capital ratio as a percent of trailing 12-month sales for the Company was 17.4%, somewhat higher than the 16% a year ago.

  • Year-over-year inventory levels were up $55 million due to softer than anticipated Residential sales, additional inventory put in place to support growth in Commercial Heating and Cooling and Refrigeration, as well as the impact of higher commodities prices on inventory values.

  • We recorded a $700,000 pre-tax gain on the gains, losses and others expenses line item, which primarily represented marking to market those copper and aluminum hedges put in place early in 2006 that are still open, as well as more current economic hedges for copper and aluminum in some of our international operations.

  • As a reminder, in our domestic operations, we are using cash flow hedges for copper and fixed forward contracts for aluminum.

  • In last year's first quarter, gains, losses and other expenses included an unrealized pre-tax gain of $9 million for economic hedges on copper and aluminum.

  • Corporate expense in the quarter was down $4 million, primarily due to lower incentive compensation expenses, as well as lower professional fees related in part to audit and compliance activities.

  • That concludes our prepared remarks for today's call.

  • At this point we would be pleased to address any questions that you may have.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Curt Woodworth, JPMorgan.

  • Curt Woodworth - Analyst

  • I realize that 1Q is ahead of your internal plan with perhaps Residential a little weaker, maybe Commercial a little bit better, but I'm just wondering if you could talk about what gives you confidence that you're going to be able to meet your guidance for the year, which implies pretty good improvement in organic growth and margins over the back half of the year.

  • If you could just help us, a little bit more clarity on helping us bridge that gap, I would appreciate it.

  • Sue Carter - CFO

  • Sure.

  • Well, first let's start and look at the seasonality of the business.

  • So we start looking at the first quarter, we are on our expectations for the first quarter.

  • But we have the strongest part of the demand profile to come.

  • So, as we look at our guidance for the rest of 2007, what we have assumed is that the Residential New Construction markets are not going to decline more than the 20% that the NAHB numbers were at this point, and we assume that a more normal replacement market occurs within the Residential business.

  • Our other businesses, as we reviewed them in the first quarter, are looking very good for the quarter.

  • Commercial is doing well, the Service Experts has done well, and the Refrigeration businesses are performing well and performing to our expectations.

  • So, as we look at that part of the year, our restructuring activities are on track with our South Carolina consolidation.

  • We have executed our share buyback program, and all of those things allow us to look at our businesses and reaffirm our 2007 guidance.

  • Curt Woodworth - Analyst

  • Okay.

  • And then on Commercial and Refrigeration, the topline overall is pretty solid, but the incremental margins were weak with margins down for both of those segments year-on-year.

  • Is that mainly a function of price, and do you still feel confident that you will get margin improvement year over year in both those segments?

  • Sue Carter - CFO

  • I think it is a combination of getting pricing traction on some of the national accounts within the Commercial business.

  • If you also recall in my comment on the Commercial segment, the commodity prices are still creating a headwind for that business.

  • So commodity costs are ahead of what our pricing is for that, and we expect that to turn around later in the year.

  • And, on the Refrigeration segment, their pricing is taking hold.

  • We're starting to get some price in Europe.

  • But their pricing activity is basically covering the commodity costs and not above that.

  • Curt Woodworth - Analyst

  • Okay.

  • And maybe a question for Todd in terms of how he -- how you view share repurchases versus acquisition opportunities.

  • Obviously the balance sheet could afford both.

  • I am just curious maybe what the preference is going forward.

  • Todd Bluedorn - CEO

  • Thanks, I look forward to meeting you.

  • If I reflect on Lennox over the last five years, the two words I would use to summarize the use of cash would be balanced and disciplined, and I would suggest that going forward that would be the same approach.

  • And we would balanced organic growth investments in our business, which my sense is there are quite a few, giving money back to the shareholders either in stock repurchases or dividends or where it makes sense do strategic acquisitions to add to our business.

  • So I think balance and discipline would be the key words moving forward as they have been in the past.

  • Curt Woodworth - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Operator

  • Jeffrey Hammond, KeyBanc Capital Markets.

  • Jeffrey Hammond - Analyst

  • Congratulations, Todd, on the appointment.

  • You know you mentioned in your opening remarks a lot of the positives that you saw in Lennox but also some opportunity.

  • I was wondering if you could just give us a little more color based on your initial observations where you see most of the opportunity either on the factory floor or elsewhere in terms of improvements longer-term?

  • Todd Bluedorn - CEO

  • I'm going to give you the three-week answer, which means what I say I can wrap up and change, but as I have spent time with the team and talked about the business, I would say it is across the board.

  • I would say there's topline growth both around executing on the new products that we have in the pipeline and the geographical expansion that I know the team has talked to you and other investors about in November.

  • So I think there is both expanding organically with our product lines and geographically.

  • There's also clearly margin expansion growth as we talked or the Lennox team talked to the investors back in November, talked about getting us up to a segment (inaudible) of 10%.

  • That is clearly opportunities on margin expansion, which we all know what that means on the cost side of the business.

  • And I think where it makes sense, as I said earlier, I think there are acquisitions around geographical extensions, around industry consolidation, around adjacent markets where appropriate.

  • So I sort of say, if you look at the broad array of opportunities, I think there are lots of opportunities in this Company going forward.

  • Jeffrey Hammond - Analyst

  • Okay.

  • I guess going to the guidance and asking Curt's question maybe a little bit differently.

  • But, as you look at the 6% to 8% revenue growth within the guidance and the 50 basis points of margin improvement, can you just maybe identify which segments there might be some meaningful variance, positive or negative, from those targets?

  • Sue Carter - CFO

  • Meaningful in terms of the year-over-year?

  • Jeffrey Hammond - Analyst

  • Yes, I mean what segments might maybe grow ahead of that number or below both in terms of revenue growth or margin expansion?

  • Sue Carter - CFO

  • Well, I think, as you look at all of the different segments, the one segment that we have not projected a lot of revenue growth on and has been relatively flat is the Service Experts business, and of course, that remains for 2007.

  • As we look at the Commercial business, certainly that business has been growing as we have moved throughout the past several years and has that opportunity to keep growing on the sales line.

  • Again, in the first quarter, it was 18% with 7% of that coming from volume.

  • So we feel good about that.

  • The Refrigeration business also had the opportunity to continue to grow on the revenue line, and what we saw in the first quarter also was some demand growth in our European businesses, which was nice.

  • So we had not only demand, but we were able to get some price in terms of the European businesses.

  • So I think all of those things combined.

  • You know and again I think as you look at the Residential business, which I did not talk about in there, I don't think the first quarter is indicative of what that demand profile looks like for the entire year.

  • Not only with R&C down, but the replacement business was down as well.

  • Jeffrey Hammond - Analyst

  • Then how about on the margin side?

  • Are there any businesses that clearly outpace the 50 bips or where you don't see as much margin improvement?

  • Sue Carter - CFO

  • I think really again I think if you went through the roster of the segment, Service Experts came through very well in the first quarter.

  • Again, they held their fixed expenses flat, and they delivered from $7 million of loss last year or 6.8 I think the actual number was, to 3 million or 4 million this year.

  • I think they had very nice performance, and the rest of the businesses did what we expected them to do.

  • Jeffrey Hammond - Analyst

  • Okay.

  • As you look into April, any indications that, as you move into the selling season, the Residential market is normalizing, or is it still pretty challenging?

  • Sue Carter - CFO

  • I don't think there's enough data out there to tell us.

  • You can look at the weather pattern just as we can and see the other things.

  • I just don't think there is data yet to see that start to happen.

  • Jeffrey Hammond - Analyst

  • I guess anything in your business, though, that suggests the trend is getting better?

  • Sue Carter - CFO

  • Nothing that I have seen or would talk about at this point.

  • I think it is just too early.

  • Jeffrey Hammond - Analyst

  • And then final question on commodities.

  • It sounds like commodities are still a bit of a challenge.

  • I guess thinking specifically of your Commercial business, do you expect to be able to get price from these national accounts?

  • And then is there a point in the year where pricing starts to more meaningfully outpace the commodity headwind, or does that continue to be a challenge all year?

  • Sue Carter - CFO

  • Well, let me take both pieces of that question and answer them separately.

  • First, let me go to the Commercial business.

  • I believe that there is an opportunity to get price on those national accounts.

  • I mean we're seeing the cost escalations and the commodities, and it is our desire to offset some of that with price.

  • As we look at the business, we know that that is a tough challenge in the first half of the year, but we expect some recovery on that side in the back half of the year in the Commercial business.

  • Commodities in general, as we look at them, I think we started talking in February for the fourth-quarter teleconference with what we're doing.

  • So on copper we're doing cash flow hedges, and we are utilizing a banding strategy that we talked about on that teleconference.

  • And the banding strategy basically goes out 18 months, and we lay in hedges for copper based on our demand over that 18-month period, which provides us, if you kind of did the math at any given point in time, you would have 50% kind of coverage on the hedging activity for that.

  • So I think that helps us, as we look forward to what happened in copper just over the last six weeks, which is just almost incredible with the escalation that we saw there.

  • But we feel like our hedging program is working.

  • We feel like it is doing what we wanted to do, which is to take some of the volatility out and also give us some visibility to what our cost structure looks like over the near-term.

  • So I think we are in good shape on the commodity side.

  • Jeffrey Hammond - Analyst

  • So, even with the copper escalation, is your expectation for commodities any worse, or have you kind of managed that with hedges?

  • Sue Carter - CFO

  • I think we have kind of managed that through the hedging program.

  • And again, we're not necessarily trying to take and speculate on what the market is going to do when, quite frankly, I don't think anyone is very good at that right now.

  • But what we're trying to do is utilize the hedging program to give us visibility so that we know what to do in terms of our pricing activities and what we need to do in terms of our communications with the customers.

  • And I think that is really important as you look at what that commodity program represents.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Gary Lenhoff, Ironworks Capital.

  • Gary Lenhoff - Analyst

  • You mentioned that your inventories were up about $55 million in the quarter.

  • You were slightly ahead of your business plan for the quarter.

  • I guess I am curious, were you planning on building that inventory for the balance of the year?

  • Can you maybe help us better understand your inventory planning?

  • Sue Carter - CFO

  • Sure.

  • As we look at what happens with our inventory within a normal business cycle, we will start to build inventory before we head into the cooling season.

  • So we did typical build on the inventory as we entered the first quarter.

  • Now we did see some addition to our inventory levels on a year-over-year basis because of the softness in the Residential demand.

  • But again, that is to be expected with what happened in there.

  • We also, as we look that at that, there are also some increases on a year-over-year basis from commodity prices that increase the value of the inventory.

  • But I think we are in pretty good shape for what we know and what we have seen in each of the businesses going into the highest point of selling for the Company.

  • Gary Lenhoff - Analyst

  • Okay.

  • And you touched on this, but maybe you can elaborate.

  • It looks like your inventories are about $145 million or so higher than they were in the first quarter two years ago.

  • Your sales in the quarter were about $90 million higher.

  • Is it fair to look at the difference, a good part of that difference at least to be attributable to higher commodity costs?

  • Sue Carter - CFO

  • I think there's a number of different factors in there when you look at it.

  • First of all, you have the increment in the cost of the inventory from not only the commodities prices but the impact of the 13 SEER transition.

  • Along with that, in our Commercial business, we started a regional distribution strategy to support the replacement business.

  • That sort of added a $10 million kind of number for inventory for that program also.

  • And, as we look at the inventory, our goal is not only to just look at the dollars, but to look at the customer service levels that we need for each of our products, and that factors into that also.

  • Gary Lenhoff - Analyst

  • Okay, that is helpful.

  • I wasn't on the call when you went through your hedging strategy, maybe if you could just summarize what is your total exposure, dollar exposure to the copper and aluminum hedges at this point?

  • Sue Carter - CFO

  • Do you mean the total commodity costs for the year?

  • Gary Lenhoff - Analyst

  • Yes, but what have you hedged?

  • The dollar value of what you had hedged?

  • Sue Carter - CFO

  • That is not something that we disclose.

  • But I will tell you that, as we have looked at headwinds from commodity prices in previous years and in 2007, for example the headwind in the first quarter was about $23 million of headwind from the increases in commodity prices.

  • Gary Lenhoff - Analyst

  • Okay.

  • And did you say that you have, when you were describing the banding strategy, that you have got -- you have achieved about 50% coverage of your exposure to copper cost increases?

  • Sue Carter - CFO

  • What we cover is about 50% of the copper requirements for those periods.

  • Gary Lenhoff - Analyst

  • Okay.

  • For the next 18 months?

  • Sue Carter - CFO

  • Yes.

  • And the banding strategy, what the banding strategy does -- so I don't want you to think that 18 months from now we have 50% of our copper hedged.

  • The further you go out in the 18 months kind of strategy, the lower the amount hedged that you're going to see.

  • So, for instance, if I looked at 2008, my expectation is at this point in time that 2008 about 10% of the copper would be hedged as you enter 2008.

  • Gary Lenhoff - Analyst

  • Okay.

  • That is great.

  • Last question.

  • I can't recall -- you took an adjustment to your warranty liability reserve in the fourth quarter of last year of close to $20 million.

  • It increased by about $20 million, if I recall.

  • Can you refresh my memory on what that was, and is that related to the $4 million in the first quarter?

  • Sue Carter - CFO

  • No, I can certainly refresh your memory, but the two are not related.

  • As we look at the 2006 warranty expenses, what we were doing is we were looking at the overall warranty reserve and specifically products that were no longer in production in that reserve, and we were increasing the reserve for the later years in the warranty program.

  • So we were adjusting the reserve from products no longer in production and getting the warranty reserve to where it needed to be at the end of the year.

  • In the first quarter of 2007, the $4 million increase is essentially taking what you're projecting to use as replacement parts for warranty type of activities in the future and incrementing it for the additional cost that we have primarily due to the commodity cost increases that have gone through.

  • Gary Lenhoff - Analyst

  • Okay.

  • So, in effect, you're changing the estimate of your cost of providing warranties.

  • That is not based on Q1 sales, for example?

  • Sue Carter - CFO

  • No.

  • That is actually just adjusting the amount of cost that each component that you're going to replace in the warranty is in there.

  • So, as you look at the entire warranty charge when we file our 10-Q, there was $4 million in the Residential business, and the total for all of our businesses adjusted in Q1 was $5.5 million.

  • Operator

  • [Vincent Arloch], Guggenheim Capital Markets.

  • Vincent Arloch - Analyst

  • You had said that one of your assumptions for the year was a more normal replacement market.

  • Can you elaborate on what would drive a more normal replacement market and maybe talk a little bit about what would positively impact the replacement market at this point?

  • What might be the drivers that would improve the replacement market for you?

  • Bill Moltner - VP, IR

  • It is Bill Moltner here.

  • The drivers of demand in the Residential market include weather, which is something certainly we cannot control.

  • You know, general economic activity, as well as New Construction.

  • And two-thirds or more of the market is actually replacement, and that is the piece that is very weather-dependent because the hotter the weather, the more cooling equipment would be stressed.

  • And so that would be certainly one of the variables that would play in.

  • General economic conditions basically, consumers who are more confident in the marketplace are going to be more likely to make a big ticket purchase if, in fact, they have to replace their air conditioning.

  • Over time it has been lumpy because of those factors, but we have seen that the Residential market has done a little bit better than GDP kind of mid single digit growth.

  • Operator

  • Jeffrey Hammond, KeyBanc Capital Markets.

  • Jeffrey Hammond - Analyst

  • On the Hearth business, I guess I'm trying to understand what was different in Q1 versus Q4.

  • It seemed like the housing weakness started in the fourth quarter, and I think weather was probably more of an unfavorable in fourth quarter versus first quarter.

  • So maybe what is different sequentially?

  • Sue Carter - CFO

  • I think, as you look at the Hearth business, obviously it is our business that is most exposed to the Residential New Construction market.

  • I would say that, as you look at factors, that the largest factor would be that, as we planned for R&C for the year -- so utilizing those NAHB figures -- we planned on that market being down 50% -- 15%.

  • And it is actually down about 20%, which is really the biggest factor that is driving that down.

  • Todd Bluedorn - CEO

  • We also had a reasonably strong first quarter of a year ago, so the comp was much more difficult first quarter over first quarter versus what it was fourth over fourth.

  • Jeffrey Hammond - Analyst

  • Okay.

  • And then I guess if we were to assume maybe a more challenging Residential market and maybe a less than normal summer, are there levers -- maybe you can just talk in general about what levers or what areas of focus where you get kind of the margin improvement?

  • Are there some additional levers you can pull to make it up on the margin side, or if volumes do come in a little bit lighter, do you have to kind of revisit the guidance?

  • Bill Moltner - VP, IR

  • What we are doing is the things you would expect us to be doing given the softness in first quarter.

  • So we are clearly looking at all discretionary spending across the business, identifying those areas where we can pull levers.

  • Uniquely important is understanding the timing of when we need to pull them to have impact in the year.

  • All that being said, it is tough to answer your question.

  • We cannot pull enough cost levers, quite frankly, if the market is way down, but we are certainly going to do the things we can do on the cost side to protect the business.

  • Operator

  • Thank you.

  • We have no further questions, so I will turn the call back to you, Mr.

  • Bluedorn, for any closing remarks.

  • Todd Bluedorn - CEO

  • Well, good.

  • It has been good to have this call with you.

  • I look forward to meeting you all in person.

  • It is great to be here at Lennox International, and after a few short weeks, I'm increasingly confident that my initial assessment was accurate, that there's plenty of opportunity in front of us here at Lennox.

  • So again, thank you for your questions, and I look forward to meeting you in person.

  • Thanks.

  • Operator

  • Thank you, and ladies and gentlemen, that does conclude our conference for today.

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