Lennox International Inc (LII) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Lennox International Q-1 2010 earnings conference call.

At the request of your host all lines are now in a listen only mode.

There will be a question and answer session at the end of the presentation.

As a reminder this conference is being recorded.

I would now like to turn the conference over to Steve Harris, Vice-President of investor relations.

Please go ahead.

Good morning.

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

I'm here with Todd Bluedorn, CEO and Bob Hau, CFO.

Todd will review highlights for the quarter and Bob will take you through the companies 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 measures.

You can find a direct link to the webcast of today's conference call on our corporate Web site at www.lennoxinternational.com.

We'll 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 intentional or obligation debate 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 CEO Todd Bluedorn.

Thank, Steve.

Good morning and thanks everyone on the line for joining us.

And market conditions continue to improve in the first quarter and our revenue was up 11% as reported and up 6% at constant currency.

Gross margin was up 330 basis points and total segment margin was up 420 basis points as our restructuring, global sourcing and productivity initiatives are providing clear benefits.

Lower commodity costs also provided a benefit in the first quarter.

Now residential business segment revenue was up 13% at constant currency.

We saw a robust growth in both replacement and new construction business.

And our service experts business revenue is up 17% at constant currency led by strong residential replacement business.

Residential segment margin was up 440 basis points and service experts segment margin was up 320 basis points from the first quarter a year ago.

And our commercial unitary business, the market remained down from a year ago, although the rate of decline slowed further in the first quarter.

Revenue was down 12% at constant currency.

Profit was up with commercial segment margin up 130 basis points.

While we still expect the market to be down in 2010, some of our major big box retail customers are reflecting a pickup in activity for both planned replacement and new construction business.

Our commercial K-12 school business continued to do well in the first quarter.

The business grew 40% last year, and we expect very strong growth in 2010 also.

Our refrigeration business returned to growth in the first quarter, up 1% at constant currency.

Refrigeration segment margin was up 560 basis points.

North America was the strongest region, with revenue up mid single digits.

We continue to gain share with our industry-leading high-efficiency products.

In the first quarter, we saw some pickup in activity for refrigeration equipment at big box retailers and supermarkets.

In cold storage, and in nonfood applications.

However, the food service end market remained soft.

In our seasonally strongest quarters we are increasingly optimistic about residential and refrigeration markets and at the rate of decline will continue to slow in the commercial unitary market through the year.

Our restructuring activities continued in the first quarter as we announced plans to exit our oem refrigeration coil business in Australia due to declining market conditions for those products in that country.

Looking at our restructuring programs and savings overall for 2010, we now expect $15 million in savings from announced programs.

And our global sourcing initiatives we continue to expect $35 million in incremental savings.

For commodities we now expect a $15 million to $20 million headwind for the full year versus prior guidance of $5 to $10 million headwind for 2010.

Since commodities are tailored for us in the first half due to our hedging program, the second half of the year comparison will be significantly more difficult.

In 2010 we are excited about our previously announced new products now all in production.

We're seeing a strong reception for them, positioning us for share gains and to capitalize further on our market opportunities.

In residential we've introduced a new furnace platform 33 inches tall and extends our leadership in energy efficiency comfort and quietness.

The new furnace uses our precise comfort technology that constantly monitors and automatically adjusts the heat and air flow from 35% of the rated capacity to 100% and increments as small as 1%.

The new sun source home energy system fully integrates solar power to reduce electricity used by the air conditioning or heat pump system.

When the AC or heat pump is cycled off it can also supply power for other devises in the home that consume electricity such as lighting and appliances.

if the system generates more power than the home uses the excess power can be sent back to the utility company for a possible credit on the utility bill.

We have also introduced new thermostat called icomfort.

It is the first full tower communicating touch-screen thermostat available in the market.

Simple and intuitive.

Icomfort Synchronize our most advanced heating, cooling and humidity control products and provides equipment diagnostics.

It is easy to install in any retrofit since it requires only four wires.

In the second quarter of the next generation of sun source will be on the market which significantly expanded capabilities.

This is yet another example of industry-leading innovation at Lennox to provider premiere products in energy efficiency for our customers.

In commercial we are seeing significant success with our two major new products for 2010, landmark and energence.

Landmarks is a low cost roof top platform for the out once replacement market.

A segment that offers tremendous growth opportunity for us.

Energence is the only 17 seer roof top in the industry.

It offers the highest efficiency and most factory installed options available including advance learning capabilities, humidity control and indoor air quality.

Before I turn it over to Bob let me touch on a couple of points on cash.

With end markets continuing to recover we restarted our stock repurchase activity in the first quarter, buying back $35 million of our stock.

As mentioned last quarter, we plan to at least offset normal dilution of 1 to 2 million shares this year.

At the end of the first quarter, $250 million was remaining under our current stock repurchase authorization.

In the first quarter we also announced a 7% increase in our dividend for 2010.

While we used cash in the first quarter as is typical for our seasonal inventory build as well as support our new product introductions this year we will continue to manage the business with a focus on cash generation and maintaining strong balance sheet.

I'll now turn it over to Bob.

Thanks, Todd.

Good morning to everyone.

I'm provide some additional commentary on the business segments for the quarter starting with residential heating and cooling.

In the first quarter revenue from residential heating and cooling was $284 million, up 15%.

Currency had a positive 2% impact, volume was up 16%, price and mix were down 3%.

This is primarily due to some price movement in our Canadian business to offset the effect of stronger Canadian dollar.

We sell to our company-owned distribution in Canadian dollars, and due to the strength in that currency we lowered our price to those dealers to maintain competitiveness against companies who sell in US dollars.

Overall the lower pricing Canada related to FX was largely offset by the two point positive currency impact I just mentioned.

Residential segment profit was $7 million compared to a segment loss of $5 million a year ago.

Segment profit margin was 2.5% an improvement of 440 basis points from the first quarter a year ago.

Turning to our commercial heating and cooling business, in the first quarter revenue was $120 million, down 9%.

Currency had a positive 3% impact, volume was down 12%, and price and mix were stable.

Segment profit was $3 million, up from $2 million in the first quarter a year ago.

Segment profit margin was 2.8%, up 130 basis points from a year ago.

Our North American commercial H vac revenue was down in the low teens primarily on continuing softness in the retail market and our European commercial H vac revenue was down low double digits at constant currency.

Moving to our service experts business, in the first quarter revenue was $127 million, up 22%.

Currency had a positive 5% impact, volume was up 18%, and price and mix were down 1%.

Both residential and commercial services revenue was strong in the quarter.

And in the seasonally lightest first quarter, segment loss was $5 million compared to a loss of $7 million a year ago.

Segment margin was negative 3.6%, an improvement of 320 basis points from the first quarter a year ago.

In our refrigeration segment, revenue in the first quarter was $131 million, up 16%.

Currency had a positive 15% impact.

Volume was flat, and price and mix were up 1%.

The North America region showed the greatest strength at constant currency with revenue up mid single digits.

Segment profit was $15 million, up 129% from a year ago, and segment profit margin was 11.3%, up 560 basis points.

Restructure charges and other items in the first quarter were $4.7 million after tax.

3.4 million of which was for a new project to exit the OEM refrigeration coil business in Australia.

In total these charges impacted our GAPP EPS from continuing operations by .08 cents in the first quarter.

Corporate expenses were $13 million in the first quarter, compared to $14 million in the prior year quarter.

For 2010, our corporate expense guidance remains approximately $65 million.

SGA was $169 million in the first quarter versus $155 million in the prior year quarter.

Excluding impact of Foreign Exchange, SGA was up 5% primarily on higher variable selling costs and incentive compensation.

For the first quarter, cash used in operations was $40 million, primarily due to the seasonal inventory build as well as the ramp up of new production introductions.

In the first quarter a year ago, cash provided by operations was $16 million, which included the benefit of $24 million return of collateral posted for hedges.

Capital spending was $11 million in the first quarter compared to $10 million in the prior year quarter, and free cash flow was negative $51 million for the first quarter compared to positive free cash flow of $6 million a year ago.

Working capital as a percent of trailing 12-month sales for the company was 17.3%, compared to 18.4% in the prior year period.

The quarter ended working capital ratio was 16.4% compared to 15.8% a year ago.

Looking at liquidity, cash and cash equivalents were $63 million at the end of March and our debt to EBITDA was 1.2 ending the first quarter.

Total debt was $291 million at the end of the quarter, $270 million of which was under the current company revolver.

The company utilized the revolver to pay off $35 million prior replacement note in the quarter as well as to repurchase $35 million of company stock as Todd mentioned earlier.

Before I turn it over to Q&A I'll briefly talk about outlook for 2010.

Looking at our underlining market assumption we now expect the North American residential market to be up mid single digits in 2010 versus our prior assumption of low single digits.

We now expect North American commercial unitary markets to be down low double digits versus our prior assumption of down lower teens.

And we expect Europe H vac and refrigeration markets to be down mid single digits.

Based on these assumptions and with the first quarter behind us we are raising the low end of our 2010 revenue guidance by 1 point to a range up 4% to 7% and we still assume two points of positive FX impact.

Were also raising our 2010 guidance for adjusted EPS from continuing operations from a prior range of $1.85 to $2.25 to a new range of $1.90 to $2.30.

This higher range factors in the offset of an additional $10 million headwind for higher commodity prices now assumed for this year above our previous guidance.

Our GAAP EPS guidance range is $1.77 to $2.17, reflecting the higher adjusted EPS guidance and full year impact of our announced restructuring charges.

Our tax rate is still expected to be between 35% and 36% for 2010, our diluted share cost for 2010 is expected to be flat with last year and capital spending we continue to expect $75 million for 2010.

With that let's turn it over to Q an A.

(Operator Instructions).

Our first question comes from the line of Phil Gresh from JP Morgan.

Please go ahead.

Hi, Phil.

Good morning, guys.

I guess I'll start with the raw materials.

How positive was that in the quarter?

You talked about it basically in every segment.

So how positive was that?

Approximately $5 million.

Okay.

And I appreciate the color on the first half versus second half.

How are you guys trying to combat them?

Are you looking to increase prices to offset or does it have to be

It's

a tough environment right now to get price I think until everyone understands that markets are stabilized, we'll do what we always do which is try to offset commodity increases with price increases but I think it will be challenging in the current environment.

Okay.

On the commercial side, obviously, a lot less bad there against some tougher comps from last year.

And the comps get easier.

So any thoughts about when that might turn the corner and turn positive?

You know, you saw what the market guidance that we gave for full year that we still think it's going to be down.

And we sliced the guidance pretty tight.

We said earlier it was going to be low teens, now we're saying low double digits.

So we're saying 10%, 11% we think the market is going to be down.

We were down a little bit more than that in first quarter.

You also heard some color commentary in our script that we're seeing some pickup from some of the retailers and order rates are picking up and backlogs building.

But we're not to the point where we're ready to call bottom yet.

But it feels better than it did 30 days ago or 90 days ago.

Okay.

Last question for me is on the resi-margins last three-quarters you guys have done high $30 million in profits.

Despite sales declining and obviously seasonally weaker Q-1.

But I guess what changed from Q-4 to Q-1 that profits from $38 million to $7 million?

I mean is, there a mix factor there?

Could you just explain that?

Yeah.

There's a couple things in play, Phil.

One, the Q-4 to Q-1 comp for us is always a difficult one and mix just normally we're going from our furnace business which is incrementally higher margin than our air conditioning business.

And also during the first quarter we always have as well as everyone else an industry-loading programs incentives to get the product into the dealer location.

So it's lower margin mix than our very rich fourth quarter mix.

On this fourth quarter, excuse me, fourth to first it was that plus a significant pickup in the R and C business, residential new construction which has incrementally lower margins.

And in the final pieces from fourth quarter to first quarter this year as some of our hedges rolled off, net although I said a $5 million year-over-year commodity tail wind sequentially our commodity costs were higher in the first quarter than they were fourth quarter.

Okay.

Very helpful.

Thanks.

Thank you.

Our next question comes from the line of Robert Wertheimer from Morgan Stanley.

Hello, everyone.

Just had a question on whether you're seeing any-- well, and it's early I know, but any change from the coolant change over in terms of people purchasing complete systems with air handlers and units or repair versus place if that's triggering in?

I know there's an up sell potential as the installer goes out to the house.

I think your promise is right, it's a little early.

I think we will know better come summertime.

Because right now obviously a lot of the sales are we're selling from our distribution and the dealers on the air conditioning side and heat pump side.

And we'll know better come summertime how it plays out.

Fair enough.

Any thoughts on financing available for consumers?

I think it stands -- I mean, if anything, incrementally better than the last time we talked about this.

But we continue to use GE finance to provide financing for our -- we coordinate with our dealers and our dealers provide financing to end-use consumers.

When we talked to our dealer base, they have lots of things they'd like to talk to us about.

That's usually pretty far down the list.

Consumers are finding ways to buy units when they need to.

What's high up on the list?

With distribution it always starts with price, doesn't it?

Fair enough.

When does that GE agreement renew for another year?

I'm sorry.

I've forgotten.

I think it's an evergreen agreement.

I think we just keep it rolling.

But we'll get back to you on an exact answer.

I'm answering that from the top of my head, Robert.

That's fine.

Thanks, everybody.

Our next question comes from the line of Keith Hughes from Suntrust.

Please go ahead.

Two questions.

One in the residential business, the unit numbers there look like some of the better ones we've seen in this reporting season in that business.

Do you think you did some share pickup here?

The effect on the furnace?

Any sort of thoughts on that topic.

I'll say the same thing when our numbers don't look as good which is tough to draw conclusion from one quarter as you know in this business where you're loading and reloading.

That being said, we're really excited about our new product and I talked about it in the script.

At our dealer meetings around the country they're very excited about the furnaces, about icomfort, and increasingly excited about our sun source product line.

Combined with the fact on our new distribution strategy we have 29 new parts plus stores or distribution sites with the remodeled format in place.

So I wouldn't read too much into the one quarter but we're feeling good both about our product and our distribution initiatives.

Okay.

Second question, the $15 million to $20 million commodity headwind, is that a net number for the full year or is that what you'll start experiencing in the second half of the year?

I'll answer it and then do the math to be clear.

It's net.

And since we had $5 million in tail wind first quarter, it's $20 million to $25 million for the balance of the year.

So second quarter probably a neutral on this topic?

Order of magnitude, yes.

Okay.

Thank.

Thank you.

Now to the line of Glen Wortman from Sidoti & Company.

If possible can you provide us with your margin assumptions on your residential that you have built into your four year guidance?

I don't think we give that, Glenn.

Walking around the room to see if I ever told you that before.

I don't think I have.

I don't think you ever have either.

I was just checking.

The second, I think this tax credit which expires I believe at the end of 2010 has been supporting your mix.

Do you expect a reversion to lower efficiency units once that tax credit expires?

I think it will put pressure downward.

But I don't think you go back.

I don't think you go back for two reasons.

I don't think you go back because part of the issue of selling high-efficiency units is getting your dealers to a position where they're ready to do that and aggressive to do it and know how to do it.

I think the stimulus money has encouraged them to really figure out how to sell up.

So I think that maintain' s in place.

I think second is, as we roll into 2011 and beyond there'll continue to be pressure just around the base economics to justify which is higher energy costs and who knows what kind of scheme will come out of Washington to help encourage that?

And then finally in commercial can you just give us your expectations of how the replacement market will perform here and what percentage of your sales you think are derived from replacement sales?

Traditionally we've been 60% new construction in our commercial business, 40% replacement.

Last year we were closer to 50/50, maybe 55 new construction, 45 replacement.

I think that trend towards replacement mix will continue in our business for a couple reasons.

One is what we've done with our landmark product, which gets us to a cost point for the at once replacement and what we've done on a distribution side in terms of repositioning product.

I think the second is our customers.

When I talked about retailers in our increasing order rates from big box retail, it's mainly being driven, although there are some new stores being built, it's mainly being driven by increase ins planned replacement that they like most of corporate America really had their heads down last year.

So the way to think about it is they took a year out of their planned replacement cycle, or better stated, added a year to their planned replacement cycle, now some of this equipment economically need to be replaced so I think that will help drive our business.

Thank you very much.

Thanks.

Our next question comes from the line of Jeffrey Hammond from KeyBanc Capital Markets.

Please go ahead.

Good morning, guys.

Hi, Jeff.

Jumped on later here but I just wanted to drill down on this priced mixed place dynamic.

Looks like you guys were minus three.

Can you help parce out price versus that and then how much Canada really impacted that?

Jeff, this is Bob.

We were combining price mix really because of a large amount of new products introductions we've got this year.

Two major high volume product lines in commercial are completely new furnace line and residential.

So price and mix go hand in hand pretty aggressively this year.

In terms of residential price mix down 3%, you're right.

Largely driven by this Canadian currency strengthening.

And what we found was our dealers who are buying in Canadian currency are being put at a disadvantage against some of the competitors who are buying in US.

And so we had to adjust slightly to help make them hold their competitiveness against those customers who are buying in that US dollars.

So our guys buying Canadian, competitors buying in US and the strength of the Canadian dollar drives some offset there.

So all of this minus three was really the Canada issue?

I'd say about two points of it.

Okay.

Because as I look at very strong performance from a demand perspective, and I think you cited even in service experts good replacement demand which would seemingly be mix-up, with the stimulus tax credit we're hearing from distributors, 60% growth and higher efficiency around the stimulus tax credit.

I'm just a little confused as to why price mix wouldn't have been more neutral to positive.

I understand the question.

I think R an C was a piece of it.

We have a very strong position with new construction as you know.

And all be it off a low base, single family starts were up what, 40% year-over-year first quarter versus first quarter last year.

So I think that's a piece of it.

Okay.

So then if we think about this commodity headwind into the second half, I mean, how do we need to be thinking about pricing as we move into the selling season?

Is there a need to go out and get more price or maybe take a little more resilient stance on price going forward?

We have a tradition, better stated, we have over the last four or five years as we've had commodity shocks we've gone into the market place and gotten price to either fully offset it or partially offset it.

And that will continue to be our strategy going forward.

But I'm not sure in the current environment we can get all that.

I think we'll know better as we start to get into the season and everyone feels comfortable about the market then I think we'll be able to get it.

Okay.

And then some of your peers and competitors have talked about a solid start to April.

Can you just talk about what you're seeing as we head into the front part of the selling season?

I think our comments are consistent, both with what we saw in first quarter and what I know -- what our competitors have talked about.

We continue to see residential market on the same kind of trend lines that we saw in first quarter, broadly speaking, which is up.

And we see commercial, the rate of decline slowing and we see refrigeration somewhere in between which is sort of heading up but not as rebust as residential.

And obviously the caveat that you'd expect me to say is the money month is June for the quarter.

So April is trending the right direction but the money month is June.

Okay.

Thanks, guys.

Thanks, Jeff.

(Operator Instructions) .

We'll now go to the line of Michael Coleman from Sterne & Leach

Historically you've given kind of mix in terms of high efficiency or kind of the low end and that shifts as the efficiencies get higher.

But do you have kind of what your 17 plus seer is on your unit mix versus maybe a year ago?

I don't off the top of my head have 17 seer.

I know our 14 seer and above for the first quarter was order of magnitude, 50% of our Lennox-branded product in the first quarter, which is continued strong performance.

But we can dig up that 17seer number.

I just don't have it at my fingertips.

I guess I was looking at the sum explanation of the price mix being that you had already moved your mix to a higher-efficiency relative to distributors or so forth.

Is that a possibility of one explanation?

The way I would piece it together for you would be within the replacement mix we haven't backed up in terms of our high efficiency.

In other words, we didn't sell less high efficient units in first quarter than we had a year ago in the replacement cycle business.

I think the mix issue has been the mix between replacement and new construction that we saw the new construction grow strongly in first quarter.

Okay.

On the new furnace, the 33-inch tall furnace, was that in the mix in the quarter?

Pieces of it were in the mix for the quarter.

The products to be very precise is being rolled out during the year across all our brand and all our business units on the resy side but there were big pieces of it in the first quarter furnace sales.

Okay.

And on the sun source, so it sound like you've got a second generation product that has some net metering capability and would provide power if the HVAC doesn't require it.

The one thing I was wondering was what the potential service area of the solar piece of it is if it's been increased.

What do you mean service area?

You mean geographically?

No.

No.

The photo voltaic cells, I think the first generation was reasonably sized, but can you upsize this?

You know, instead of using a relatively small surface area can you have a much larger surface area to run that off of?

I think I'll get out of my depth pretty quick unfortunately, Mike.

I mean, we can clearly use 15 panels that we can put together which covers most roofs, at least where I live that feed into the unit.

I think the other sort of neat thing about our second generation sun source , my guess is you already know this, is our Dave Lennox signature series which is our premium line will come off the line solar ready.

So on a new construction job you don't have to make the decision or you don't have to make the decision when you're replacing an unit that you want as solar ready all the hardware is built into your unit just like you buy a television set that's HD compatible and then you wait awhile before you buy direct TV and buy HD signals.

The units we sell will be solar ready.

And then a year from now or two years from now you want to buy the solar panel, hook it up, the system will be ready to accept

Oh, okay.

Thank you.

Thanks.

Thank you.

At this time we have no further questions.

I would now like to turn the call back over to Todd Bluedorn.

Please go ahead.

Thanks, operator.

We expect end markets to continue to show improvements in 2010 led by early cycle residential.

It's our strong double-digit growth in the first quarter.

We're excited about our new product introductions and are well-positioned for share gains and to capitalize further on market opportunities.

The benefits from our productivity initiatives are clear as seen in our strong margin improvement.

We remain highly focused on the leverage in the business model as end market conditions improve and volumes return.

Thank you very much for your interest.

And have a good day.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

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