Lennox International Earnings Call Insights: Parts Plus Strategy and Replacement Side

Lennox International, Inc. (NYSE:LII) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Parts Plus Strategy

Aditya Satghare – Lazard Capital Markets: It’s (Aditya Satghare) from Lazard Capital Markets. I’ve had two questions here. Could you elaborate on your Parts Plus strategy and how we should think about the total contribution of the expanded distribution channel into both overall growth and market share gain?

Todd M. Bluedorn – Chairman and CEO, Lennox International: When we initially launched this initiative, three or four years ago, we talked about sort of half the benefit of a $25 million 2013 savings from logistics costs and the balance $12.5 million, $13 million from share gains that we got from the distribution network. I think the way I’d calibrate it is on the logistics side, sort of the cost savings. I think we’re tracking about where we thought we would be given – adjusting for the volume that we have, and I think on market share gains, we’re probably actually doing even a little bit better. When I think about the momentum of our residential business and sort of the implied market share gains, I think a big driver of that is the Parts Plus business or the Parts Plus investments.

Aditya Satghare – Lazard Capital Markets: My second question was on mix. Could you kind of help us understand what kind of feedback you’re getting from your distribution channel in terms of this mix (diversity) as you said, 14 plus we’re going north of 35%. What sort of feedback are getting in terms of driving this mix shift here?

Todd M. Bluedorn – Chairman and CEO, Lennox International: I think – I’ll even broaden the question a little bit and just talk about mix for the quarter in our resi business. I mean, one driver of the positive mix was add-on and replacement was stronger than new construction and it wasn’t that new construction was down. It was AOR was so strong for us, up 17%, so that helped. Then the mix up within add-on and replacement where we mixed up in the share levels, I think that reflects sort of the strengthening of the American consumer and the consumer confidence in existing home values and some of the other metrics that we’ve talked about that – talking in business jargon, if people were managing for NPV, they’ll make the investment in the higher share product in many locations in the country and then people were managing for cash flow, they resisted it. I also think, quite frankly, it’s after two or three years of mix down, we were due for a quarter where the market started to change. Comps has got a little easier too I think.

Replacement Side

Richard Kwas – Wells Fargo Securities: Could you just detail as the quarter played out what you saw, particularly in the replacement side? I know back in April, you said that Q2 got off to a pretty good start, but sounds like you got some incremental momentum as the quarter went on.

Todd M. Bluedorn – Chairman and CEO, Lennox International: It was pretty solid the entire time, Rich, to be honest with you. I mean it was the – in the quarter, it started at – overall, for the quarter while it was warm historically, it was down 10% in cooling degree days, and so it was cooler than it was a year ago. I think maybe the only way it sort of helped us at the end in June was the last week or two of June was warm even on a year-over-year basis. April-May was cooler, but we still had good momentum and so I think during the full quarter we saw it.

Richard Kwas – Wells Fargo Securities: Then Q3, as you mentioned some pretty warm weather here, I assume it’s gotten off to a pretty good start. But any comments there would be helpful…

Todd M. Bluedorn – Chairman and CEO, Lennox International: Again, just to sort of calibrate a little bit on the weather, because it’s all relative on a year-over-year basis and we had a really hot summer last year. So through mid-July, cooling degree days are actually down 15% in the U.S. and Canada, so actually cooler than a year ago which is hard to imagine but it’s true. All that being said, we are off to a solid start in July in Residential and the momentum that we saw in second quarter has – broadly speaking, has continued in our Commercial business as we’ve seen some choppiness in shipment timing with grocery customers. We have pretty solid backlog and order rates in our commercial businesses, both refrigeration and commercial going into third quarter.

Richard Kwas – Wells Fargo Securities: Then just when you look at M&A in the balance sheet right now anything changed in the last few months whether it’s properties that are out there or just the attractiveness of it at this point?

Todd M. Bluedorn – Chairman and CEO, Lennox International: I don’t think anything’s changed – it’s just sort of the constant thing that we’ve said for several years now which is we’ll invest in Kysor/Warren like acquisitions to build out our refrigeration business and commercial service business and those are sort of $100 million, $150 million deals like Kysor/Warren is sort of the way I’d think about it. And if a property opened in North America HVAC in the unitary business either residential or commercial, we think we could create value by consolidating the industry and if something opened up and valuations are right and we created some value by doing it, we would want to do that.

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