Lennox International Earnings Call Nuggets: Service Experts, Housing Business Breakdown

On Monday, Lennox International, Inc. (NYSE:LII) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Service Experts

Robert Barry – UBS: I just wanted to make sure I understood all the moving pieces in the guidance, I mean the midpoint is going up $0.20. Could you tell us what the impact is for moving Service Experts out?

Todd M. Bluedorn – Chairman and CEO: Yeah, I guess, I probably think about it this way, if I understand the question you have Robert, and actually some others have it too, is a couple points. One is, from the guidance we had on the table before the $2.35 to $2.65. Service Experts deteriorated in third quarter versus that guidance that we gave last time. Our continuing operations everything else, reflecting a strong Q3 that we had, the new guidance is very much in line maybe even slightly up versus the guidance that we had on the table before for the continuing operations.

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Robert Barry – UBS: So adjusting for Service Experts just so I’m clear, the continuing ops guidance for the other three businesses is about the same now as it was before?

Todd M. Bluedorn – Chairman and CEO: Correct.

Robert Barry – UBS: Then I just wanted to clarify also what the guidance implies for the variable SG&A that I think was the negative 20 in your original outlook?

Todd M. Bluedorn – Chairman and CEO: I think Joe sort of called it out in the script, we still expect it to beat $20 million of headwind from re-inflating incentive comp in 2012.

Robert Barry – UBS: Then just finally on the — you had alluded to the PartsPlus stores helping to drive market share gain, I know a while back you had quantified that has about half of the $25 million EBIT benefit expectation. I was just curious kind of how you were tracking versus that or if you can – just to mention that share gain a little bit?

Joseph W. Reitmeier – EVP and CFO: Let me (indiscernible) a little bit Robert. I think the short answer is we’ve gained significant share this year in Lennox Residential, and it’s often hard to sort of break out the different pieces of what’s driving it. At the December Analyst Day, we’ll take a crack at that and sort of give a little bit more insight on some of the drivers. But the short answer to your question is we’re seeing a share gain in Lennox PartsPlus, even better than what we had hope when we put them in place.

Housing Business Breakdown

Stephen Tusa – JPMorgan: Can you just give us the breakdown around what your housing business did? Then what the R410A systems, if you can do this sold into replacement markets data in the quarter?

Joseph W. Reitmeier – EVP and CFO: New construction in Resi was up by 25% year-over-year. What was the second question?

Stephen Tusa – JPMorgan: The second question was, I guess, that there is a lot of moving parts around R22 and 410A. So, I’m just curious, R22 obviously is coming in weaker than expected, so I’m just curious as to 410A?

Todd M. Bluedorn – Chairman and CEO: R22 as a percentage of the mix, as we said in the call, was down in the quarter versus a year ago and that we’ve been calling all long for it to be 25% the mix this year. We’re now saying, it’s going to be flat more likely it’s going to be down. On a year-to-date basis, it’s down versus last year. In terms of the system sales of 410A, I understand the question, it’s a little hard to calculate sort of all the pieces and sort of how they attach, but I think you can look at our volume growth 12% in the quarter, and I think that’s reflecting the fact that we are tying together system sales and getting furnace volume versus last year’s second and third quarter where we didn’t.

Stephen Tusa – JPMorgan: So, what you think just a guess, I mean are installs of 410A just condensing units. I’m just trying to get an idea around the consumers’ mindset. Are those – you got housing up, which is a big help obviously. You got R22 down. Does that mean the 410A replacements, the condensing units are up and if they are, it seems like it’s kind of low to mid-single-digits? Is that right?

Todd M. Bluedorn – Chairman and CEO: Our add-on and replacement for the quarter was up high single-digits, and so we have 25% in new construction portion of our business, up 9% in add-on and replacements, and if you do all that weighted math.

Stephen Tusa – JPMorgan: You get to the 12.

Todd M. Bluedorn – Chairman and CEO: Yeah. We are flat to down on parts, so you sort of roll that and you get to weighted-average.

Stephen Tusa – JPMorgan: As far as price cost is concerned, obviously you’re going to get a little bit more of a benefit here. How does that roll forward into next year, the way your hedges work? Do you already have a benefit dialed in and also what’s the approach on upcoming pricing into next year?

Todd M. Bluedorn – Chairman and CEO: We always try and get price in the market and part of that, as we’ll roll into 2013, we’ll have more visibility on the end-markets. It’s early on 2013, although, I guess it’s getting later as we get closer. If spot prices on copper and market prices on steel stayed where they are today, we’d have some tailwind going into 2013 from commodities.

Stephen Tusa – JPMorgan: One last question, you guys are big, a relatively, I think, larger furnace play here, you guys have a very easy comp to the warm winter last year. There is also the furnace regulation, I guess, that’s coming up and changing. We’ve heard that some of the newer furnaces are a lot more expensive to install. Do you think you’re going to see any kind of pre-buy associated with that here in the fourth quarter as contractors tell people that the 80% is obviously a lot cheaper than 90%? The second question, I guess is, do I have that wrong, am I getting kind of wrong information from the channel on that?

Todd M. Bluedorn – Chairman and CEO: Let me come out at this way. I don’t think it’s more – at least with our product line, it’s not more expensive to install our new furnace versus our old furnace. A 90% efficient furnace is cost more and the street price is more than 80% furnace, that’s certainly true. I think the more fundamental point is, the way the implementation of this efficiency changes is being implemented in fields is different than in the past. Where in the past, it was implemented at the OEM level, which is you couldn’t make them after a certain day, which means there is real incentive for distributors and to a lesser degree dealers are sort of stock up on the units, which drove a pre-buy. While, DOE is still a sort of fine tuning the implementation details and we’re waiting for them and parenthetically may delay the implementation, since we haven’t gotten them yet, but the way we understand it right now the way the implementation is going to work is the dealer can no longer install them after the effective date, so any pre-buy would have to be the consumer deciding to buy a furnace and having it install prior to the implementation date. That’s a lot less likely. People just don’t pull forward their decisions to replace furnaces until they have a reason to.

Stephen Tusa – JPMorgan: I guess what I have been hearing is that the new furnaces are – because you have to like cleanout some pipes or something like that, that they’re like a couple of times more expensive to install. So, my point was if contractors were going to come to somebody today that it would just fix it, they’d say look it’s going to be a lot more expensive to replace couple years down the road, so just do it now. I guess what you’re saying is that’s not the case?

Todd M. Bluedorn – Chairman and CEO: I’m saying it may happen on the margins, but our experience is consumers, dealer they trust or a contractor they trust that the furnace is working to have someone tell you to pull it look forward because they’re not likely to do that.