Lennox International, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Lenox International First Quarter 2020 Earnings Call. At the request of your host, all lines are in a listen-only mode. There will be a question and answer session at the end of the presentation. To put yourself in queue, press 1, then 0. As a reminder, this conference is being recorded. I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for this review of Linux International's financial performance for the first quarter of 2020. I'm here today with Chairman and CEO Todd Bluedorn and CFO Joe Reitmeyer. Todd will review key points for the quarter and the outlook, and Joe will take you through the company's financial performance and expectations. To give everyone time to ask questions during the Q&A, please limit yourself to a couple of questions or follow-ups and read Q for any additional questions. In the earnings release we issued this morning, we have included the necessary reconciliation with the non-GAAP financial measures that will be discussed, two GAAP measures. All comparisons mentioned today are against the prior year period. You can find a direct link to the webcast of today's conference call on our website at www.linuxinternational.com. The webcast will be archived on the site and available for replay. We'd 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 risk and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risk and uncertainties, see Linux International's publicly available filings with the SEC. The company disclaims any intention or obligation to update 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 Chairman and CEO, Todd Bluedorn.

Thanks, Keith. Good morning, everyone, and thanks for joining us. Let me start with a quick overview on the first quarter, then discuss our current outlook for 2020 and the actions we are taking in this unprecedented time. For the first quarter, company revenue was $724 million, down 8% on a GAAP basis, and down 4% on an adjusted basis that excludes the impact from the vestiges last year. GAAP operating income was $36 million, down from $95 million in the prior year quarter that included approximately $47 million of insurance benefit related to the 2018 tornado. GAAP EPS from continuing operations was $0.32 compared to $1.73 in the prior year quarter that included $0.87 of insurance benefit. On an adjusted basis, total segment profit was $38 million compared to $99 million in the prior year quarter that included $40 million of insurance benefit. Total adjusted segment margin for the first quarter was 5.2% compared to 13.1% in the prior year quarter as reported and 7.8% excluding the insurance benefit. Adjusted EPS from continuing operations was $0.56 compared to $1.68 in the prior year quarter that includes $0.75 of insurance benefit. Looking at the business segment performance for the first quarter, there are a couple overarching comments to make. First, weather continued to have a significant adverse impact. Heating degree days were down from last year and every month and down 15% overall for the quarter. Second, we saw an increasing impact on our business in March from the COVID-19 pandemic, first in Europe and then in North America. On the demand side, We saw contractors stocking up less residential equipment ahead of the spring and summer seasons due to the rising economic uncertainty, and national account customers and both our commercial and refrigeration businesses have pushed orders out. Operationally, HVAC has been designated an essential business in North America, Europe, and in Mexico. We have managed to supply chain well across regions that we source from, including Asia. And combined with our buffer stock, we have not seen an impact on our manufacturing capability in this regard. In late March, we did make the decision to close some of our factories for a couple weeks and broadly protected the Lenox team from COVID-19 cases at those locations. These factories are all back up and running, and of course, protection for the team members are in place. In our residential segment in the first quarter, revenue was down 5%. Revenue from replacement business was down high single digits, impacted by the warm weather. New construction revenue was up high single digits as the warm weather generally enabled homebuilders to get an early start in the year. Residential segment profit was $33 million, down from $87 million in the prior year quarter on a reported basis that included the $40 million of insurance benefit that I mentioned earlier. Segment margin was 7.4% in the quarter compared to 18.6% as reported, or 10% excluding insurance benefit in the prior year quarter. In commercial, revenue was up 3% in the first quarter, and segment profit rose 24%. Segment margin expanded 180 basis points to 10.5%. Commercial equipment revenue was up low single digits in the quarter. New construction revenue was up high teens, and replacement revenue was down high single digits. Breaking out the business another way, revenue from regional and local business was up low single digits. And national account equipment revenue was also up low single digits in the quarter. On the service side, Lenox national account service revenue was up low double digits. In the refrigeration segment for the first quarter, adjusted to exclude the impact from the best issues in the prior year, revenue was down 11% of constant currency. Segment margin declined 730 basis points, to 0.7%, and segment profit was down 93%. The segment has approximately 55% of its revenue from North America and 45% from Europe, which has seen soft markets for some time and then was impacted earlier from the pandemic than North America, including a shutdown at both of our French factories. North America revenue is down mid-single digits, and Europe revenue is down high teens. Looking ahead for the company overall, market conditions are highly uncertain and there are significant challenges we are addressing. But Lenox has a focused and seasoned team with experience managing through economic downturns and difficult times. For me personally, I manage Carrier's HVAC business in Southeast Asia in the wake of the Asian financial crisis in the late 90s. Those of you who don't remember it, I encourage you to go Google it. I manage Carrier's North America HVAC businesses through the impact from 9-11. and then a CEO at Lenox through the residential new construction collapse and the global financial crisis of a little over a decade ago. Based on how HVAC markets performed in those prior downturns, our current view is that the North America residential and commercial unitary HVAC and refrigeration markets will be negatively impacted about 20% this year by the pandemic. We have reset our financial expectations for the year based on that level of market impact. I now expect revenue to be down 11% to 17% from last year versus our previous guidance for growth of 4% to 8%. We expect adjusted EPS from continuing operations in the range of $7.50 to $8.50 for the year. We have already taken cost reduction actions to realize approximately $115 million in SD&A savings for the balance of the year. The decremental drop through on the guidance reduction on our revenue is 25%, which reflects our aggressive cost actions. We expect cash generation to remain strong for this year as working capital requirements shrink and capital expenditure plans have been reduced from 153 million to 120 million this year. We tend to think of maintenance CapEx levels of being around 10 to 15% of that. We are targeting 340 million in free cash flow for 2020. Lenox is rated investment grade by both S&P and Moody's, and we expect to remain well within our debt covenants. Our bank revolver and asset securitization line do not have to go through renewal again until the latter half of 2021, and our senior notes do not mature until November 2023. The company's quarterly dividend plans are unchanged. Most recently, $0.70 per share or more than $115 million in total for this year. We repurchased $100 million of stock in the first quarter of our $400 million plan going into this year. But we have placed repurchases plans for the second quarter on hold, and we will review plans for the third and fourth quarter as the year progresses. As I turn it over to Joe to discuss financial results, I will just say that while we execute on what is required in these current economic conditions, we remain mindful of the future and are confident we will once again strengthen our position in the market as we emerge in the recovery. Now I'll turn it over to Joe.