Feb 06, 2018 • 09:30 am ET



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Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International Fourth Quarter 2017 Earnings Conference 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. As a reminder, this call is being recorded.

I would now like to turn the conference over to Steve Harrison, VP of IR. Please go ahead.

Steve L. Harrison

Good morning. Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full year 2017. I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier. Todd will review key points for the quarter and year, and Joe will take you through the company's financial performance and outlook. To give everyone time to ask questions during the Q&A, please limit yourself to a couple of questions or follow-ups and re-queue for any additional questions.

(Forward-Looking Cautionary Statements)

Now let me turn the call over to Chairman and CEO, Todd Bluedorn.

Todd M. Bluedorn

Thanks, Steve. Good morning, everyone, and thanks for joining us. Let me start with a quick review of 2017 overall and then discuss some fourth quarter highlights and thoughts on 2018. Lennox International posted another record year in 2017 as the company set new highs for revenue, operating margin and profit. Revenue was up 5% for the year to a record $3.84 billion. GAAP operating income rose 15% to a record $495 million. GAAP EPS from continuing operations was up 13% to a record $7.17. On an adjusted basis, total segment profit rose 10% to a record $515 million, and total segment margin expanded 50 basis points to a new high of 13.4%. Adjusted EPS from continuing operations was up 14% to a record $7.92.

Our residential business led the company's performance in 2017 as it set new highs for revenue, segment margin and profit. Commercial hit new highs for revenue and margin, and Refrigeration continued to show improvement with segment margin and profit up for the second consecutive year. Residential revenue and profit were up 7% for the full year, and segment margin ticked up 10 basis points to 17.5%.

Revenue from replacement business was up mid-single digits, and new construction was up mid-teens for the year. Replacement business was affected by unfavorable weather over much of the year, including the severe weather from the hurricanes that hit Texas and Florida. Residential margins were affected by the unfavorable mix from new construction growing faster than replacement and by the significant investments we made for the future growth and profitability of the business. Investments ranged from new products to distribution expansion to leading information technology for dealers, technicians and homeowners. Investments returned to more normalized levels in 2018.

In commercial, revenue was up 5% at constant currency for the year, and profit rose 5%. Segment margin was 16.2%, up 10 basis points. As in residential, we made investments for the future growth and profitability of the business and had unfavorable mix