Lennox International, Inc. (NYSE:LII) Q3 2019 Earnings Conference Call - Final Transcript

Oct 21, 2019 • 09:30 am ET

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Lennox International, Inc. (NYSE:LII) Q3 2019 Earnings Conference Call - Final Transcript

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Presentation
Executive
Joseph W. Reitmeier

ending the quarter.

Now turning to our guidance for the Company, overall for 2019, we're updating guidance for adjusted revenue growth from a range of 2% to 5% to a new range of 2% to 4%. We are updating GAAP EPS from continuing operations from a range of $11.91 to $12.51 to a new range of $10.65 to $10.95. This includes a non-cash pension settlement charge of approximately $28.9 million after-tax or approximately $0.73 a share that we expect to recognize in the fourth quarter of 2019. Similar to what we did in the second quarter, this pension settlement charge relates to an agreement we entered into with Pacific Life Insurance Company in October to annuitize $78 million of our defined benefit pension obligation. As part of this transaction, we also transferred $75 million in pension assets to Pacific Life. This event required a remeasurement of the pension plan and resulted in a non-cash $28.9 million after-tax settlement charge, we expect in the fourth quarter to write-off the related accumulated actuarial losses.

We continue to expect a pre-tax gain of $91 million in 2019 related to factory reconstruction cost and the associated gain from replacement value above book value. For adjusted EPS from continuing operations we are updating guidance from a range of $11.30 to $11.90 to a new range of $11.15 to $11.45.

Now, let me run through the other key points in our guidance assumptions and the puts and takes for 2019. First, the guidance elements we are updating. For price, we still expect a 2% yield for the full year, but with lower volumes through the summer season is now equates to $75 million versus the prior guidance of $80 million. Corporate expense is now expected to be approximately $85 million, down from our prior guidance of $90 million, primarily due to lower variable compensation. Free cash flow is now expected to be approximately $320 million for the year compared to guidance of $390 million. The change is due to approximately $15 million of lower earnings and $55 million of inventory.

Given the tight labor market for manufacturing employees, instead of reducing direct labor as is typical for a core summer, we decided to be more level loaded -- we decided to more level load production from the Iowa factory and pre-build some product for 2020, which will burn-off over the course of the year.

For the 2019 guidance elements that remain the same. We still expect a $25 million benefit from sourcing and engineering led cost reductions. We continue to expect $20 million -- a $20 million headwind on a full year basis from commodities. We still expect $15 million of headwind from freight and $10 million from tariffs. We continue to expect headwinds of $15 million for distribution investment and $15 million from SG&A. Net interest expense is still expected to be approximately $45 million, and we still expect an effective tax rate in the range of 22% to 23% on a adjusted basis for