Q1 2021 Lennox International Inc Earnings Call
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[music].
Ladies and gentlemen, thank you for standing by welcome to the Lennox International first quarter 2021 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. You may enter the queue to ask a question by pressing one and zero on your phone pressing one and zero again exits the queue. As a reminder, this call 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 Lennox International's financial performance for the first quarter of 2021.
I'm here today, with chairman and CEO, Todd <unk> and CFO, Joe Reitmeier Todd.
Todd will review key points for the quarter and Joe will take you through the company's financial performance and outlook for 2021.
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.
In the earnings release, we issued this morning, we have included the necessary reconciliation of the non-GAAP financial measures that will be discussed to 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 Dot Lennox International Dot com.
The webcast will be archived on the site for replay.
I would 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 risks and uncertainties that could cause actual results to differ materially from such statements.
For information concerning these risks and uncertainties see Lennox 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 <unk>.
Thanks, a lot Steve good morning, everyone and thank you for joining us in the first quarter. We continued to see strong momentum in our residential business combined with strong improvement in commercial and refrigeration is the overall company set new first quarter high per revenue profit and earnings per share.
Overall for the company revenue was up 29% to a new first quarter record of $931 million at constant currency revenue was up 28%.
GAAP operating income was a first quarter record of $114 million up 213% GAAP EPS from continuing operations was a first quarter record $2 20 up 588%.
Total segment profit rose, 208% to a first quarter record of $116 million total segment margin expanded 720 basis points to 12, 4% and adjusted EPS from continuing operations rose, 305% to a first quarter record $2 27.
Looking at our business segments from the first quarter, we realized double digit revenue growth and margin expansion in all three businesses and.
In residential we set new first quarter highs for revenue and profit Reza.
Residential revenue was up 37%.
Segment profit rose, 197% and segment margin expanded 850 basis points to 15, 9%.
<unk> business was up more than 40%, new construction was up more than 25%.
Breaking it down between our Lennox business in our Allied business Lennox revenue was up about 25% and Allied was up about 70%.
Strong growth rates let.
So let me take a moment to unpack the strength, we saw in residential in the quarter.
First with strong operational execution, our residential team is capitalizing on its ability to deliver to meet contractor and distribution distributor distributor demand and gain share.
Post 2018 tornado and initial 2020 pandemic impact we're back on offense with production distribution and executing our playbook from market share gains second.
Residential benefited from the colder winter weather with heating degree days up 13% from the first quarter last year, you may recall, we had a soft first quarter.
In 2020.
Third I'd like to note that we had six.
I would like to note that we had a 6% benefit to revenue from more days in the quarter. This year than last year that happens every four years as we reset the calendar. Conversely, the fourth quarter will have a 6% headwind from fewer days in the quarter. This year. This applies to residential as well as all our other businesses at.
Adjusting for the days residential grew 31% with Lennox growing nearly 20% and allied growing about 65%.
In addition for Allied we had approximately $25 million of pull forward in the first quarter from different distributor loading patterns this year than last year.
Adjusted for both days and this pull forward as well.
Allied was up approximately 35% in the quarter.
Working through all this math I gave adjusting for days and the pull forward in our allied business, which sells to independent distribution overall resident residential segment revenue was up about 25%.
We believe this compares to mid teams sell through for the industry driven in part by the favorable cold weather that I talked about.
Our performance that is above that is due to market share gains as I mentioned earlier, we are back on the offensive with production distribution and executing our playbook for gaining share. The team has had strong operational execution to drive this outperformance and we are well positioned for the summer season, and our largest seasonal quarters.
In commercial revenue segment profit and margin were all first quarter Records Records revenue was up 12% at constant currency revenue was up 11% segment profit was up 47% and segment margin expanded 330 basis points to 13, 8%.
In the first quarter, we saw broad strength in commercial as year over year growth turn positive across all of our businesses.
Constant currency commercial equipment revenue was up mid teens in the quarter.
Within this replacement revenue was up mid teens with plan replacement up mid teens and emergency replacement up high teens new.
New construction revenue was up high single digits.
Breaking out revenue another way regional look local business revenue was up mid teens National account equipment revenue was also up mid teens, our team on three new national account equipment customers in the quarter.
On the service side. The next National accounts services revenue was up mid single digits. The RF revenue was up mid Thirty's percentage.
Some highlights I mentioned for commercial.
Schools continue to be an area of focus for US we have a dedicated sales force from product line that will drive a multiyear growth opportunity for us in this market today.
Today K through 12 schools are just a little under 10% of revenue for this.
Equipment revenue for this segment this.
This business was up more than 20% for us in the first quarter and given the recent stimulus package that benefits HVAC indoor air quality spending for schools, we expect K through schools to be a growth vertical for us moving forward indoor.
Indoor Air quality continues to be important focus for us with our building better air initiatives. Most interest and activity. We are seeing are in this K 12 school segment, but conversations are taking place with many customers across many industry verticals.
We have launched our new model, our rooftop unit as we continue to lead the field in energy efficiency. The model well features variable speed technology and an all new advanced control system, we're seeing high customer interest in this industry, leading product for 2021 and beyond.
Overall for commercial entering the second quarter momentum continues with backlog up double digits and strong order rates.
In refrigeration for the fourth first quarter revenue was up 21% at constant currency revenue was up 17% in North America revenue was up more than 25%.
Europe refrigeration revenue was up low single digits at constant currency and Europe HVAC revenue was up mid single digits at constant currency.
Refrigeration segment margin expanded 560 basis points to six 3% and segment profit rose rose to $8 million from $1 million from prior year quarter like in commercial momentum continues for refrigeration entering the second quarter with backlog up double digits and strong order flow led by north.
America.
The strong performance from the company overall in the first quarter and outlook for the second quarter and year. We are raising 2021 guidance. We now expect 7% to 11% revenue growth and adjusted EPS from continuing operations of $11 40 to.
The $12, we're also raising free cash flow guidance to $375 million for the full year.
We now assume a loss of 55% of earnings in the first half of the year compared to the prior guidance of about 50%.
This reflects the strong first quarter performance and second quarter outlook, we repurchased $200 million of stock in the first quarter and plan on another 200 million for a total of $400 million and our guidance for the year now I'll turn it over to Joe.
Thank you Todd and good morning, everyone I'll provide some additional comments and financial details on the business segments for the quarter, starting with residential heating <unk> cooling.
In the quarter revenue from residential heating <unk> cooling was a first quarter record $606 million up 37% volume was up 32% price was up 1% and mix was up 4% foreign exchange was neutral to revenue.
Residential profit was a first quarter record $96 million up 197%.
Segment margin expanded 850 basis points to 15, 9%.
Segment profit was primarily impacted by higher volume favorable price and mix high factory from higher factory productivity sourcing and engineering led cost reductions distribution and freight savings and favorable foreign exchange partial offsets included higher commodity warranty and other product costs and higher SG&A.
Now turning to our commercial heating and cooling business in the first quarter commercial revenue was a first quarter record $199 million up 12% volume was up 15% price was flat and mix was down 4% foreign exchange had a positive 1% impact to revenue growth.
Commercial segment profit was a first quarter record $27 million up 47% segment margin was a first quarter record 13, 8%, which was up 330 basis points.
Segment profit was primarily impacted by higher volume lower material costs and lower SG&A partial offsets included unfavorable mix.
In refrigeration revenue was $125 million up 21% volume was up 15% price was up 1% and mix was up 1% foreign exchange had a positive 4% impact to revenue growth.
Refrigeration segment profit was $8 million in the first quarter compared to $1 million in the prior year quarter segment margin was six 3% up 560 basis points.
Segment profit was primarily impacted by higher volume favorable price and mix lower material costs and higher factory productivity higher SG&A was a partial offset.
Regarding special items from the in the first quarter. The company had net after tax charges of $2 $7 million that included a $2 million net charge for other tax items, a $1 $9 million net charge in total for various other items and a $1 $2 million benefit for excess tax benefits from <unk>.
Share based compensation.
Corporate expenses were $16 million in the first quarter compared to $14 million in the prior year quarter.
Overall, SG&A was $145 million.
Compared to $131 million in the prior year quarter.
SG&A was down as a percentage of revenue to 15, 6% from eight from 18, 1% in the prior quarter.
Yes.
In the first quarter the company used $18 million in cash from operations.
Compared to a usage of $99 million in the prior year quarter.
Capital expenditures were approximately 25 $24 million.
In the first quarter and in the prior year quarter.
Free cash flow was a negative $42 million in the first quarter compared to a negative $123 million in the prior quarter.
The company paid approximately $30 million in dividends in the quarter and repurchased $200 million of stock.
Total debt was $1 7 billion at the end of the first quarter and we ended the quarter with a debt to EBITDA ratio of one eight.
Cash cash equivalents and short term investments were $40 million at the end of the first quarter.
Now before I turn it over to Q&A I'll review current market assumptions and our updated guidance points for 2021.
We now expect the industry to see high single digit shipment growth in residential commercial unitary and refrigeration markets in North America for the full year up from our prior assumption of mid single digit growth in these end markets.
For the company, we are raising guidance for 2021 revenue growth from a 48% range to a new range of 7% to 11% and we still expect foreign exchange to be neutral to revenue for the full year.
We are raising guidance for 2021, GAAP EPS from continuing operations from a range of $10 55 to $11 15.
To a new range of $11 33 to $11 93.
And we are raising our 2021 adjusted EPS from continuing operations from $10 55 to $11 15.
To a new range of $11 40 to.
To $12.
Now, let me run through the key points in our guidance assumptions and the puts and takes for 2021.
First for the items that are changing.
We have announced the second round of price increases and now expect a benefit of $90 million in price for the year up from our prior guidance of $50 million.
We now expect residential mix of tap of $10 million up from our prior guidance for neutral mix.
We expect a benefit of $15 million from sourcing and engineering led cost reduction actions down from our prior guidance of $25 million and this change reflects inflationary pressures from suppliers.
For commodities, we now expect a $55 million headwind up from our prior guidance of $30 million corn.
Corporate expenses are now expected to be approximately $95 million up from prior guidance of $90 million, primarily due to higher incentive compensation.
And now for the guidance side items that remain the same.
We still expect a $20 million benefit from factory productivity.
With 30, new Lennox stores planned for this year will be at a more normal run rate with distribution investments compared to last year.
Freight is still expected to be a $5 million headwind and tariffs are also expected to be a $5 million headwind.
We are planning for SG&A to be up approximately 7% for the year or a headwind of about $45 million.
Now within SG&A, we are making investments in R&D and <unk> for continued innovation and leadership in products controls E Commerce and factory automation and productivity.
A few other guidance points.
We still expect neutral foreign exchange we.
We still expect interest and pension expense to be approximately $35 million.
We continue to expect an effective tax rate of approximately 21% on an adjusted basis for the full year.
We are still planning capital expenditures to be approximately $135 million. This year about $30 million of which is for the third plant at our campus in Mexico.
We expect construction to be completed at the end of 2021 and have the plant fully operational by mid 2022, and we expect nearly $10 million in annual savings from the third plant.
Free cash flow is now targeted to be approximately $375 million for the full year up from prior guidance of approximately $325 million on the strong earnings performance in the first quarter and our current outlook.
And finally, we still expect a weighted average diluted share count for the full year to be between 37 to 38 million shares which incorporates our plans to repurchase $400 million per stock this year.
And with that let's go to Q&A.
And ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the ones you know command and if you're using a speakerphone. Please pick up the handset before pressing the numbers.
Our first question is from Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Back on the offensive.
Yep.
Just on just on mix it seems like kind of a tale of two cities here with RASM ex really good in commercial negative just kind of explain what was going on there and how you see that persisting going forward I know you raised the mix guidance.
For residential.
Positive benefit from the premium product, we're seeing traction.
On the new furnace line that we launched which is our premium product net now part of the ultimate comfort and we're coming out with.
2006 here.
Residential units. So we feel good about the mix and we saw that in the quarter I wouldn't read too much into commercial that just has to do with the lumpiness of customers in the quarter.
So we feel we feel good about mix full year for commercial.
Okay, and then it looks like the Incrementals were a little bit better than kind of your run rate.
Just maybe talk about.
What went right in the quarter and how Youre thinking about as you look at the moving pieces of price cost, how you think about incrementals into the selling season.
I mean, the things we did well was we manage the factories in the face of lots of pressures on our supply chain and on labor because of COVID-19 manage a factor as well.
We executed on MCR, but I mean, there's some timing involved here obviously, Jeff as you know and that's why you asked the question, we're getting the benefit of the price increase and we're getting benefit of lapse lapping the SG&A cuts that we did in <unk>.
April of last year, but we don't have the full inflationary pressure shat of commodities.
In components and the number share so the Decrementals excuse me the Incrementals will soften as we go through the year, but.
They'll still be overall for a full year basis, nice, but they won't be a strongest day, our first quarter balance of the year.
And where do you think price cost is the biggest challenge like timing wise is that kick in in <unk> or.
It will be second half of the year third fourth quarter and a half day, okay. Thanks, I'll get back in queue. Thanks.
Yes.
And our next question is from the line of Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Can you comment.
Todd I wanted to start on the resi market.
Specifically on your comment back on offense good to hear so I wanted to ask.
What levers you pulled in the business.
Behind that strategy, you mentioned a couple of points.
Distribution among them, but what specific changes to the business or the strategy would you call out and then.
As you look to the full year.
Bridging from from Lennox to the industry. It sounds like the outlook for per units now went from mid to high singles.
Should we think about Lennox is in line there.
Maybe outperforming or too early to tell for the full year.
Well, we're certainly expecting to outperform the market. So I'll answer that question first so we raised the market from mid to high.
For residents and for the other end markets and our goal is always to gain share and we certainly have been gaining share and we expect to do that for the full year.
The point about being on back on the offense is.
It seems like forever certainly been since mid 2018, we added tornado then we had the pandemic.
And so we sort of been stalled on driving new business, and we talked about coming out of the tornado it.
2019, right before the pandemic hit that we had won back to dealers, we were sort of gaining their business and thats a multi year effect I mean, you start to get the flywheel going on new business development. It really helps we had really we've had strong momentum in our allied business, where there is not signing up dealers are signing up distributors and then.
It just continues to be the flywheel effect of investments we continue to make in district excuse me.
And digital on our e-commerce initiatives and our ability to support our dealer contractors with our.
Control systems, and then it continues to be investments in product I mean, our residential dealers are excited by our new ultimate home comfort system. They are excited by our new heat pump products and we have a full product lineup and we're making significant investments to even make it better and we're seeing the benefits of that.
Thank you Todd that's all helpful. One quick follow up on the stores. It sounds like <unk> is still the number for this year.
Rough timing you could give us on on when you think youll execute through that plan and just given the strength of the market at least through one quarter any.
Any potential that number might go higher.
I don't know if the number will go higher just in terms of the lead time to define the real estate to put it in place and the majority of the stores.
Our second half of the year, where we put a handful in first quarter, we will put some in second quarter, but it's really third and fourth quarter, especially once we get through the summer selling season that we really start to stack up to stores.
Great. Thank you I'll turn it back.
Thanks.
Our next question's from the line of Stephen Volkmann with Jefferies. Please go ahead.
Great Good morning, guys Todd.
Can I just ask you to give us a little more on the sort of the shift a little bit towards the first half from the second half of the 55% in the first half now it used to be 50 is that all kind of allied or distributor channel is there anything in commercial that might be moving that at all.
No that's not commercial I mean, a large part of it.
Allied reshuffling.
And that's sort of best expectations.
Okay. Thanks, and then you talked about the K 12 through Heathrow of opportunity. It seems like that's taking US what are you actually seeing those guys doing are they upsizing systems are they putting in just more a Q or what exactly is driving that growth.
It is replacement.
So it's.
I think about it as replacement rather than new systems, but yes. They have older systems that are now comfortable that theyre going to have financing and.
Available capital to upgrade it. So they are doing that are talking a lot about indoor air quality.
Really doesn't isn't what moves the needle what moves the needle is replacing the entire system and then that has better efficiency better ventilation, which leads to better indoor air quality.
Great I appreciate it thank you thanks.
Thanks.
Next we'll go to Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Maybe just wanted to circle back on the.
The earnings sort of seasonality. So I think your guidance implies at the high end around $5 40 for the second half from EPS.
Last year's second half was around $1 higher.
So just wondered if you could help us understand.
Year on year.
Yes, how that dollar decline breaks out how much is just kind of raise the volume versus price cost headwinds wides.
The other day.
Day sales impact that you mentioned any other factors that I didn't capture that.
I mean, if I had to put them in order I think.
It would be inflationary pressure commodities.
It would be the days impact.
And then it would be.
I understand there is lots of questions about and rightfully so about what we're doing our full year guidance.
As you know Julian I've been doing this for 14 years I don't think I've ever raised guidance after the first quarter.
And so we raised guidance by <unk> 85.
For the full year after first quarter, I said I would never ever do that we did it let's get through second quarter net we'll see love a better clear view of what we should do for the full year guidance. Obviously, our guidance is our guidance right now.
But let's get through second quarter, and I think we'll have a better clear view of second half of the year.
Fair enough. Thank you.
Maybe just to switch to commercial a second you mentioned the replacement activity in the education. That's a cool just now but it was interesting to see the high single digit revenue growth in new construction and commercial in Q1.
I think that surprising for people given all the macro data on the U S. Non resin market starts and so forth. So maybe help us understand.
What drove that new construction growth in the quarter and how you see that new construction growth in commercial over the balance of the year.
Again, not to get too hung up on the math of things I mean, you make the adjustments per day as it's low single digits is a good number it's not quite as impressive as high single digits.
And then it was multiple verticals I mean.
It certainly wasn't K through 12, but with some of our retail customers.
But maybe the largest driver was the distribution customers people like Amazon building new distributions.
Got it thank you very much.
Next we'll go from the line of Jeff Sprague with vertical research. Please go ahead.
Thank you good morning, everyone.
Todd I missed a little good morning, I'm, just a little bit of the open but did you also comment on kind of the margin impact of kind of the revenue pull forward and if theres any kind of sort of effects on the margins in <unk> in particular.
I did but short answer there really isn't.
The revenue would have drop through on the normal margin margin line. So when I think about the margin expansion in residential.
Hang my hat on the pull forward I quite frankly would hang my hat on.
Factory productivity the SG&A cuts that we took at the end of last year, the ability to get price and the fact that commodities and inflationary pressures haven't worked away into the numbers yet.
And.
Just thinking about the price given the inflationary pressure.
Like there is talk that kind of round two actions this year and some of those are out in the market I think already but what what do you see the kind of the likelihood of kind of a second bite at the Apple on price.
Any kind of pushback in the channel on that.
I mean, I think the second bite has already taken place Jeff right. So we announced a price increase a second price increase effective June one.
Trains announced a second price increase <unk> announced a second.
Price increase that <unk> announced a second price increase Goodman announced a second price increase.
<unk>.
Carrier businesses have announced a second price increase so we've all now second price increases and we feel as you know we get price to offset commodities as recently as.
2019, 2018, we got 2% of price and we're signing up for a little bit more this year, but inflationary pressures are greater this year. So we feel pretty good about the price increases.
Great. Thanks, I'll leave it there thanks.
Thanks.
And our next question is from.
From the line of Nicole <unk> with Deutsche Bank. Please go ahead.
Yes, good morning, turning to clinical.
So Todd you kind of alluded to some challenges on the supply chain side could you just provide a little bit more.
And what the bottlenecks are and I guess the level of concern.
Good day.
Yes.
Yes.
I think the highest level message I would give us.
Sure.
You can see from our performance in Q1, we're delivering a lot of product and we're set up to deliver a lot of product in second quarter.
We think we're as good or better shaped than anyone else in the industry is what we hear from our customers the areas that we're wrestling with.
And I think everyone.
In our industry, if not corporate America's wrestling with is <unk>.
Integrated circuits, both on our own control systems, but integrated circuits that go in components that we buy from others.
Steel and resin and sort of other raw commodities are under some pressure to make sure we get them.
And then.
Since coat since the pandemic started over a year ago sort of hopscotch around the globe of wherever the hotspot is then you have pressure on our supply chain that comes from there.
<unk>.
Right now, we think thats largely behind us because we don't source much from India, but that's sort of has been the issue that we've wrestled with when Mexico was not going well.
We had issues in the north of the U S was having some problems we are having some issues and then I think the final piece.
And we've talked about this over the years. It went away last year. It's now back it's just shortage of direct labor.
In our factories and our suppliers' factories, making sure we have enough workers to build this high demand is something we continue to work through and unemployment has snapped back or employment of snapped back nicely.
All for.
The president's policies on the Democrat, but I would observe when you pay people to stay at home.
Less likely to come to work and we continue to wrestle with that.
Got it thanks, Todd that's really helpful and I guess, just one follow up.
I'll bet about channel inventory and how youre positioned as we move into the summer selling season, and maybe how that compares to last year.
Yes.
We think we're in really good position as you know, but I'll say it for others on the phone call.
80% of our business is Lennox residential and there thats when the homeowner.
<unk> to buy a product the dealer replenishes the stock and so we sort of have direct sell through almost to the end customer so dealers are carrying inventory.
I saw one sell side analyst note that suggested maybe because of price increases homeowners were deciding to preemptively replace their systems Ain't No way that's happening.
People aren't going to do that because of the two 2% price increase.
For the portion of the market that we saw at independent distribution, we talked about the $25 million pull forward and we got that number broadly speaking by talking to our distributors understanding their inventory levels and so one way of thinking about it as their inventory levels of $25 million higher than last year at this point in time to say pull forward inventory.
Got it thanks, Todd I'll pass it on.
Thanks.
And next we'll go to the line of Joe Ritchie with Goldman Sachs. Please go ahead.
Hey, good morning, guys.
So Todd maybe my first question just starting on just the growth outlook for the rest of the year, if I think about.
The second quarter, if we if we normalize.
<unk> for Q1, you still come up against your easiest comp in <unk> and it sounds like the backlog trends are really good. So I mean is there any reason why like the second quarter growth number can't be as good.
As you put up in Q1 again kind of normalizing for <unk>.
Are these days and the inventory.
Okay.
We're set up to have a strong second quarter.
So I mean, I hate to hypotheticals or any reason not yes, I mean I come out the reasons not but we're set up for a strong second quarter and we obviously just need to execute.
Got it and then just like talking talking through that that the comments you made earlier I think julians question around the guidance. It's just too early for you guys to take up the back half guide at this point, but.
As you see today things things seem really good in the 711% looks like that looks like a beatable number at this point looks conservative.
[laughter].
Alex trying new launches I mean, the guidance the guide number one so the guidance the guide, but as I said earlier, we never raise after first quarter, we raised 85.
I've learned anything since a tornado in the pandemic is things can change quickly.
If we stay on the trend line, we are in North America, because we are in North America business that we have.
We've left the pandemic and we're back to back to normal economy.
With all the government investment in the economy and have a nice run for a couple of years and all three of our businesses and we're prepared for that.
So we feel good about 2021 quite frankly I feel good about 2022.
And but the guys the guide.
The short answer.
Yes, I don't mean to vacuum, but that makes that makes a lot of sense I guess, one last one in just thinking through that you mentioned the pull forward on the allied side of the business this quarter.
Do you think there's any dynamics with the pricing that's going into effect in June but are you continuing to see kind of stronger demand ahead of the June pricing increases.
I think there may be some effects.
There may be some effect, but I think it's.
Yes.
Distributors right now want to make sure they have enough to get through the summer selling season, and they're well on.
They're going to pay what they need to do to make that happen. So I think there'll be some pull forward.
But again, it's sort of the demand levels we're at.
We may not have all the product when they want the product to load. The barns early they may just have the product line when they need the product and so we will continue to work through what will happen. There may be some pull forward, but again thats, 20% of our business I don't think it will be a material impact us.
Nice quarter guys. Thank you.
Yes.
And ladies and gentlemen, just a quick reminder, if you do have a question. Please press one than zero.
And next we'll go to John Walsh with Credit Suisse. Please go ahead.
Hi, good morning.
Hey, John.
Okay.
You mentioned heat pumps earlier.
Just wanted to get kind of your temperature on where your capacity is for this product and if you might be spending any capex.
Increased production of heat pumps in particular.
I mean, we're.
We can always continue to manage.
Capacity versus demand and we make them on the same line. So when we talk about adding a third factory in CTO, that's adding overall capacity to heat pumps and every other product line that we do so.
He he pump continues to be a growing market for us we came out with.
Highest excuse me cold weather heat pump that allows us to play north of the Mason Dixon line be very competitive in northern climates, and we think thats a growing market.
I would have said five years ago, we lag the competitors in our heat pump offering I'd say now we're on par with the Big Boys carrier Trane and further ahead of our other competitors and so.
We like that market and we're well positioned to compete there.
Great and then just maybe a second question here on capital allocation, taking up the free cash flow taken up your share repo.
Should we think that the majority of the excess cash goes to buyback stock or might there be anything.
In terms of M&A bolt on or otherwise, we should be thinking about.
Yes, I'm not breaking any news.
Think about it and I'll say it for others I know you know this is.
Will we.
We don't want to Delever.
We will do something with the cash and we'll have dividends grow with earnings and we will invest in the business and we will do M&A as we've spoken about but we've done one deal of any size since I've been here and then the balance will get back share buyback.
Great. Thank you for taking my questions. Thanks.
Our next question is from the line of Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning.
Hey, Nigel.
So I think I've got the numbers the underlying numbers, though highlight plus 35% ex the days and ex the $25 million just to be clear that $25 million is that the full extent of the imagery, we spoke dynamic or is there some.
Inventory restock within the positive three 5% as well too.
The $25 million our.
Our best guess of the extent to the inventory to $35 million is ex any pre buy.
Okay.
Plus 35% is kind of an apples for apples. This is basically dealer market share gain no imagery Stoke dynamics going on there.
It is.
35 versus say the 15 are.
You know that I said was sell through the differences were winning new distributors and when you win new distributors.
Big sort of wash of volume that flows through your business.
So it's not necessarily winning at the dealer level twinning at the distributor level were converting dealers from our competitors and when we convert them, we get a slug of new volume.
Okay. That's clear and then your inventory levels I think fiber too.
At the end of the quarter definitely.
So then what you would normally have.
And then.
You answered the COVID-19 question, very well and some of the supply chain, but I'm just curious all things being equal is that is that low level of injury without caused by just the surge in demand.
And then that with depletion.
And in his equipments.
Or was it some of the pricing it's great that you weren't able to replenish their inventories just curious in terms of.
What caused the level of inventories to be so low and your confidence in sort of rebuilding net levels.
It's primarily the demand okay.
Okay. I knew we were not first quarter I think rajeev is going to be up 37%.
Six months ago.
And so I think Thats a primary issuance and then once you see the line of their eyes. If you will and you see the demand rising then you try and ramp up production to catch up with it and then when you start to ramp up production. Then you run into some of the issues that I talked about which is if you're going to try and raise production 50, 60% to get ahead of everything then you run into.
<unk> integrated circuits and you run into Labor then you run into other things so.
Hello Guy.
I've said, we're doing as well or better than anyone in the industry.
But but everyone. When you have this kind of demand levels.
<unk> sort of <unk>.
<unk> grinding gears, but youre running hot.
And we're running off right.
Okay. Thank you.
Okay.
Next question is from the line of Ryan Merkel with William Blair. Please go ahead.
Hey, Thanks for fitting me in.
So first off you mentioned K through 12, and a good outlook there if everything goes well with the stimulus money what kind of growth rates could you see from K 12 in the next couple of years.
I understand the question.
I'll be honest with you we haven't really modeled it in any great detail I see some of the sell side notes, including air sort of take crack at it.
We think it could be a material opportunity for us.
I know people are modeling externally I just wanted to give a number that's about 10% of our segment revenue and so whatever growth rate others are modeling looking at the stimulus number 10% of our business will be we will grow that same speed.
Okay. That's helpful. And then just talk about the resi new construction outlook any signs of moderation or just full steam ahead there.
I think it's full steam ahead I think the only moderation is.
Trades.
Employment issues I spoke about it impacts builders also.
Inflationary pressures, but I don't think inflationary pressures will slow things down right now I think people need homes.
There's not much inventory unused or existing homes right now and so builders were trying to build so.
We feel pretty good about new construction from the balance of the year.
Sure.
Got it thanks.
Sure.
Yeah.
And next one line of adjusted book Krzeminski with Morgan Stanley. Please go ahead.
Hey, good morning, guys.
Morning, Josh.
Todd just on the mix front I guess that number stood out to me on residential that it was plus four even with all of that strong growth and in allied.
I would imagine you have some sort of long term model of like how much the industry should mix up or.
Homeowners kind of buy up on features or see or any given year did we just jump like several years forward like what's what's going on there.
How much ahead of where you would have been in recent years are we today on that mix dynamic.
I wouldn't read too much larger long term macro into it I would tell you what I my read into it is our highest margin business is furnace.
We had a warm winter last year, we had a cold winter. This year guests what furnace sales grew probably fast I don't have an exact numbers in front of me EBIT furnace sales grew strongly in the quarter and that helped the mix of business.
So I think thats.
The biggest driver that combined with we've launched some new product that has helped us but.
Saying that we're going to be up full year $10 million of mix, that's sort of a normal guide I think the bigger question was why are we guiding flat and mix from a full year in resi and the reason we are guiding flat was because we had we are not certainty of what was happening with the pandemic and whether people are just going to buy entry level product because they were concerned economically.
That's now behind Us and we feel confident for the full year.
Got it and then I guess.
Just kind of thinking about entering the selling season here first quarter I don't know.
Really indicative of much of all but we're yes, we're kind of through April at this point.
At what point does the industry or whether it's dealers or your independent distributors, even though there's not it's not the ball.
The business at what point do they just say okay. Now we are now we are ready.
Are they still positioning inventory thinking about.
What price level, they want to be loaded at right now are they sort of saying we're ready for the season.
And again ex Josh I'll say it for others, I mean, 80% of our business, we're selling to dealers.
Think that way I mean, they're not stocking up inventories theyre not getting ready they see demand they sell demand they buy some more and some of them may have a week really.
Well capitalized dealers may have a couple of weeks, but.
That's not how that works for the independent distribution.
The order rates remained strong.
Still one inventory and Theyre still selling product right now and demand is still high at the deal excuse me at the homeowner level.
So they're coming out of a very good first quarter and they want more inventory and we're selling items.
Got it that's helpful. I apologize I'm, just going to try to squeeze in one more the the allied cover power that you said were.
A lot of that growth is new distributors any sense on kind of same store.
Within allied versus the contribution from from new customers there.
Yes, I don't have that math in front of me because I tend not to think about same stores.
I know our internal people do within those businesses I don't have that number in front of me. We're also focused on existing distributors getting them to grow my guess would be the existing distributors, who are selling day dealers they were.
Buying a 15% 20% also if thats what the what the end markets for growth.
Yeah.
Got it that's helpful. Thanks.
Thanks.
Our next question is from the line of Gautam Khanna with Cowen. Please go ahead.
Yes, thanks, good morning, guys.
Hey, Gautam how are you.
<unk>.
Doing well thanks two questions first.
On the commercial side I was wondering Todd if you could.
Maybe give us some perspective on how quickly the deferred replacement.
From last year with the commercial market down nearly 20% how quickly that catches up and how much it catches up.
Yes, I mean, our experience here.
After.
The financial crisis and in my experience I was a carrier after 911.
Marble rolls off the table on planned replacement goes down dramatically.
Sort of at the trough last year, we were down 50%, 60% year over year on planned replacement and then it comes back strongly and.
My experiences, it's 18 to 24 months that it all comes back and so over the next 18 to 24 months, assuming the environment remains benign as I suggested it might.
I would expect all the demand that we missed during that time period. The pent up demand. If you will to come back plus a normal planned replacement that was scheduled during the same time period.
And so that's why we're pretty optimistic on the commercial end markets for the next 18 to 24 months.
In fact.
That would suggest.
The guidance might be a little low.
Recognizing nobody now.
Okay, and then sorry.
Quickly on rugby I was curious.
Any competitors have any issues production issues, what COVID-19 outbreaks whatever that may have benefited Lennox was results that might be nonrecurring.
We saw the Tyler.
Collapse of train Goodman.
<unk> had issued last year, just wondering if anything.
It stood out from you.
Yes.
Our competitors I mean better stated.
Steve I always worried when I bass competitors too much. So I actually have in my notes to say you can ask them.
But I won't listen to Steve I'll give a little bit more color.
Well, if our competitors had issues I mean, when we talk to our customers, we hear about GCI having issues.
We hear about Goodman still having issues and again I don't think about that as a one off thing I think it's when they are unable to provide support we step in and we win it either by signing up new distributors, who convert over to us and our allied business or we win with our own dealers in the marketplace. So the.
<unk> dealers can sell product our dealers can we win share we win.
And that's not a onetime thing we sort of get it and we keep it and we keep moving.
Okay.
I appreciate you.
Sticking to the script on that thank you very much.
Thanks.
Yes.
Sure.
And we have a question from the line of Chris Dankert with Longbow Research. Please go ahead.
Hey, good morning, Todd.
Thinking about R&D priorities, I guess, where is the investment focus at the moment I mean is it still controls and user experience is it efficiency as it footprint and noise reduction I guess, when you think about where you want to see the team is prioritizing investment kind of any rank order there or any any thoughts on the targeting of that fund.
You said some of them.
Number one is digitization of the business I think we continue to make significant investments both the product on controls.
But also significant investments in the e-commerce in the backend of the business and so significant investments and we continue to make those investments and thats driving the productivity and part that you see in our numbers we.
We continue to make investments in.
What I will call environmental sustainable sustainable product and so having industry leading energy efficiency.
As we go through a refrigerant change that we're going to see over the next few years to lead the industry, there and do it in the most effective and cost effective manner to lower our greenhouse gas emissions is important I think those are probably the two big areas right. It's about digitization of the business and environmental sustainability.
Our product line.
The average.
Got it thanks, so much for the color there and again.
Second question forgive me if you've commented on this in the past, but thinking about the Mexico facility will there be kind of a flexible construction to it in terms of will you have the ability to build everything from entry level on up to the Dave series, there or is it a little bit more focused.
We don't we don't quite go to everything there there are certain products that we build.
And Marshall town, and some products that we only build.
In Orangeburg or.
Our Mississippi, Grenada, Mississippi factory.
But but we continue to build our capabilities in Mexico.
This cooling then went to furnace than it was just entry level now it continues to be almost a full product line. So we continue to develop our capabilities our Mexico facility.
Got it makes sense, Hey, just thinking about how.
Having that ability to flex as needed was really brought to the for just a couple of years ago. So thanks for the color I appreciate it.
And quite frankly brought to the fore right now I mean, I think one of the ways that we're able to battle against some of these issues around labor <unk> absenteeism because of COVID-19 as we have multiple factories that can that have significant overlap on what they produce and we're able to sort of meet demands.
Yeah.
Absolutely.
Thanks.
Sure.
And our next question is from Steve Tusa with Jpmorgan. Please go ahead.
Hey, guys. Thanks from me.
Thanks.
I was just checking all the inventory in my garage I have a bunch of a bunch of different HVAC systems in my garage sitting there I'm going to sell for higher price.
Yes.
I guess is or probably they're probably train and carrier.
Definitely not GCI CACI.
Yeah.
[laughter].
Do you see you mentioned that the carrier businesses have gone out with price increases have you seen that across all of their brands.
Yeah.
What I have in front of me as we've seen it in the.
ICP brands.
The announced also Todd.
Carrier announced also yes, so Steve's helping me is in a different room for security reasons, but yes. So we've seen it in the carrier brand also so we've seen it on all our major competitors. Okay got you and then how do you kind of expect the kind of.
I know this is not a typical question, but obviously with what happened last year, how do you kind of expect the monthly used to play out.
In the second quarter.
Well I think as you would expect right. So.
May was the nadir last year for the businesses.
So April.
We will will be up.
<unk> will be up.
June will be up and again it depends on the business quite frankly.
Residential didn't go as deep and came back relatively quickly.
The commercial and refrigeration business was deepened stay deep and did really start to come back until fourth quarter.
And I guess for for sales in the second quarter, you mentioned that.
55% EPS seasonality can you just.
Maybe update us on what you would what do you expect kind of from a sales seasonality perspective on that front, whether it's <unk> or the total company.
No.
I frankly don't have in front of me I mean, I'm not going to give the revenue guide. We just wanted to give the EPS GAAP, Okay and then just one last.
Last one how much I guess.
Two five per cent of price for the total company.
How much of how much in <unk> should we assume.
A tick above that and resi eat something in kind of the three five per cent range.
No I think.
If I was modeling because we don't give segment price guide.
I would assume two and a half across the board.
Okay.
This is two thirds of our business so.
Let me give a guide and we don't delineate. It then I'd just assume prices that got it.
I don't think you guys have that as kind of like a record price number year over year at least the data I have looking back 10 years right. I mean, that's a that's a pretty decent size number looking back historically.
Right.
We did $70 million $71 million in 2019, we did $72 million in 2018.
Steve did have a number that went back I think in 2011 2012 as a percentage because we are lot smaller back then.
I think we did close to two 5%, but yeah. I mean, we've done two percentage regional twice two years in a row I would tell you that inflationary pressure people see in the headlines that they have on it and all of our competitors are feeling is unlike anything I've seen.
Just not in commodities sort of across the board.
Better stated just not raw copper steel aluminum, it's across the board because everyone sort of has a what.
What I would call. It COVID-19 surcharge of inefficiencies that are trying to pass on so I feel very confident will pass it on again the homeowner it's opaque to them they get a new unit. Once every 15 years and half the price is labor and apps.
Equipment, and so whether it's two or two and a half doesn't matter.
<unk> our competitors doing the same thing and it looks like they are.
And you're sure that there is no you haven't heard any anecdotes from about contractors not necessarily saying Hey, your price is going to go up 2%. If you don't replace it today, but did they are saying last year. There were real availability concerned the industry is extremely tight there is a new regulation coming in a couple of years from now.
You don't think any of those conversations are going on it at the at the kitchen table.
I think those conversations always take place at the kitchen table. So so the way. It works is a catastrophic failure compressor brakes 3000 to replace the compressor.
The homeowner says I'm not going to spend 6000 for new system I'll just replace the compressor.
Want to do that and here's to seven reasons why you don't want to do that those are always conversations take place. My point is there isn't a bad there isn't a thermostat software issue that you go to the home and fixed that in the system is working fine you say.
You get a new system because there is a two 5% price increase that inc. Never happen per happens as if theres a catastrophic failure theres a conversation.
And and.
There is price increases every year Theres refrigerant changes, there's minimum efficiency change saw that takes place year after year after year and whether at 2% price increase or a two 5% price increase.
It doesn't change that conversation so a nine to 18 and 19, we had 2% price increase now we have two and a half a dozen people over to replacement units in a wholesale way that they didn't before.
Yes, I don't I don't think its a price I mean, I would say availability is a bit more of a of a buzzword in a hot button issue. These days than it's been in the past but.
There are.
Our dealers have product so right habit.
Okay.
Right. Okay. Thanks, a lot guys I appreciate the detail as always.
Thanks.
And with no further questions Mr. Blue Darren I will turn it back to you for any closing comments.
To wrap up 2021 is off to a strong start and momentum continues in the second quarter.
Company is executing well to capitalize on market growth and share gain opportunities and we look forward to a year of strong growth and profitability. Thanks again, everyone for joining us today.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.
Yeah.
We're sorry your conferences ending now please hang up.