Q2 2021 Lennox International Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Lennox International second quarter Conference call.
At the request of your host all lines are currently in a listen only mode.
There will be a key.
Question and answer session at the end of the presentation.
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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 second quarter of 2021, I'm here today, with chairman and CEO, Todd Blue Doron and CFO, Joe Reitmeier Todd.
Todd will review key points for the quarter and Joe will take you through the.
<unk> financial performance and outlook for 2021.
Good day, 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.
To us 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're 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.
For information concerning these risks and uncertainties see Lennox International's publicly available filings with the SEC.
The.
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 believed on.
Thanks, Steve Good morning, everyone and thank you for joining us in the second quarter, we continued to see strong momentum on our residential.
Business combined with continued rebound in commercial and refrigeration is the overall company set new record highs for revenue and profit.
Company revenue was up 32% to new record of $1..2 4 billion at constant currency revenue was up 30% GAAP operating income was up 59% to a record 2.
$216 million GAAP EPS from continuing operations is up 72% to a record $4.51.
Total segment profit rose, 45% to a record $222 million.
Total segment margin expanded 160 basis points to 17, 9% and adjusted EPS from continuing operating.
Operations for 54% to record $4.57.
Looking at the business segment highlights for the second quarter in residential we set new highs for revenue margin and profit Reza.
Residential revenue was up 30% as reported and up 29% at constant currency.
Segment profit rose.
49% of segment margin expanded 290 basis points to 22, 6%.
Residential had comparable revenue growth on both replacement and new construction of approximately 30%.
1 ex brand revenue was up 30% as was our allied and other brands combined.
Broad strength across residential.
Second quarter year over year comparisons become tougher in the second half actually started in June as well.
Previously mentioned the fourth quarter of 2021 will have a headwind of 6% from fewer days in the prior year quarter.
But market demand remains high entering the second half on our residential business continues to perform.
<unk> and <unk>.
Perform as well or better than anyone in the market low.
Looking beyond the second half for the year to 2022 in future years, we remain extremely bullish on the residential market as we see the residential replacement cycle spinning faster due to shorter equipment lives, we analyze the actual runtime data on air conditioner.
Well last year with most with many people at home due to the pandemic adjusted for weather Air Conditioners ramp 30% more during the summer season last year.
This summer, we may not be getting our runtime impact of 30%, but theres still a lot of people working from home and many will continue to work from home full time or like.
For like here Atlantic on a flexible schedule a couple of days a week at.
If the runtime impact is 20% that will reduce the medium life of an air conditioner from 15 years to around 12 years.
Another factor is weather and the impact of hotter summers our original analysis on air Conditioner lifespan the years 2005.
2.2015.
Since then for the year 2016 through 2020, whether as measured by average cooling degree days has been 5% hotter in the United States for 2021, we're still in the middle of the summer, but the second quarter was even hotter than last year were run time impacts equipment life on a linear basis.
Summers impact equipment life on an exponential basis.
Another reason, we are bullish on the residential replacement cycle for the coming years is that there will be more complete HVAC system sales, taking place as old R 22, refrigerant systems come into the replacement window.
For those not familiar with the history of the EPA ban the sale and distribution.
Of.
Using the R 22, refrigerant effective January 1.2010 and band of production or import of the R..22, refrigerant effective January 1.2020.
While R 22, refrigerant is still available on the market is significantly more expensive than for <unk> in many cases.
<unk> cheaper replaced with a new for 10, a system, which is also more efficient and comfort with the new warranty to repair the old R..22 system. This also accelerates the replacement cycle.
We expect all of these dynamics to lead to a strong residential market condition for years ahead.
On top of this Lennox and allied will be running their proven playbook.
Mrs at ex for market share gains.
Moving on to our commercial business second quarter revenue was up 34% as reported and 33% at constant currency segment profit Rose, 27% segment margin was 17, 9% down 100 basis points on the timing of expenses and factory inefficiencies.
Playbook constant currency commercial equipment revenue was up more than 30% in the quarter within this replacement revenue was up more than 40% with planned replacement up 50% and emergency replacement up more than 20% new construction revenue was up high teens.
Breaking out another way regional and local business.
It was up more than 20% National account equipment revenue was up more than 50%. This market continues to rebound and benefit from the pent up demand created last year.
Team on 60 National account equipment.
Equipment customers in the second quarter to a total 9 in the first half on.
On the service side Lennox National account services.
Revenue revenue was up more than 30% via RF revenue was up more than 25%.
In refrigeration for the second quarter revenue was up 37% as reported and 32% at constant currency.
North America revenue was up more than 30%.
Europe refrigeration revenue was up more than 30% at constant.
<unk> on Europe, HVAC revenue was up more than 25% at constant currency.
Refrigeration segment margins expanded 90 basis points to 9.1% and segment profit rose 52%.
With a strong performance for the company overall on the second quarter and outlook for the second half.
Current we have raised 2021 guidance, we now expect revenue growth of 12% to 16% on a reported basis or 11% to 15% at constant currency we.
We raised guidance for adjusted EPS from continuing operations to $12.10 to $12.70 for the year.
We are raising free cash koga.
Have we are raising free cash flow guidance to $400 million for the year on stock repurchase guidance for a total of $600 million for the year.
So I will talk about the specifics, but inflationary pressures continue to ratchet up this year, we're seeing headwinds for commodities components LIFO adjustments in labor where.
During a higher yield from our first 2 price increases this year and now expect $110 million of price benefit from those in addition, we just announced a third price increase of up to 8% for most of our businesses that is effective September 1 this will yield even more price benefit than the 210.
<unk> guidance provided today, so a third price increase is not in our current guidance.
This is a special year demand is blistering and supply chains are tight at this level of high demand, but the company continues to execute as well or better than anyone in the industry.
1 thing to note in regard to our public guidance. This year, we have been incremental.
$10 million on your earnings outlook up 1 quarter at a time now after the first quarter and again after the second quarter. So while our guidance is our guidance given the unique uncertainty. This year, we're remaining balanced on future guidance.
Lastly, so I'm sure. Most of you saw the company announced on July 14th that after 15 years.
Moving to step down as chairman and CEO of Lennox International by mid 2022.
There's never perfect time for a transition like this but within end market strong and a company well positioned for the future with an exceptional management team hardworking and dedicated employees and the benefit of all of the strategic investments we've made in product.
I plan on distribution, we think it's a good Todd.
The board has commenced a search for <unk> next CEO and I will be here over the next year to ensure a smooth transition and the interim managing day to day be assured him on the ring punching until the final Bell now I'll turn it over to Joe.
Thank you Todd and good morning, everyone I will provide some.
Technology comments on financial details on the business segments for the quarter, starting with residential heating and cooling.
In the second quarter revenue from residential heating <unk> cooling was a record $838 million up.
Up 30% Volte.
Volume was up 27% price was up 3% and mix was down 1% foreign.
Additionally, <unk> had a positive 1% impact on revenue.
Residential segment profit was a record $190 million up 49% segment margin expanded 290 basis points to a record 22, 6%.
Residential profit was primarily impacted by higher volume favorable price.
In exchange for factory productivity sourcing and engineering led cost reductions for each savings and favorable foreign exchange.
Partial offsets included unfavorable mix higher commodities tariffs and warranty costs distribution investments and higher SG&A, including research and development and information technology investments.
Now turning to our commercial heating and cooling business in the second quarter commercial revenue was $253 million.
Up 34%.
Volume was up 29% price was flat and mix was up 4% foreign exchange had a positive 1% impact to revenue <unk>.
Commercial segment profit was.
$5 million, which was up 27% segment.
Segment margin was 17, 9% down 100 basis points.
Segment profit was primarily impacted on mix.
Partial offsets included higher material distribution freight tariffs and other product costs.
40 factory inefficiencies and higher SG&A, including research and development and information technology investments.
In refrigeration revenue was $148 million.
Excuse me up 37%.
Volume was up 30% price was up 2% and mix was flat.
Foreign exchange had a positive 5% impact to revenue.
Refrigeration segment profit was $14 million up 52% and segment margin was 9.1%, which was up 90 basis points.
Segment profit was primarily impacted by higher volume favorable price and sourcing and engineering led cost reductions.
<unk> and partial offsets included higher commodity freight and other product costs and higher SG&A, including research and development and information technology investments.
Regarding special items in the second quarter. The company had net after tax charges of $2 million that included a charge of $1 million restructuring activities.
Our net charge of $3.4 million for various other items in total and a benefit of $2.4 million for excess tax benefits from share based compensation and other tax items.
Corporate expenses were $27 million in the second quarter compared to $19 million on the prior year quarter, primarily on higher.
Incentive compensation.
Overall, SG&A was $168 million compared to $130 million on the prior year quarter.
<unk> was down as a percentage of revenue to 13, 5% from 13, 8% in the prior year quarter.
In the second quarter cash from operations was 1.
$192 million up from $105 million on the prior year quarter.
Capital expenditures were $21 million in the second quarter compared to approximately $19 million in the prior year quarter.
We generated $170 million $171 million of free cash flow in the second quarter up.
Approximately $87 million in the prior year quarter.
The company paid $29 million on dividends in the quarter and repurchased $200 million of stock.
The total debt was $1.2 4 billion at the end of the second quarter and we ended the quarter with a debt to EBITDA ratio of 1.7% cash.
Cash.
Up from equivalents and short term investments were $47 million at the end of the second quarter.
Now before I turn it over to Q&A I'll review, our current market assumptions and our updated guidance points for 2021.
We now expect the industry to see low double digit shipment growth in residential commercial unitary and refrigeration.
Markets in North America for the full year up from our prior assumptions of high single digit growth.
This is an industry comment, including competitors, who shipped primarily to independent distributors. Unlike our model.
As previously announced on July 14th we raised guidance for 2021 revenue growth from 7% to 11%.
To a new range of 11% to 15% at constant currency. We now expect a 1 point benefit from foreign exchange for revenue growth of 12%, 16% for the year at actual currency.
We raised guidance for 2021, GAAP EPS from continuing operations from $11.33 to $11.93.
2.
To a new range of $11.97 to.
To $12.57.
And we raised guidance for 2021, adjusted EPS from continuing operations from $11.40 to $12 to a new range of $12.10 to $12.70.
As we previously.
<unk> mentioned, the first quarter of 2021 had a 6% benefit for more days than in the prior year quarter and the fourth quarter of 2021 will have a headwind of 6% from fewer days than the prior year quarter as Todd mentioned.
For 2022, there are no days differences like this to highlight.
Let me now run.
On through the key points in our guidance assumptions and the puts and takes for 2021.
First for the items that are changing we now expect a benefit of $110 million from price for the year up from our prior guidance of $90 million benefit.
The new $110 million price guidance reflects the additional yield weird.
Turing from our first 2 price increases this year in.
In addition, we announced a third price increase for up to 8% that is effective September 1 for most of our businesses.
This will yield a price benefit on top of $110 million. We are currently guiding for full year price this year.
Our cash change is now expected to be a $10 million benefit up from neutral of our previous assumption.
And we now expect an effective tax rate of approximately 20% on an adjusted basis for the full year compared to the previous guidance of approximately 21%.
Free cash flow is now targeted to be approximately $400 million.
For full year up from prior guidance of approximately $375 million on strong earnings performance in the first half and our current outlook.
We are raising stock repurchase guidance for the for the year from 400 million, which we completed in the first half to $600 million.
For the headwinds from.
For the items commodities.
Commodities are now expected to be a headwind of $80 million up from our prior guidance of $55 million.
With inflation and components, we are reducing our net savings from sourcing and engineering led cost reductions to a $5 million benefit down from prior guidance to be at 15 million.
Prior against it.
The higher material costs from inflationary pressures in 2021 are leading to our LIFO accounting adjustment of approximately $15 million this year for.
Factory productivity is now expected to be a $10 million benefit down from a $20 million benefit in our prior guidance and we are now planning for corporate expenses to.
$100 million.
Up from $95 million on our prior guidance.
<unk>, primarily due to higher for incentive compensation.
Now for the guidance items that remain the same.
We still expect residential mix to be a $10 million benefit.
With 30, new stores planned for this year our distribution investments.
<unk> went up from last year to a more traditional run rate level for.
<unk> is still expected to be a $5 million headwind and tariffs are expected to be a $5 million headwind we.
We are planning on SG&A to be approximately up approximately 7% for the year or a headwind of approximately $45 million.
And within SG&A, we are making investments.
Our R&D and for continued innovation and leadership in products controls E Commerce and factory automation and productivity.
Now for a few other final guidance points, we still expect net interest and pension expense to be approximately $35 million.
We still expect capital.
<unk> 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 by the end of 2021 and to have the plant fully operational by mid 2022, and we expect nearly $10 million in annual savings from the third plant.
Expenditure and finally, we still expect expect the weighted average diluted share count for the full year to be between 37 to 38 million shares.
And with that let's now go to Q&A.
Thank you. Our first question comes from the line of Jeff Hammond with Keybanc. Please go.
Hey, good morning, everyone Todd.
Todd first of all congrats it's been a good 15 years together.
I agree.
Just on <unk>.
Just on price.
It seems it seems like the numbers you gave for <unk> kind of low just given the higher yields.
Go ahead just wanted to.
Understand how price you expect price to flow in into the second half, particularly on on commercial.
Yes, I mean, I think you're pulling on the right thread.
Steps up 1 the second price increase in residential.
Has a bigger bite in second half of the year on the first half of the year just sort of.
The timing of things, but for commercial and refrigeration.
We've got some price in second quarter, but we will get significantly more second half for the year and then as we've talked about in the script. There is a third price increase that's announced September 1 day.
I won't have much impact on commercial and refrigeration just given the lead times, but it will have a material impact for.
For residential and that's not currently in the guide we're still short of framing exactly what that will look like and we'll update it on after the third quarter call.
Okay and then just.
Inventory levels look a little bit low for the season and the demand just talk about your ability to kind of keep up with demand and where you kind of frame.
<unk> inventory levels here as you go into this second half.
We've been transparent about this from the beginning I think the entire industry is facing challenges I think all of corporate America is facing challenges with integrated circuits.
With steel.
Lots of things that were buying but when we talk to our.
Our customers <unk>.
Our suppliers for 1 thing Thats that we're confident on and we see our own share position. So we know organic share, we're doing as well or better than anyone in the industry.
Look we'd like to have more inventory right now so you see that in the numbers and Thats clear we'd.
We'd like to have more product and if we did we could probably sell more.
Okay. Thanks, a lot.
Thanks.
Thank you. Our next question comes from the line of Ryan Merkel with William Blair. Please go ahead.
Hey, thanks.
So first off Todd you mentioned, the resi replacement cycle spinning faster and you gave us some nice data points.
Can you just speak to how much this will increase HVAC demand annually and what I'm trying to do is just trying to judge how impactful. These changes are.
Well I think the most important metric that I gave is if you think.
The unit life goes from on average 15% to 12, so in other words the curve I always show shifts to.
On the left by 3 years.
What that does is it all doesn't come into the market in 1 year, but in essence, what you're doing is creating all this demand it spreads out I think over a multiyear period and I haven't specifically called it out.
Because what I was trying to introduce as a.
Very explicit point that.
The traditional way you guys on us not you personally Ryan but for the analysts have viewed it in the industry is viewed it as a very traditional boom echo analysis, when where the units put in place during the housing boom, how old are they and how long do they last and so we're introducing some new variables that are real and we measure that and so when it spins.
And you take 3 years off the light for 30% off the life.
20% off the life.
Sure.
Then all of a sudden you're creating much more demand over a 5 or 6 year period as sort of our best guess auto play out. So that's why we're real confident while we've been publicly saying that this mid.
Single digit growth market for years.
And that we're not afraid of a cliff.
Got it okay. It makes sense.
And then second question you raised revenue all year, but EBIT margins for the second half will come down just what explains as if you were to rank order them I think price cost maybe first but just clarify that if you would.
I think it is inflationary pressures.
From components and commodities.
It is.
Tightness of the supply chain the leads itself to productivity issues in the factories were running over time.
Mixing up shifts to be able to juggle things.
And then I think the third thing.
It doesn't incorporate.
The third price increase yet so I don't think we get all the way back to 30% Incrementals, but I think it's a price increase bites.
Timing of some SG&A I think it will look better than what's out there now.
Got it alright, thanks, I'll pass it on.
Thank you. Our next question comes from the line.
Tom Connie with Cowen. Please go ahead.
Yes.
Thank you and congrats Todd I know you are here for another year, but.
Thanks for always been a pleasure to work with you we're going to Miss it.
And for like I'm, Tom Sawyer ask your questions.
Todd.
On on your as funeral, if you've ever read Tom Sawyer for go ahead.
Yeah, no I totally get it hey, I'm just going to ask on the National account business was up quite a bit I was wondering if you had any updates to your thoughts on how quickly.
Commercial.
On the unit replacement picks up catches up.
Yes.
On a standby on our current views a year and a half to 2 years, that's what ice after 911, when I was a carrier. So I saw for the financial crisis that commercial companies are commercial buyers national accounts better stated deferred planned replacement.
[laughter] defend and for for a year 15 months and they've now turned it back on and they don't do it all immediately and I don't even do it on a year to 18 months to 2 years. So I think we have a nice tailwind in commercial.
Okay. Thank you and then just another 1 on on Ramsey.
Last quarter, we asked about <unk>.
Competitors.
And their ability to supply in.
If that's benefiting Lennox in terms of share pickup.
Do you have an update on that and updated view on weather.
Some of your competitor Youre hearing on the channel that some of the competitors are just not able to get product and Thats confirmed an outsized benefit.
<unk> I think the.
I think the answer is all of the major competitors have 1 issue or another because we're all the same same supply chain.
Train had an issue with their tire factory Goodman had issues in Houston.
So I think it's all the challenges what unfortunately happens in this type of environment if some.
Sort of lower end brands people like moored on maybe the people at cream have a little bit of advantage, because we're able to pick up share. They had before we're gaining share where quite frankly, not gaining as much share as we could if we had more product, but we're gaining share and I don't think its 1 competitor I think it depends on the marketplace and I think what competitors are doing.
Hum.
Protecting certain marketplaces and certain distributors, so I assume carriers protecting.
Watsco as best as they can wear some of their other distributors are being protected a sponge.
Great. Thank you and Todd 1 last 1 just.
What are your current views.
Consolidation in the HVAC industry, the likelihood of it.
The.
What might actually drive it if theres a catalyst because we've been talking about it for a long time, but not a whole lot has happened just curious do you have any views on.
I'll answer the question more broadly, but I'll directly narrow question I.
Hughes on us.
Well I read all the things you guys right and some of the nodes for talking about whether my announcement had any impact on consolidation there was somebody suggested a bite.
I don't think it matters, 1 way or another what I'm doing on industry consolidation in terms of the precondition for industry consolidation I think its either.
Some.
I think they are going to pay the Lennox premium to buy us, which I don't think they will R. R.
Need to or whatever.
I think the other way would be if someone who's in the business decides to get out and it's hard to imagine that happens when resi is going as well as it is.
So.
I've been very adamant over the years.
I'm on for someone like <unk> is a commercial player.
Isn't getting full value out of the residential business, but.
They feel differently.
And so it's up to that to make a decision or anyone else.
Yeah.
<unk>.
Thank you very much.
Uh huh.
Thank you our next question.
It's from the line of Julian Mitchell with Barclays. Please go ahead.
Thanks, and good morning.
Your line, maybe 1 question around the margin outlook. So I just wanted to double check can you sort of dialing in a sort of mid twenties incremental margin for the year as a whole and so.
Income margins are down sort of 100 bps plus year on year in the back half is that roughly the right way to think about it.
I was trying to be a little cuter than that.
I think if you take our guide its a hair lower than that and then I was signaling that we had some additional upside versus the guide because of the price increase then it was south.
For therapy.
But north of low 20, so I think you're probably in the right Zip code.
Perfect. Thank you and then just on the commercial business specifically.
Specifically you had the margin headwind.
Headwind year on year on the second quarter, just wanted to maybe some old backward.
Background on what's behind that and what do you think happens to those commercial margins in the back half.
You know there was a couple of things net net.
Well 3 things it impacted commercial to have an impact at all the businesses, but 1.1 was sort of unique 1 was just the timing of expenses.
Incentive comp and some SG&A expenses of when they happened this year versus the prior year and on a business that size you.
Do you have a couple of those happening in sort of hurt.
Hurt the margins.
But the other sort of maybe more important points are that things I've spoken about which is.
Inflationary pressures and their inability to get price during the quarter because they are.
Yes.
A larger backlog, where it was already price down and they'll start to get price second half of the year in a better way.
And then the inefficiencies.
Due to.
And their factories due to.
To shortage of supply and labor shortages at our Stuttgart facility. So those are sort of all the things that led to lower margins.
I expect that they will have a better performance for our we expect to have a better performance for the balance of the year.
Great. Thank you.
Okay.
Thank you. Our next question comes from Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my question.
Of course, Tony.
Todd I wanted to start by.
Following up on your commentary on the replacement cycle potentially bringing the asset life in 3 years give or take.
You referenced some runtime data that you've come through.
Was curious if there's any more detail you could offer there.
In terms of the method or any surprises you came across it seems pretty straightforward, but anything else you can share would be helpful.
I think we did it the way Tom you might have thought we did but I'll say it for others.
Others I mean, we we have on comfort on a lot of our units.
And tens of thousands of units and we have access to their on times. So we're able we were able to go and region by region not quite ZIP code by ZIP code by region by region adjusted for the weather.
It makes it a other adjustments we thought were appropriate and then we're able to come up with.
<unk> average run time of the units on a year over year basis.
And that was sort of around say, 30%, it's plus or -30%.
But right around 30% and then and then I then I did some Kentucky windage by just saying.
It's probably not going to be that on.
With going basis, because we don't have as many people working from home as we did last year. So I, just said say its 20% instead of 30%.
And that's sort of felt right at least from the world and I'm living in because we still have a lot of people working at home and we will continue that people working at home, even when we get to the other side of this.
On an on towards 20% came from <unk> and 20% times.
15 gets you 3.315 -3 get to 12, and then I just sort of rolled into it to say.
The weather's, 5% warmer the last 3 or 4 years than it was when we originally came up with a 15 year data.
And.
And that 5% weather has a higher impact than just saying you reduce the lifecycle by 5% and so I didn't even try and quantify it.
But it's sort of exponential in nature, so it's sort of somewhere between 5 and 10% maybe closer to 10% from having 5% warmer weather.
And that's sort of in the mix also said so.
The point I wanted as I.
Repeating myself just introduced the concept of the very traditional way of saying, Okay. How many units were installed in 2006, and we're 15 years forward. So that means it goes to zero that's not the way to look at this and I think we all knew.
That there are other variables in play because.
It doesn't explain.
What's happening in the market for last couple of years, the bears have been predicting resi turning for a while now and they've been wrong.
And the reason they're wrong. We think are these these new variables.
Thank you Todd that's helpful wanted to follow up on price. So you've pushed 2 increases through you got another 1 announced for the fall.
What's been on it.
Good to hear you confirm I think that you.
You have yet to see any kind of gamesmanship.
Across the industry it seems pretty consistent across the group there there's no 1 trying to steal share with them.
Little bit of price in this environment and then if you think downstream just in terms.
Has there been any any pushback at all or does it feel like I'm at least for your Lennox brands that your customers can pretty easily pass pass it along through ultimately to the homeowner.
Well I think short answer is they can absolutely pass it on right now.
Fact.
If.
We had more units I think we could price it for whatever we wanted to and many people would pay.
On the competitor side carrier announced up to 8% effective September 1 pay on.
On 5% effective September 1 train, 7% effective August 7th dike in 4 to 5 effective August 1.
Customer JCR 6 to 13 effective July 19th so we're all on the pull together.
And then I think the other point I would make and we're not talking about 2022, yet or 2023 yet.
I remind everyone and you know there's Tommy but the way. This industry works is you have this inflation inflationary shock with commodities and grow.
On just different than anything we've seen before but you have inflationary.
Shocked with commodities and then when the inflationary pressure abates you net.
For past the price back.
And so we're sort of roughly keeping up this year.
Although a little bit of lag in second quarter, but full year will be roughly in line.
Granted but then in the out years, if you think cultural steel which was 600.
<unk> a ton.
18 months ago and is now over 800 Bucks a ton you think it's going to pull back at some point.
When that happens we won't give the price back or do you think copper is closer to 3 than for 50.
Give the price back and so there's going to be an out year, whether its 22 or 23, where all that's going to come back to us and we will still hang on to the price and so again, that's why I feel good about the trajectory of the business and the business model.
Thanks, Todd I'll turn it back.
Thanks Tommy.
Thank you. Our next question comes from the line of Stephen Volkmann.
With Jefferies. Please go ahead.
Once you go to someone else operator.
Yeah.
Thank you next.
Next we'll go to the line of Nicole.
<unk> with Deutsche Bank. Please go ahead.
Hey, Thanks, guys, good morning, and congrats to tackle.
Yes.
So I think you guys you mentioned in the press release that there was some unfavorable mix dynamics and Rajiv.
Can you just talk about that a little bit and the expectation for mix over the next.
The Blazers.
You know the the biggest mix issue on <unk> is just that.
We've been able to produce more product out of steel factory, which is more entry level product and so as we've been production constrained.
Been able to get more out of CTO and Thats quite.
Due to the supply base in Mexico, being able to stay with us longer than the supply base in the U S has done so that's the major reason and then the other reason.
The mix of customers and just some of the customers.
We were selling 2 had a slightly lower mix, but overall a good quarter for resin.
Quite frankly, I wouldn't be concerned about the Mexico.
<unk>.
Got it thanks, Todd that's really helpful. And then I don't think you commented this on in the prepared remarks that you kept.
Do you like order activity in commercial and refrigeration and I'd be curious like how long the backlog goes out now like are you booking into 2022.
And yes.
Yes, we're not quite booking into 2022.
Cause if we did we'd be in big Big trouble I mean, typically what you do are typically what we've seen this business in our commercial businesses and on a quarter enter enter in a quarter were about.
Half the quarter on backlog and have we book and ship.
So if we were quoting into next year, we'd be like the integrated circuit.
We have long lead times that no 1 would buy from so we don't have that yet I didn't get into the order rates in the backlog just because.
There is sort of silly high numbers because of where we were last year at this time, but the answer is.
Chip and momentum in commercial and refrigeration remained strong.
And what I said about commercial having another year and a half to 2 years of strength is absolutely true.
And to a lesser degree, but still the same directional point is true on refrigeration. So order rates backlog is extremely strong on both businesses.
Got it thank you I'll pass it on.
Thanks.
Thank you just as a reminder, if you wish to put yourself on the question queue. Please.
Please press 1 zero at this time.
Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please go ahead.
Thank.
Hi, good morning, guys and congratulations for that.
Thanks, Joe.
Yeah.
So Todd maybe I want to focus just maybe 1 question on the announcement.
I know that the upfront for my Vantage point I was a little surprised in a lot of folks that I spoke to were also surprised a little bit by the timing because.
There wasn't necessarily.
Seth are in place so.
Anything that you can kind of tell us around what influence your decision whatever you're comfortable disclosing if any thoughts around the timing would be helpful.
Well.
And in some ways it's.
And I don't want to offend anyone of us.
Grandparents, but it's sort of like I had a 93 year old grandfather, who died and I was shocked that he died.
And what I mean by that is I've been at <unk> for 15 years, that's a long time.
And I'm ready for a change and I.
I think the company in fact, I know the company. The board wanted me to stay but in on.
Some ways I think just shelf life.
Elderly CEO and 15 years, maybe Ed.
On my hands are firmly on the wheel and I'm going to keep running the business like I do every day until the day I leave.
As we mentioned in our press release on stepping down to create a better balance between my personal and professional life, but I'm not done with my career I.
I'd like to think on myself as young ish if not young.
My phone is lots of energy in my plans to do something more entrepreneurial maybe private equity maybe venture capital, but something now there's never a perfect time to make this kind of transition I get that.
But this is a good time to begin to transition with a strong market conditions and a company well positioned for growth on higher profitability and now that I've announced that the board.
For conduct the board can conduct an open search for the right person in the year transition that have committed to ensure that the process is not rushed to net.
It'll be a smooth transition.
Got it.
Super helpful. Thanks for that detail and.
I guess maybe.
My follow on question and just focused.
And how you guys have now characterize what the revenue replacement cycle looks like on the commentary around R..22 was interesting I'm curious when you guys did your in depth analysis, yes, how much how much is left from an installed base perspective on R..22, I'm just trying to understand that opportunity as you know.
Just on the potential upgrade cycle over the next few years.
That's a very good question. So I don't have it at my Fingertips, we'll get it out publicly I think it's in the AHRI data, but will pull it out and again, those who have sort of been ingrained in the story for years May remember in 2011, there was a huge dry run excuse me dry.
The charge phenomenon that had a huge impact on year. Those are all our 'twenty 2 condensing units that were put in place and so even past 2010, there were units being placed into the market that were R 22.
And again, the bell shaped curve of those units that were being put in place.
We're 15, ignoring the heat comments.
Runtime comments I gave it the old 15 midpoint.
The right side of that Bell shaped curve is going to get cut off because not even be able to do sort of traditional repairs.
Because if you lose to charge, it's prohibitively expensive, but I understand the question, Joe we'll get that data and put it out to you guys.
Got it that's helpful. Thanks again.
Yeah.
No.
Thank you and next we go to the line of Stephen Volkmann with Jefferies. Please go ahead.
Great. We'll try this again can you hear me.
Yeah sure Ken.
Sorry, I don't know what happened last time, just a couple quick follow ups. If you will you talked about that replacement sort of spinning faster Todd any similar.
And the lots are analysis, you've done on the commercial side.
No we haven't.
And in part because the.
Emergency replacement and commercial is 30% 40% of the market.
As important as the <unk>.
<unk> placement, which really isn't broadly impacted by that and.
And then the new construction and again sort of the major driver of resin is people being home.
I don't think Theres, a negative if I, maybe non I've seen your question about it I don't think there's a negative reciprocal of that if that's right way of phrasing it for commercial leasing.
Land or pre commercial maybe for high rise office space, but we don't play there.
But retail has been running restaurants have been running and whether you have 1 person shopping or 1000 people shopping youre still running the unit sales.
I don't think Theres, a negative implication to commercial.
Okay, Great and then.
Units are on them.
I'm curious about your commentary around sweet and more degree days et cetera. It seems like a lot of that's been focused on the northern part of the U S. Recently, where there may actually be still some penetration opportunity do you have any view on that.
I think that's true I mean, that's not worked in to our point of view.
That's quite frankly throw another log on fire right.
I didn't notice numbers all quoted from an article I read it to set in the northwest.
About 40% penetration.
<unk> HVAC.
They have many more 100 degree summer days, I think thats going on pet hi.
Higher than 40%, so that's clearly an opportunity for us moving forward also.
Okay I appreciate it thanks.
Thanks.
Thank you next we go to the line of John Walsh with Credit Suisse. Please go ahead.
Hi, good morning, everyone.
Hey, John.
But.
Maybe just a quick 1 on the the unitary right I mean, if you look at PK through 12 unitary makes up a good amount on that installed base, we talked a lot about kind of the corporate accounts, but what are you seeing there on the education verticals and is this stimulus.
We've all been reading about is that actually flowing through and there are you seeing it.
We're seeing some flow through but it's a long and.
On a normal case, it's a long gestation period for.
Schools, I mean, the decision making slower.
Obviously more of a board decision than an individual decision and then lay on top of that the overlay of this money coming in what's the money going to be spent on who is decision rights on the money that's low.
Little slower than we would like it to be but I remain real confident that slightly less than 10% of our unitary business is K 12.
A list and that's going to be a growth market going forward.
Great and then you know a lot of discussion around the margins and I. Appreciate you guys, obviously don't don't give quarterly guidance, but.
You know Q4 on the residential business the margin the last couple of years.
We haven't kind of seen that normal step down sequentially from Q3 to Q4, I mean, 1 year you had the insurance recoveries last year was really strong I'm. Just curious what are you. How are you thinking about it in your guidance that you gave us today I mean are you expecting a normal step down or.
<unk> do you how do we think about that the seasonality in the back half just what's in your guide.
Well I don't know if all directly answer the question, but I think the 1 thing to sort of weigh into any thinking is going to be be up 6% fewer days in the quarter.
So that creates headwind not only on revenue but.
Hi.
You cannot absorb all the costs you have more factory fixed costs fall to the bottom line and so having 6% less days in the fourth quarter everything else being equal we will have a negative impact on margin.
Yes, Okay makes sense. Thank you for taking the questions.
Yes. Thanks.
Thank you next day go to the line of Jeff Sprague with vertical research. Please go ahead.
Hey, Thanks, good morning, everyone.
Hey, Todd.
Just a couple for me first on the price.
Understand with things, so low and you don't really want to dial this in your guide but.
Maybe just give us a little bit more color on how the market responded.
To that for 2 price increases obviously, we've got the number for the year now you gave us but.
Are you worried about it being accepted.
On some mixed down that might resolve just want to understand why.
Actually don't want to include it in the guide because I assume you're including the inflationary pressures on the guide.
I think in part we didn't at.
I'll be very transparent as we made that we came out early with your earnings because of my announcement.
And we came out with a guide and then.
Between that time and when we were finalizing the price increase the third price increase but we have made a decision yet we made a decision shortly after the announcement we announced it.
And we're going to implement on September 1 and then I just thought it was a little cute.
Have a guide 2 weeks ago, and then change it today and so I just thought we'll.
But where it's at being very transparent that.
Now that it's out there and that will touch it up at the end of the third quarter. The first part of your question is.
Just on the first 2 price increases we had been guiding that we're going to get 90 now we're guiding we're going to get 110. So I think that answered the question how it is being accepted it's being accepted.
I'll just leave it to pass it on and it's sticking and again, the fact that our competitors have announced third price increases across the board and quite frankly.
Actually struggled in econ, which I shouldn't admit as a CEO, but the 1 thing I remembered in econ is.
If demand is high and supplies down I think price should go up and that's that's.
And we're able to industry is doing.
Absolutely.
Replacement thing.
We all know we can make this a much more realistic in an excel spreadsheet than it is in real life for sure but.
Just wondering how much of this pull forward do you think might have already happened right because again if.
Well go back for the Excel spreadsheet 1 complication. We have right is 12 years ago was actually <unk> 10, 11 trough when there weren't many units being shipped so.
Just wonder if you could tell from that data is this pull forward already happened is in progress.
Where do you think it's still in front of us.
Well I think it's.
I don't think it's already happened I think it's probably already started.
Because last summer already started.
And the units running more has already started.
But I think it's a large part in front of us and again I'm not I'm not validating all of these numbers I'm just.
If we do about getting a 30% and on validating the 5% warmer.
But sort of guessing a 20% reduction.
On an ongoing basis, that's just a swag use your own number but if it goes from 15 to 12, a 20% reduction means 20% of our.
A full years.
On the auction sort of gets moved.
And thats not happening in 1 year I mean, that's not what this year's about this year is about.
Scarcity up demand and distributors buying a lot of units to protect themselves I think that's what this year is about.
So I I.
I'm a broken record on this Jeff as.
Purdue.
But now on putting some math around my opinion that I think we got multiple years.
Single digit growth in revenue.
All right understood. Thanks, a lot.
Thanks.
Thank you. Our next question comes from the line of Josh <unk> with Morgan Stanley.
As you know go ahead.
Josh that wasn't even in the same ZIP code as your name.
Yeah.
Are you there Josh.
Operator, he was so offended on how you pronounce his name he hung up so can you bring someone else in place.
He's here thank you.
<unk>.
Can you hear me there Josh I can't Josh Let's go ahead.
Excellent yeah.
We were a few eastern bloc countries off on the on the pronunciation there.
It's probably hard work.
So Todd I guess.
On the this whole kind of replacement cycle stuff for me.
You know I have as much 6 all time on that as anyone you ive been opinions on that over the years, but the I just want to make sure I'm understanding. This right. This is assuming like 20% kind of higher home usage for App.
The di already cash.
No.
Let's see here I think it will be.
Just sort of get the full benefit of gone for 15 to 12 forever.
Then it's 20% there was a year, where they ran 30% more I know that is a fact, so that ties already cast.
There have been for years that the weather's.
5% hotter than what we build on the model that's already cast and then other than.
Morgan Stanley and J P. Morgan.
I think most companies for letting people stay at home as we get through the pandemic.
And so decide whether people are going to work, 50% flex time at home.
60% flex time at home Atlantic So, it's going to be 40% flex time at home for most of our employees. So its somewhere south of 30 greater than zero that the units are going to run more and I think that's here to stay.
Got it yeah I may need you to write me a doctor's note on that on that work from home policy.
Yeah, and then on.
On the parts side of the equation.
I'm sure you saw watsco had pretty healthy growth on the equipment side as well as parts and you guys clearly have a window into that as well with parts plus stores did you see kind of proportionate growth any observations on repair versus.
Replace I would I would imagine, there's probably a bit more replace than usual, but I don't want to make it sound like its overloaded the 1 side.
No I mean.
Equipment grew faster than.
And parts did for us in the quarter.
But we had strong growth rates from both.
Got it and then just last 1 if you on mine on the on the price cost equation. I mean, we can all sort of look at steel.
Fuel costs in copper and aluminum and sort of play the the hedging game, which never really ever work. So I gave up on that.
But yeah Theres a lot of inflation out there that kind of falls outside of commodities, whether it's labor or with <unk>.
How how does that visibility look like is that getting worse or better and then how do you think your ability to kind of price that into the marketplace versus other kind of.
Material inflation.
No trends over time.
Yeah, I mean, I would think about it this way.
We typically get.
25, $30 million of engineering sourcing led cost reductions a year.
And that's always a net number that is after all the price increases we get and this year, we're calling it out of $5 million. So what you should take from that is.
Thanks for having $20 million or so more price increases on components that we buy from others, along with the $80 million of steel along with a $15 million on LIFO.
And.
And all of that's being offset by the $110 million of price we've already gotten.
Plus the third price increase that we're going to.
During the fourth quarter so.
I think we're offsetting it this year, we're not offsetting it and still getting a margin percentage, but then as I said earlier, those things will turn and when they turn we won't get the price back, but all of a sudden we will have our engineering led cost reduction instead of being the normal 25.30.
Because all of the commodity price increases that we took for motors and compressors and everything else. We have we will get those reduced and so we'll have a year, where we'll have a blow out.
Cost reduction year.
Commodities will decline plus will hang on the price, so we're sort of having lower margins than normal.
This year, but then there'll be a year or 2 where margin percentage will be higher than the 30% because of the things I just said.
Crystal clear I appreciate it.
Thanks.
Yeah.
Thank you and our next question comes from the line of Steve Tusa with Jpmorgan. Please go ahead.
Hey, good morning.
Hey, Steve.
Congrats on like really an epic run.
Great.
Grassroots turnaround fantastic market outgrowth and.
Theres deserve all the credit in the world to enjoy whatever you do next so congrats thanks I appreciate it.
And you're a good guy.
I think youre really good guy.
So.
But I think I kind of disagree on a lot of the numbers and I just kind of wanted to dig in a little bit I was a poly Si major so mark Twain in for.
That's a fancy macro econ stuff wasn't my suit but.
How do you how did you value.
Validate the 30% again, you said on a few thousand.
Lennox units that you have visibility into.
Yes, exactly we contract the unit. So we have we are in our dealer portal on the homeowner signs up for it we can track that run hours on units.
So we're able to go in on our installed base and do it region by region. So then.
We can adjust for weather. So it wasn't just sort of okay. We have 20000 units how much of day run.
We'd go region by region, not quite simply by ZIP code and understand how long the units were running I got detailed analysis detailed spreadsheets, we went through it and looked at it.
And then we're able to say what we expected which is people are at home more they are running the units for and then.
Calibrated and it came out a lower number but we looked at how much energy usage went up at homes and not just the high level macro number.
And for the full year was up about 10, 15% and so thats sort of said okay. We're in the right ZIP code and we would expect air conditioners in the summer to run longer because people are at home.
The furnaces youre going to still sort of habits roughly to set point in the winter time, because you don't want it to go down so again my commentaries about air conditioners, running 30% more and we feel pretty good about it what was the sample size of that again.
I don't know off top my head on.
<unk> hundred.
50000, Todd.
So small number only $150.
And are those what do you think the installed basis for the industry.
I think you could figure that out on your own right. So look at an annual number multiply times 15, thats, probably the installed base.
And then.
I thought you guys had said it was 16 years, but obviously there was a kind of a curve around that but I feel like in the last couple of years of the housing Echo boom discussion that you guys are with <unk>.
More of a 16 year number you threw out there I think I I think I was rounding because theres a meat, sometimes we talk me and sometimes we talk mode.
But say a 16, so it goes from <unk> to <unk>.
<unk>.
Okay got it.
And.
And just on.
<unk>.
The I think the last thing you talked about was this has been you try to figure out what's been happening in the last couple of years I mean, when I look at your data.
You guys were down.
On kind of coming into Covid, you guys really weren't growing very much I know that there was the 18 year that was kind of like you know messed up.
But the industry was I mean, I think down kind of heading into Covid. It was at least weak kind of in the low single digit range. So I mean isn't the strength just really the last 12 months.
Like.
How are you so.
I'm confident that like what happened during COVID-19.
Is it is really something that we kind of like need to dig into and figure out like how this has changed kind of of.
A decade, plus long type of discussion we've been having for the last few years.
I'm on.
On a poll, we signed major on an electrical engineer and I looked at the data.
And everything I know about the day that tells me 2 things how long you run the unit impacts how long it low how hot the weather is because in a spike up in temperature, it's an exponential impact on how long you just lost and so the question that we asked been asked.
On ourselves as there has to be an impact on people staying at home, we've been talking about that for a year and a half.
And I think it's.
I think you have to take the new facts into consideration we all are.
And as things are changing and so we looked at the data and the data said 150000 units are being run longer and that fits with all my.
Total evidence we talk to dealers talk to my family members Freak at home.
It makes sense for running longer and if they're running longer they're gonna break sooner.
All day.
And then I step back I know J P. Morgan's coming back to work, but Lennox Inc. A 100%. Neither example, neither.
There's Dell and you there's a lot of other companies and so it's pretty clear to me.
The phenomenon is going to change how it may change back in 5 years.
But it's there and it's going to have an impact, but I guess my point is sorry that last point on this because I think it's a really interesting discussion obviously.
It's really been only the last 12 months.
So like I, just struggled to kind of read into something that's happened in a pretty abnormal time period over the last 12 months and you said you know look it's 20% or whatever it is I mean, your average sales have been up 20% for the last 12 months. So like you know why haven't we just kind of experience that and why are we making this out to be something.
It's been a trend for 2 or 3 years that we have to figure out I mean again I haven't really been as bearish on the market in the last 3 years to 4 years, but.
On the math.
Thank you for stating what I'm, saying I'm, saying 2 things I think the weather has been warmer over last 3 or 4 years I think the units over the last 18 months because.
Because of the pandemic started in March.
That's 2021 excuse me 2020 units for last 18 months have been running.
Your number 20, 30% longer.
And that's going to have an impact on the lifecycle of the product and then you ask yourself is that.
We're going to continue and the answer is yes, so I mean I sort of extrapolated. If we worked if we were talking about buicks.
And we said the entire country moved 20% further from their workplace, So I'm gonna put 20% more miles on the Buick with the units breakfast or which they of course, they would and that's what we're seeing in Asia.
And again, we can it's.
It's been 18 months.
I'm trying to get answers whats going on in the World is changing quickly Steve. So we can wait another 3 years.
<unk> up with numbers, but I'm, telling you on what's happening now right right now very very very helpful. Just 1 last 1 any color on you gave us kind of the days impact in <unk>.
Any color on just high level, what you expect the industry to grow in <unk>, maybe what youre seeing so far in the first few days of July.
Why.
We continue to do well demand strong on that.
The industry call, we call was full year, which is.
Low double digits and let's see how it plays out again I think the variable that's on accounted for in my mind is those who are selling exclusively to independent distribution is upset.
To come out on a cliff before we do and so I don't know what they see.
That will impact the industry more than what we do because were.
A little less than 20% of it questions. What's the other 80% of selling to independent distribution day, because theyre going to close before we do.
Great. Thanks for all the color I appreciate it Todd Congrats again thanks.
Yes.
Sure.
Thank you there are no further questions in the queue I'll turn it back to the speaker for closing comments.
Thanks, operator to wrap up we've raised guidance for revenue profit free cash flow on stock repurchases for this year demand remains extremely strong and the company is doing as well or better than anyone in the market. We look forward to the second half on continuous.
Strong market conditions in 2022 on beyond thanks, everyone for joining us.
Yes.
Thank you, ladies and gentlemen that does conclude our conference for today.
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