Lennox International, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Lenox International third quarter conference call. At the request of your host, all lines are currently 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 1 and 0 on your phone. Pressing 1 and 0 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 Linux International's financial performance for the third quarter of 2020. I'm here today with Chairman and CEO Todd Bludorn and CFO Joe Reitmeyer. Todd will review key points for the quarter and the outlook, and Joe will take you through the company's financial performance and guidance. 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.linuxinternational.com. The webcast will be archived on the site and available 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 Linux International's publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Before I turn the call over to Todd, I would like to announce the date of our annual investment community meeting. The event will be held the morning of Wednesday, December 16th. The format will be virtual this year. Please mark your calendars, invitations, and more details will follow. Now let me turn the call over to Chairman and CEO, Todd Bluthorne.

Thanks, Steve. Good morning, everyone, and thank you for joining us. Let me start with a quick overview on the third quarter that continues to be impacted by COVID-19 pandemic and then discuss our updated 2020 outlook. For the year, we are raising guidance for revenue, earnings, and free cash flow, driven by the continued strength in our residential business. Overall for the company in the third quarter, revenue was up 2% to $1.06 billion, the third quarter record. GAAP operating income was up 7% to a third quarter record of $167 million. GAAP EPS and continuing operations was up 16% to a new high for any quarter of $3.42. Total adjusted segment profit was a third quarter record of $177 million, up 1% from the prior quarter. That included $16 million of insurance benefit. From an operational perspective, excluding the insurance benefit, total adjusted segment profit was up 11%. Total adjusted segment margin for the third quarter was 16.7% compared to 17%. in the prior year quarter. From an operational perspective, excluding the insurance benefit in the third quarter last year, total adjusted segment margin was up 130 basis points. Adjusted EPS and continuing operations is up 6% to $3.53 a third quarter record. In our residential segment in the third quarter, revenue was up 13% to a new high for any quarter of $722 million. Revenue from replacement business is up low double digits. Revenue from new construction is up mid-teens. Residential segment profit set a new third quarter record at $153 million, up 21%. Segment margin expanded to 140 basis points to a third quarter record of 21.2. On an operational basis, excluding the insurance benefit in the prior year quarter, segment profit rose 38%, and segment margin expanded to 390 basis points. Our residential business benefited from continued strong market conditions and favorable hot weather in July and August. Consumers continued to replace units more than repair, with equipment growth rate running multiples ahead of the parts growth rate. September turned significantly cooler. which has continued to date in October as contractors look toward winter and furnace season. Strength in the residential market continues, and the team is executing well as it continues to take advantage of market opportunities and gain share. Turning to our commercial-facing businesses, they continue to be more heavily impacted from the pandemic than residential, as expected. In the commercial business segment, revenue and profit were down 18%. Segment margin expanded 10 basis points to 18.7%. National account equipment revenue was down nearly 30%, and regional and local revenue was down mid-teens. Breaking down revenue another way, replacement was down high teens, and new construction was down high 20s. On the service side, Lenox National Account service revenue was down low double digits. VRF revenue was down low double digits. While overall commercial equipment revenue is down 20% in the third quarter, we continue to see signs of relative improvement in the business, with commercial equipment backlog currently down mid-teens year over year and order rates reflecting gradual improvement as well. Our commercial team continues to win new business and position for future growth. Commercial won 11 new national account customers in the third quarter, bringing the year-to-date total to 26%. In addition, our commercial group has launched an initiative called Building Better Air that is focused on improving indoor air quality in commercial spaces. This initiative combines our innovative product line and industry-leading building services to provide comprehensive IAQ solutions to commercial customers. We're helping business and building owners evaluate RageVac systems, recommend a comprehensive indoor air quality solution tailored to the building, and identify a maintenance plan to ensure ongoing indoor air quality effectiveness. Turning to our refrigeration business segment, revenue is down 14% of constant currency. North America was down high teens, and Europe was down high single digits. Segment profit was down 34%, and segment margin contracted 350 basis points to 10.4%. Refrigeration profitability was impacted by negative mix, with Europe down less than the U.S. in the quarter, as well as factory inefficiencies due to COVID-19. As in the commercial business, we are seeing signs in refrigeration of relative year-over-year improvement from the third quarter, with backlog up and order rates reflecting strong improvements. A quick update on SG&A cost savings this year. Earlier this year, we enacted a $115 million SG&A savings program. Due to the improved performance of our end markets and our strong operational performance, we have restored compensation and volume-related SG&A costs. Several examples of what I'm talking about are reinstituting pay from the temporary salary reduction, increased sales commissions, and paying performance-based compensation. We're now planning for $65 million of SG&A savings this year, with 45% coming from discretionary spending, 40% from headcount reduction, and the remaining 15% from pay and incentives that return in 2021. To wrap up with our updated guidance on 2020, we're raising revenue, adjusted EPS, and free cash flow. Revenue is now expected to be down 5% to 9% for the full year, Adjusted EPS from continuing operations is now expected to be $9.05 to $9.65. And free cash flow is expected to be approximately $425 million. We continue to face highly uncertain economic conditions in the fourth quarter and remain cautious on the potential impact from the pandemic heading into the winter season. but Lenox has a seasoned team, experienced in managing through downturns, and will continue to invest and advance the company for the future. We look forward to closing 2020 strong with momentum in 2021. Now over to Joe.