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spk18: Ladies and gentlemen, thank you for standing by. Welcome to the Lenox 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 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.
spk00: Good morning. Thank you for joining us for this review of Linux International's financial performance for the first quarter of 2021. I'm here today with Chairman and CEO Todd Bludorn and CFO Joe Reitmeyer. 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.linuxinternational.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 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. Now let me turn the call over to Chairman and CEO Todd Bluedorn.
spk04: Thanks a lot, Steve. Good morning, everyone, and thank you for joining us. In the first quarter, we continue to see strong momentum in our residential business, combined with strong improvement in commercial and refrigeration, as the overall company set new first quarter highs for revenue, profit, and earnings per share. Overall for the company, revenue is up 29% to a new first quarter record of $931 million. That constant currency revenue was up 28%. GAAP operating income was a first quarter record $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 for the first quarter, we realized double-digit revenue growth and margin expansion in all three businesses. In residential, we set new first quarter highs for revenue and profit. Residential revenue is up 37%. Segment profit rose 197 percent, and segment margin expanded 850 basis points to 15.9 percent. Replacement business was up more than 40 percent, and new construction was up more than 25 percent. Breaking it down between our Lenox business and our Allied business, Lenox revenue was up about 25 percent, and Allied was up about 70 percent. Strong growth rates. Let me take a moment to unpack the strength we saw in residential and the corridor. First, with strong operational execution, our residential team is capitalizing on its ability to deliver to meet contractor and distributor demand and gain share. Post the 2018 tornado and initial 2020 pandemic impact, we are back on offense with production, distribution, and executing our playbook for 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 would like to note that we had a 6% benefit to revenue for 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. Adjusting for the days, residential grew 31% with Lenox 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, 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 residential segment revenue was up about 25%. We believe this compares to mid-teen 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. Revenue is 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 turned positive across all of our businesses. At constant currency, commercial equipment revenue was up mid-teens in the quarter. Within this, replacement revenue was up mid-teens, with planned replacement up mid-teens and emergency replacement up high-teens. New construction revenue is up high single digits. Breaking out revenue another way, regional and local business revenue is up mid-teens. National account equipment revenue is also up mid-teens. Our team won three new national account equipment customers in the quarter. On the service side, the next national account services revenue is up mid-single digits. VRF revenue is up mid-30s percentage. Some highlights to mention for commercials. Schools continue to be an area of focus for us. We have a dedicated sales force and product line that will drive a multi-year growth opportunity for us in this market. Today, K-12 schools are just a little under 10% of equipment revenue for this segment. 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-3 schools to be a growth vertical for us moving forward. Indoor air quality continues to be an 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 L rooftop unit as we continue to lead the field in energy efficiency. The Model L features variable speed technology and an all-new advanced control system. We are seeing high customer interest in this industry-leading product for 2021 and beyond. Overall, for commercial entering the second quarter, momentum continues with backlog of double digits and strong order rates. In refrigeration for the first quarter, revenue is up 21 percent. At constant currency, revenue is up 17 percent. In North America, revenue is up more than 25 percent. Europe refrigeration revenue is up low single digits at constant currency. In Europe, HVAC revenue was up mid-single digits, a constant currency. Refrigeration segment margin expanded 560 basis points to 6.3%. Segment profit rose to $8 million from $1 million in the 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 for the company overall in the first quarter In outlook for the second quarter of the year, we are raising 2021 guidance. We now expect 7% to 11% revenue growth and adjusted EPS from continuing operations of $11.40 to $12. We are also raising free cash flow guidance to $375 million for the full year. We now assume about 55% of earnings in the first half of the year compared to the prior guidance of about 50%. This reflects a 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 in our guidance for the year. Now I'll turn it over to Joe.
spk03: 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 and cooling. In the quarter, Revenue from residential heating and 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, 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 is $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 quarter. Segment margin was 6.3%, 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 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 share-based compensation. Corporate expenses were $16 million in the first quarter compared to $14 million in the prior quarter. Overall, SG&A was $145 million compared to $131 million in the prior quarter. SG&A was down as a percent of revenue to 15.6% from 18.1% in the prior quarter. In the first quarter, the company used $18 million in cash from operations compared to a usage of $99 million in the prior quarter. Capital expenditures were approximately $24 million in the first quarter and in the prior 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 $1.17 billion at the end of the first quarter, and we ended the quarter with a debt to EBITDA ratio of 1.8. 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 4% to 8% 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 $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 a 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 $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. 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 items that remain the same. We still expect a $20 million benefit from factory productivity. With 30 new Lenox stores planned for this year, we'll 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 IT 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 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 the 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 of stock this year. And with that, let's go to Q&A.
spk18: And ladies and gentlemen, if you wish to ask a question, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 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 KeyBank Capital Markets. Please go ahead.
spk01: Hey, good morning, guys. Good to see you back on the offensive. Just on MIX, it seems like a kind of tale of two cities here with ResMix really good and 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.
spk04: For residential, it's just positive benefit from the premium product. We're seeing traction. on the new furnace line that we launched, which is our premium product, now part of the Ultimate Comfort, and we're coming out with 26-year residential units. So we feel good about the mix, and we saw that in the quarter. I wouldn't read too much in the commercial. That just has to do with the lumpiness of customers in the quarter. So we feel good about mixed full year for commercial.
spk01: 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 you're thinking about, you know, as you look at the moving pieces of price-cost, how you think about incrementals, you know, into the selling season.
spk04: I mean, the things we did well was we managed the factories in the face of lots of pressures on the supply chain and on labor because of COVID, managed the factories 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 lapping the SG&A cuts that we did in April of last year. but we don't have the full inflationary pressure shed of commodities and components in the number shed. So the decrementals, excuse me, the incrementals will soften as we go through the year, but it'll still be overall for a full year basis nice, but they won't be as strong as they are in first quarter balance of the year.
spk01: And where do you think price cost is the biggest challenge, like timing-wise? Does that kick in in 2Q or...? it'll be second half of the year, third, fourth quarter. Okay, thanks. I'll get back in queue.
spk18: And our next question is from the line of Tommy Mull with Stevens. Please go ahead.
spk17: Good morning, and thanks for taking my questions. Hey, Tommy. Todd, I wanted to start on the resi market, specifically on your comment back on offense. Good to hear that. So I wanted to ask what levers you've pulled in the business behind that strategy. You mentioned a couple 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, just bridging from Lenox to the industry, it sounds like the outlook for units now went from mid to high singles. Should we think about Lenox as in line there, maybe outperforming or too early to tell for the full year?
spk04: 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 Resium 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. Now, the point about being back on the offense is, again, It seems like forever, but it's certainly been since mid-2018. We had a tornado, then we had the pandemic, and so we've sort of been stalled on driving new business. And we talked about coming out of the tornado in 2019, right before the pandemic hit, that we had won back to dealers, we were sort of gaining their business, and that's 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's not signing up dealers, it's signing up distributors. And then it just continues to be the flywheel effect of investments we continue to make in 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, our residential dealers are excited by our new ultimate home comfort system. They're 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.
spk17: Thank you, Todd. That's all helpful. Uh, one, one quick followup on the stores. It sounds like 30 is still the number for this year. Uh, Rough timing you could give us on when you think you'll execute through that plan and just given the strength of the market at least through one quarter, any potential that number might go higher?
spk04: I don't know if the number will go higher just in terms of the lead time to find the real estate to put it in place. And the majority of the stores are second half of the year. We put a handful in first quarter. We'll put some in second quarter, but it's really third, fourth quarter, especially once we get through the summer selling season that we really start to stack up the stores. Great.
spk17: Thank you. I'll turn it back. Thanks.
spk18: Our next question is from the line of Stephen Volkman with Jefferies. Please go ahead.
spk15: 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 toward the first half from the second half to 55% in the first half now used to be 50. Is that all kind of allied or distributor channels or anything in commercial that might be moving that at all?
spk04: No, it's not commercial. I mean, a large part of it's the allied reshuffling. And that's sort of best expectations.
spk15: Okay, thanks. And then you talked about the K-12 opportunity. It seems like that's taking off. What are you actually seeing those guys doing? Are they upsizing systems? Are they putting in just more IAQ? Or what exactly is driving that growth?
spk04: It's replacement. So it's, you know, I think about it as replacement rather than new systems. But yeah, they have older systems. They're now comfortable that they're and available capital to upgrade it, so they're doing that. They're talking a lot about indoor air quality, but that really 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.
spk18: Next, we'll go to Julian Mitchell with Barclays. Please go ahead.
spk05: Hi, good morning. Maybe just wanted to circle back on the earnings sort of seasonality. So I think your guidance implies at the high end around $5.40 for the second half in EPS. Last year's second half was around a dollar higher. So just wondered if you could help us understand year on year you know, how that dollar decline breaks out, you know, how much is just kind of resi volume versus a bigger price cost headwind for wide, you know, any other, there's a, there's a day sales impact that you mentioned, you know, any other factors that I didn't capture there?
spk04: I mean, if I had to put them in order, I think it would, it would be inflationary pressure commodities. It would be the day's impact. And then, and then it would be, I understand there's lots of questions about, and rightfully so, about what we're doing on 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 first quarter. And so we raised guidance by 85 cents for the full year after first quarter. I said I'd never, ever do that. We did it. Let's get through second quarter, and then we'll see. We'll have a better, clearer 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, clearer view of second half of the year.
spk05: Fair enough, thank you. And maybe just to switch to commercial a second, you mentioned the replacement activity in the education vertical just now, but it was interesting to see the high single-digit revenue growth in new construction in commercial in Q1. I think that's surprising for people given all the macro data on the U.S. non-resi market starts and so forth. So maybe help us understand you know, 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?
spk04: Uh, again, not to get too hung up on the math of things. I mean, you make the adjustment for days, it's low single digits. It's a good number. It's not quite as impressive as high single digits. Um, and then it was multiple verticals. I mean, it certainly wasn't K through 12. It was some of our retail customers. But maybe the largest driver was the distribution customers, people like Amazon building new distribution.
spk18: Thank you very much. Next, we'll go to the line of Jeff Sprague with Vertical Research. Please go ahead.
spk09: Thank you. Good morning, everyone. Todd, I missed a little. Good morning. I missed a little bit of the open, but did you also comment on kind of the margin impact of kind of the, you know, the revenue pull forward and if there's any kind of distortive effects on the margins and resi in particular?
spk04: I did, but the short answer, there really isn't. You know, the revenue would have dropped through on the normal margin line. So when I think about the margin expansion in residential areas, I wouldn't 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 their way into the numbers yet.
spk09: And just thinking about the price given the inflationary pressure, it sounds like there's talk of kind of round two actions this year. Some of those are out in the market I think already.
spk04: what uh what do you see the kind of the likelihood of kind of a second bite at the apple on price and any kind of pushback in the channel on that i mean i think the second bite's already taken place jeff right so we we announced the price increase a second price increase effect of june one uh trains announced a second price increase daikins announced a second price increase reams announced a second price increase goodman's announced a second price increase Carrier businesses have announced a second price increase. So we've all announced second price increases. And we feel, as you know, we get priced 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.
spk09: Great. Thanks. I'll leave it there.
spk18: And our next question is from the line of Nicole DeBlaise with Deutsche Bank. Please go ahead.
spk11: Yeah, thanks, guys. Good morning.
spk18: Good morning, Nicole.
spk11: So, Todd, you kind of alluded to some challenges on the supply chain side. Could you just provide a little bit more and, you know, what the bottlenecks are and, I guess, the level of concern as we... Yeah, I mean, I think the highest level message I would give is...
spk04: 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, is wrestling with is 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 the pandemic started over a year ago, sort of a hopscotch around the globe of wherever the hotspot is, then you have pressure on a supply chain that comes from there. And right now, we think that's largely behind us. because we don't source much from India, but that sort of has been the issue that we've wrestled with. When Mexico was not going well, we had issues, and when the U.S. was having some problems, we were 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. That in our factories, in 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 has snapped back nicely. And I'm all for the president's policies. I'm a Democrat. But I would observe, you know, when you pay people to stay at home, they're less likely to come to work. And we continue to wrestle with that.
spk11: Got it. Thanks, Todd. That's really helpful. And I guess just one follow-up. Talk a little bit about channel inventory and how you're positioned as we move into the summer selling season, maybe how that compares to last year.
spk04: Yeah. I mean, we think we're in a really good position, as you know, but I'll say it for others on the phone call. 80% of our business is Lenox residential. And there, that's when the homeowner decides 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 aren't carrying inventory. I saw one sell site 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 a 2% price increase. For the portion of the market that we sell 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 is their inventory levels are $25 million higher than last year at this point in time as they pull forward inventory.
spk11: Got it. Thanks, Todd. I'll pass it on.
spk18: Thanks. And next we'll go to the line of Joe Ritchie with Goldman Sachs. Please go ahead.
spk07: 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 normalize resi for Q1, you still come up against your easiest comp in 2Q, and it sounds like the backlog trends are really good. Is there any reason why the second quarter growth number can't be as good as you put up in Q1, again, kind of normalizing for the resi days and the inventory pull forward?
spk04: We're set up to have a strong second quarter. So, I mean, I hate the hypotheticals or any reason not. Yeah, I mean, I come up with reasons not, but we're set up for a strong second quarter, and we obviously just need to execute.
spk07: Got it. And then just like, you know, talking through the comments you made earlier, I think that Julian's 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 seem really good. And, you know, the 7% to 11% looks like a beatable number at this point, looks conservative.
spk04: I always try to nuance this. I mean, the guide's the guide, number one. So the guide's the guide. But As I said earlier, we never raised after first quarter. We raised $0.85. I've learned anything since the tornado and the pandemic is things can change quickly. If we stay on the trend line we are in North America, because we're a North America business, that we've whooped the pandemic and we're back to a normal economy. With all the government investment in the economy, we're going to have a nice run for a couple of years in all three of our businesses, and we're prepared for that. So we feel good about 2021. Quite frankly, I feel good about 2022. But the guide is the guide is, I guess, the short answer.
spk07: Yeah, I don't mean to back you in, but 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 that there's any dynamics with the pricing that's going into effect in June where you continue to see kind of stronger demand ahead of the June pricing increases?
spk04: I think there may be some effect. There may be some effect, but I think it's, you know, distributors right now want to make sure they have enough to get through the summer selling season and they're willing to you know, 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 when they need the product. And so we'll continue to work through what will happen. There may be some pull forward. But, again, that's 20% of our business, so I don't think it will be a material impact to us.
spk18: All right.
spk07: Nice quarter, guys. Thank you.
spk18: Thanks. And, ladies and gentlemen, just a quick reminder, if you do have a question, please press 1, then 0. And next, we'll go to John Walsh with Credit Suisse. Please go ahead.
spk12: Hi. Good morning. Hey, John. Hey. 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 to – increase production of heat pumps in particular?
spk04: I mean, 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 Satio, that's adding overall capacity to heat pumps and every other product line that we do. So heat pump continues to be a growing market for us. We came out with a high, 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 that's a growing market. And, you know, I would have said five years ago we lagged the competitors in our heat pump offering. I'd say now we're on par with the big boys carrier train and further ahead of our other competitors. And so we like that market and we're well positioned to compete there.
spk12: Great. And then just maybe a second question here on capital allocation. taking up the free cash flow taking up your share repo should we think that the majority of the excess cash goes to buy back stock or might there be anything in terms of m a bolt on or otherwise we should be thinking about yeah i'm not breaking any news i mean i i would think about it and i'll say for others i know you know this is we'll we don't want to de-lever so we'll do
spk04: something with the cash, and we'll have dividends grow with earnings, and we will invest in the business, and we'll do the type of M&As we've spoken about, but we've done one deal of any size since I've been here, and then the balance we'll give back as share buyback.
spk12: Great. Thank you for taking the questions. Thanks.
spk18: Our next question is from the line of Nigel Coe with Wolf Research. Please go ahead.
spk16: Thanks. Good morning, Todd. Hey, Nigel. So I think I've got the numbers, you know, the underlying numbers for Allied plus 35% X the days and X the $25 million. Just to be clear, the $25 million, is that the full extent of the inventory restock dynamic or is there some inventory restock within the plus 35% as well?
spk04: The $25 million, our best guess, are the extent of the inventory restock. The $35 million is X any pre-buy.
spk16: Okay. So plus 35% is kind of an apples for apples. This is basically dealer market share gain, not imagery stock dynamics going on there.
spk04: Well, it is the 35% versus, say, the 15% that I said was sell-through. The difference is we're winning new distributors. And when you win new distributors, you have a big sort of wash of volume that flows through your business. So it's not necessarily winning at the dealer level, it's winning at the distributor level. We're converting dealers from our competitors, and when we convert them, we get a slug of new volume.
spk16: Okay, that's clear. And then your inventory levels, I think 502 at the end of the quarter, definitely a lot lower than what you'd normally have. And you answered Nicole's question very well in terms of supply chain, but I'm just curious, all things being equal, is that is that low level of entry? Was that caused by just the surge in demand and then therefore depletion of end equipment? Or was there some surprising constraints that meant you weren't able to replenish your inventory? Just curious in terms of what caused that level of entry to be so low and your confidence in sort of rebuilding those levels.
spk04: It's primarily the demand. I mean, look, I I knew we were now first quarter. I didn't think Resi was going to be up 37%, you know, six months ago. And so I think that that's a primary issue. And then once you see the white 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, you know, if you're going to try and raise production 50, 60% to get ahead of everything, then you run into problems. integrated circuits, then you run into labor, then you run into other things. So look, I, 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, you're sort of not grinding gears, but you're running hot and we're running hot. Right. Right.
spk16: Okay.
spk04: Thanks.
spk18: Next question from line of Ryan Merkel with William Blair, please go ahead.
spk13: Hey, thanks for fitting me in. So first off, you mentioned K-12 and the good outlook there. If everything goes well with the stimulus money, what kind of growth rates could you see from K-12 the next couple of years?
spk04: I understand the question. I'll be honest with you, we haven't really modeled it in any great detail. I've seen some of the sell-side notes, including yours, sort of take cracks at it. We think it could be a material opportunity for us. And I know people are modeling it externally. I just want to give the number that it'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 grow that same speed.
spk13: 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.
spk04: I think the only moderation is... Trades, the employment issues I spoke about impacts builders also. And then inflationary pressures. But I don't think inflationary pressures will slow things down right now. I think people need homes. And there's not much inventory on used or existing homes right now. And so builders are trying to build. So, excuse me, we feel pretty good about new construction for the balance of the year. Got it. Thanks. Thanks.
spk18: And next, we have a line of Josh Pokriwinski with Morgan Stanley. Please go ahead.
spk08: Hey, good morning, guys. Good 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 that strong growth in Allied. I would imagine you have some sort of long-term model of how much the industry should mix up or you know, homeowners kind of buy up on features or see her in a given year. Did we just jump like several years forward? Like what's, what's going on there? And you know, how much ahead of where you would have been in recent years? Are we today on, on that mixed dynamic?
spk04: I wouldn't read too much large long-term macro into it. I tell you what I might read into it is our highest margin business is furnace. We had a warm winter last year. We had a cold winter this year. Guess what? Furnace sales grew probably fast. I don't have the exact numbers in front of me, but furnace sales grew strongly in the quarter, and that helped the mix of business. So I think that's the biggest driver. That combined with, you know, we've launched some new product that's helped us. But, you know, saying that we're going to be up full year, $10 million a mix, that's sort of a normal guide. I think the bigger question was, why were we guiding flat and mix for a full year in resi? And the reason we were guiding flat was because we had uncertainty of what was happening with the pandemic and whether people were 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.
spk08: Got it. And then I guess just kind of thinking about entering the selling season here, first quarter, I don't know if it's really indicative of much of all, but we're kind of through April at this point. At what At what point does the industry, whether it's dealers or, you know, your independent distributors, even though there's not, you know, it's not the bulk of the business, at what point did they just say, okay, now we're ready? Are they still, you know, positioning inventory, thinking about, you know, what price levels they want to be loaded at right now? Or are they sort of saying we're, you know, we're ready to go for the season?
spk04: I mean, 80, and again, you know this, Joshua, I'll say it for others, I mean, 80% of our business, we're selling to dealers. They don't think that way. I mean, they're not stocking up inventory. They're not getting ready. They see demand, they sell demand, they buy some more. And some of them may have a week to really, you know, well-capitalized dealers may have a couple of weeks, but that's not how that works. For the independent distribution, you know, the order rates remain strong. They still want inventory and they're still selling product right now. And demand's still high at the deal, excuse me, at the homeowner level. Um, and so they're coming out of a very good first quarter and they want more inventory and we're selling it to them.
spk08: God, that's helpful. I'm, I apologize. I'm just going to try to squeeze in one more. The, the allied cover color that you said where, uh, a lot of that growth is new distributors. Any sense on kind of same store, uh, growth with an allied versus the contribution from, from new customers there?
spk04: Yeah, I don't have that math in front of me because I tend not to think about same stores. Um, 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 were selling to dealers. They were, you know, buying at 15, 20% also, if that's what the, what the end markets were growing.
spk18: Got that helpful. Thanks. Thanks. Our next question is from line of Gautam Khanna with Cohen. Please go ahead.
spk06: Yeah, thanks. Good morning, guys. Hey, Adam. How are you? Doing well, thanks. I have two questions. First, you know, 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, you know, with the commercial market down nearly 20%, how quickly that catches up and how much of it catches up.
spk04: Yeah, I mean, our experience here after... financial crisis, and in my experience, I was a carrier after 9-11, is marble rolls off the table on planned replacement goes down dramatically. And 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 experience is 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 the normal plan replacement that was scheduled during the same time period. And so that's why, you know, we're pretty optimistic on the commercial end markets for the next 18 to 24 months.
spk06: Got it. In fact, that map suggests the guidance might be a little low. I mean, I'm recognizing nobody knows. Okay. And then secondly, on Resi, I was curious – did any competitors have any issues, production issues, COVID outbreaks, whatever, that may have benefited Lennox's results that might be non-retrained? We saw the Tyler roof collapse of train. Goodman had issues last year. Just wondering if anything stood out to you one way or the other.
spk04: Yeah, I mean, our competitors, I mean, or better stated, I... Steve always gets worried when I bash 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. Look, our competitors have had issues. I mean, when we talk to our customers, we hear about JCI 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 aren't able 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 competitors' dealers can't sell product. Our dealers can. We win the share. We win. And that's not a one-time thing. We sort of get it and we keep it and we keep moving.
spk06: I appreciate you not sticking to the script on that. Thank you very much.
spk04: Thanks.
spk18: And we have a question from the line of Chris Dankert with Longbow Research. Please go ahead.
spk02: Hey, morning, Todd. Just thinking about R&D priorities, I guess, you know, where is the investment focused at the moment? I mean, is it still, you know, controls and user experience? Is it efficiency? Is it footprint and noise reduction? When you think about where you want to see the teams prioritizing investment, kind of any rank order there or any thoughts on the targeting of that spend?
spk04: Yeah, I think you said some of them. I think number one is digitization of the business. I mean, we continue to make significant investments both in product, on controls, but also significant investment in the e-commerce and the back end of the business. And so significant investments. And we continue to make those investments. And that's driving the productivity in part that you see in our numbers. We continue to make investments in what I will call environmental sustainable products. 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 of our product line. Those are the areas.
spk02: Got it. Yeah, 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?
spk04: We don't quite build everything there. There are certain products that we only build in Marshalltown and some products that we only build in Orangeburg or in our Mississippi, Grenada, Mississippi factory. But we continue to build our capabilities in Mexico. It started as cooling, then went to furnace, then it was just entry level. Now it continues to be almost the full product line. So we continue to develop our capabilities in our Mexico facility.
spk02: Got it. Makes sense. Yeah, just thinking about how having that ability to flex as needed was really brought to the fore just a couple years ago. So thanks for the call. I really appreciate it.
spk04: Yeah, 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 and or absenteeism because of COVID is we have multiple factories that have significant overlap on what they produce, and we're able to sort of meet demands. Absolutely.
spk18: Thanks. And our next question is from Steve Tusa with J.P. Morgan. Please go ahead.
spk14: Hey, guys. Thanks for having me in. I was just checking all the inventory in my garage. I have a bunch of different HVAC systems in my garage sitting there. I'm going to sell them for a higher price.
spk04: And my guess is they're probably train and carrier.
spk14: Definitely not. JCI. JCI. So you mentioned that the carrier businesses have gone out with price increases. Have you seen that across all their brands?
spk04: You know, what I have in front of me is we've seen it in the ICP brands. And carriers announced also, Todd. Carrier announced also, yeah. So Steve's helping me. He's in a different room for security reasons. But, yeah, so we've seen it in the carrier brand also. So we've seen it on all our major competitors.
spk14: Okay, gotcha. 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 monthlies to play out, you know, in the second quarter?
spk04: Well, I think as you'd expect, right? So May was the nadir last year for the businesses. And so April, you know, will be up. May will be up. I, and I think June will be up. And again, it depends on the business, quite frankly, you know, residential being goes deep and came back relatively quickly. Um, the, the commercial and refrigeration business, uh, was deep and stayed deep and didn't really start to come back until fourth quarter.
spk14: Right. And, and, and I guess for, for, um, sales in the second quarter, you mentioned, you know, the 55% EPS seasonality. Can you just, uh, maybe update us on what you expect kind of from a sales seasonality perspective on that front, whether it's Resi or the total company?
spk04: No. I mean, I quite frankly don't have it in front of me. I mean, I'm not going to give the revenue guide. We just want to give the EPS guide.
spk14: Okay. And then just one last one. How much, I guess, you know, 2.5% of price for the total company is But how much in resi should we assume a tick above that in resi, something in kind of the 3.5% range?
spk04: No, I think if I was modeling, because we don't give segment price guide, I would assume 2.5% across the board. Res is two-thirds of our business, so if we give a guide and we don't delineate it, then I just assume res is that guide.
spk14: I don't think you guys have – that's 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 pretty decent-sized number looking back historically.
spk04: I mean, we did $70 million, $71 million in 2019. We did $72 million in 2018. Steve did have the number that went back, I think, in 2011, 2012 as a percentage because we were a lot smaller back then. Yeah. I think we did close to 2.5%. But yeah, I mean, we've done 2% as recent twice, two years in a row. I would tell you the inflationary pressure people see and the headlines that they have on it and all our competitors are feeling is unlike anything I've seen because it's just not in commodities. It's sort of across the board. In a better state, it's just not raw copper, steel, and aluminum. It's across the board because everyone sort of has a what I would call a COVID surcharge of inefficiencies that they're trying to pass on. So I feel very confident we'll pass it on. And again, the homeowner, it's opaque to them. They get a new unit once every 15 years and half the price is labor and half's equipment. And so whether it's two or two and a half doesn't matter. The question is, are competitors doing the same thing? And it looks like they are.
spk14: And you're sure that there's no, you haven't heard any anecdotes about contractors not necessarily saying, hey, you know, your price is going to go up 2% if you don't replace it today, but that they're saying last year, you know, there were real availability concerns, the industry is extremely tight, there's a new regulation coming in a couple years from now. I mean, you don't think any of those conversations are going on at the kitchen table?
spk04: I think those conversations always take place at the kitchen table. So, so the way it works is there's a catastrophic failure. Compressor breaks 3000 to replace the compressor. The homeowner says, I'm not going to spend 6,000 for a new system. I'll just replace the compressor. You don't want to do that. And here's the 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 fix that. And the system's working fine. You say, well, You should get a new system because there's a 2.5% price increase. That ain't never happening. What happens is if there's a catastrophic failure, there's a conversation. There's price increases every year. There's refrigerant changes. There's minimum efficiency changes. All that takes place year after year after year. Whether it's a 2% price increase or a 2.5% price increase, doesn't change that conversation. So in 2018 and 2019, we had a 2% price increase. Now we have 2.5%. That doesn't tip people over to replacing units in a wholesale way that they did before. No. So the answer is no.
spk14: Yeah, I don't think it's a price. I mean, I would say availability is a bit more of a buzzword and a hot-button issue these days than it's been in the past. But, you know, fair point.
spk04: I mean, our dealers have product.
spk14: So they have it. Right. Okay. Thanks a lot, guys. Appreciate the details always.
spk18: Thanks. And with no further questions, Mr. Bluedorn, I'll turn it back to you for any closing comments.
spk04: Thanks. To wrap up, 2021 is off to a strong start and momentum continues in the second quarter. The company is executing well to capitalize on market growth and share gain opportunities and look forward to a year of strong growth and profitability. Thanks again, everyone, for joining us today.
spk18: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
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