Lennox International, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Lenox International second 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 one then zero on your phone. Pressing one and zero again exits the queue. As a reminder, this call is being recorded. I would now like to turn the conference over to Steve Harrison, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for this review of Linux International's financial performance for the second quarter of 2021. I'm here today with Chairman and CEO Todd Bludorn and CFO Joe Reichmeier. Todd will review key points for the quarter and 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 risk 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.

Thanks, Steve. Good morning, everyone, and thank you for joining us. In the second quarter, we continue to see strong momentum in our residential business, combined with a continued rebound in commercial and refrigeration, as the overall company set new record highs for revenue and profit. Company revenue was up 32% to a new record of $1.24 billion. At constant currency, revenue was up 30%. GAAP operating income was up 59% to a record $216 million. GAAP EPS from continuing operations was 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 operations rose 54% to a record $4.57. Looking at the business segment highlights for the second quarter, in residential, we set new highs for revenue, margin, and profit. Residential revenue was up 30%, as reported, and up 29% of constant currency. Segment profit rose 49%, and segment margin expanded 290 basis points to 22.6%. Residential had comparable revenue growth in both replacement and new construction of approximately 30%. Lenox brand revenue was up 30%, as was our allied and other brands combined. Broad strength across residential in the second quarter. Year-over-year comparisons become tougher in the second half, actually started in June. As we 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. Our residential business continues to perform well, perform as well or better than anyone in the market. Looking beyond the second half of the year to 2022 and future years, we remain extremely bullish on the residential market. as we see the residential replacement cycle spinning faster due to shorter equipment life. We analyzed the actual runtime data on air conditioners last year with many people at home due to the pandemic. Adjusted for weather, air conditioners ran 30% more during the summer season last year. This summer, we may not be getting a runtime impact of 30%, but there's still a lot of people working from home. and many will continue to work from home full-time or like here at Lenox on a flexible schedule a couple days a week. 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 of air conditioner life spanned the years 2005 through 2015. Since then, for the years 2016 through 2020, Weather, as measured by average cooling degree days, has been 5% hotter in the United States. For 2021, we were still in the middle of summer, but the second quarter was even hotter than last year. Where runtime impacts equipment life on a linear basis, hot 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 R22 refrigerant systems come into the replacement window. For those not familiar with the history, the EPA banned the sale and distribution of equipment using the R22 refrigerant effective January 1, 2010, and banned the production or import of the R22 refrigerant effective January 1, 2020. While R22 refrigerant is still available in the market, it's significantly more expensive than 410A. In many cases, it is cheaper or placed with the new 410A system, which is also more efficient and comes with a new warranty. to repair the old R22 system. This also accelerates the replacement cycle. We expect all these dynamics to lead to a strong residential market condition for years ahead. On top of this, Lenox and Allied will be running their proven playbooks for market share gains. Moving on to our commercial business. Second quarter revenue is up 34% as reported and 33% of constant currency. Segment profit rose 27%. Segment margin was 17.9%, down 100 basis points on the timing of expenses and factory inefficiencies. The constant currency commercial equipment revenue was up more than 30% in the quarter. Within this, replacement revenue was up more than 40%, with plan 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 revenue was up more than 20%. National account equipment revenue is up more than 50%. This market continues to rebound and benefit from the pent-up demand created last year. Team 162 national account equipment customers in the second quarter to a total nine in the first half. On the service side, Lenox National Account Services revenue is up more than 30%. VRF revenue is up more than 25%. In refrigeration for the second quarter, revenue is up 37%. as reported, and 32 percent at constant currency. North America revenue is up more than 30 percent. Europe refrigeration revenue is up more than 30 percent at constant currency. And Europe HVAC revenue is up more than 25 percent at constant currency. Refrigeration segment margins expanded 90 basis points to 9.1 percent, and segment profit rose 52 percent. With a strong performance for the company overall in the second quarter, and outlook for the second half, we have raised 2021 guidance. We now expect a revenue growth of 12 to 16% on a reported basis or 11 to 15% at constant currency. We raised guidance for adjusted EPS from continuing operations to $12.10 to $12.70 for the year. We are raising free cash flow guidance to 400 million for the year and stock or purchase guidance to a total of 600 million for the year. So we'll talk about the specifics, but inflationary pressures continue to ratchet up this year. We're seeing headwinds from commodities, components, LIFO adjustments, and labor. We're capturing a higher yield from our first two 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 $110 million of guidance provided today. So the 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. One thing to note in regard to our public guidance this year, we have been incrementally moving the earnings outlook up one quarter at a time, and 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, I plan to step down as chairman and CEO of Lenox International by mid-2022. There's never a perfect time for a transition like this, but with EndMarket strong and the company well-positioned for the future with an exceptional management team, hardworking and dedicated employees, And the benefit of all the strategic investments we've made in product technology and distribution, we think it's a good time. The board has commenced a search for LII's next CEO, and I will be here over the next year to ensure a smooth transition. In the interim managing day-to-day, be assured I'm in the ring punching until the final bell. Now I'll turn it over to Joe.