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 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. 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 15th. The format will be virtual again this year. Please mark your calendars. Invitations and more details will follow. Now let me turn the call over to Chairman and CEO Todd Bluedorn.

Thanks, Steve. Good morning, everyone, and thank you for joining us. Strong demand continued in the third quarter across all our businesses, but global supply chain and COVID-19 disruptions to production and labor availability negatively impacted our financial results, approximately a $75 million impact to revenue and $75 million to operating profit in the quarter. Company revenue is up slightly to a third quarter record of $1.06 billion, with the benefit of strong price in the shipment-constrained environment. Gap operating income was down 3%. Gap EPS from continuing operations was relatively flat at $3.41 compared to $3.42 in the prior year quarter. Total segment profit was down 7%. The total segment margin was down 120 basis points to 15.5%. Adjusted EPS from continuing operations was down 4% to $3.40. including approximately $0.55 of negative impact from the global supply chain and COVID-19 disruptions. Looking at business segment highlights for the third quarter, residential revenue was down 2% and segment profit was down 6%. Segment margin was down 90 basis points to 20.3%. Residential revenue from replacement business was down mid-single digits. Revenue from new construction was up low double digits. Dan Mansoor, The next brand revenue is down low single digits and revenue from allied and our other brands were up low single digits. Dan Mansoor, market demands from it remains high entering the fourth quarter and we remain bullish on the residential market as we look ahead to 2022 in the coming years. Dan Mansoor, More people continue to work from home and run rage fax systems than before the pandemic with global warming, the hotter weather, we are seeing has an exponential impact on reducing the life of cooling systems. and there are more complete HVAC system sales taking place with old R22 refrigerant systems in replacement window. This is driven by the EPA ban on the sale and distribution of equipment using R22 refrigerant effective January 1, 2010, and the ban of the production or import of 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's cheaper to replace with a new 410A system, which is also more efficient and comes with a new warranty than to repair the old R22 system. From 2005 to 2010, 60% of air conditioners and heat pumps sold were R22. The need to replace these has a meaningful benefit to residential growth. We expect these dynamics to lead to strong residential market conditions for the years ahead. Lennox and Allied will be running their proven playbook for market share gains. Moving to our commercial business. Third quarter revenue was up 2%. Commercial profit was down 42%. The segment margin declined 800 basis points to 10.7%. On top of supply chain shortages and bottlenecks disrupting production, our Arkansas factory was hit the hardest by COVID-19 in the quarter, and labor availability was a significant issue. At constant currency, commercial equipment revenue was down low single digits in the quarter. Within this, replacement revenue was up low single digits with plant replacement up more than 20% and emergency replacement down more than 30%. New construction revenue was down mid-single digits. Breaking out revenue another way, regional and local business revenue was down high single digits. National account equipment revenue was up high single digits. The team won two national account equipment customers in the third quarter to total 11 year today. On the service side, Linux national account service revenue was up mid-teens. VRF revenue was up more than 30%. In refrigeration for the third quarter, revenue was up 10%. North America revenue was up more than 20%. Europe refrigeration revenue was relatively flat. In Europe, HVAC revenue was down mid-single digits. Refrigeration saving and profit was up 12%. as margin expanded 20 basis points to 10.6%. Looking ahead for both our refrigeration and commercial businesses, demand remains strong. Backlog is up approximately 60% for refrigeration and 90% for commercial, and order rates continue to be strong. Demand is clearly not an issue, but as we look at the fourth quarter, we continue to expect material impact to production for supply chain shortages and bottlenecks. We currently expect a similar negative financial impact to our business as we saw in the third quarter, approximately $75 million of revenue and $25 million of operating profit. We continue to see broad inflationary pressures, including for commodities and components, but we have enacted three rounds of price increases this year. The latest one was just on September 1st with a focus on staying ahead of inflation. The company yielded 4% price overall in the third quarter, including 5% in residential. In addition to the carryover benefit next year from our June and September price increases, we're announcing additional price increases heading into 2022. Our refrigeration business has announced a price increase of 8% in North America effective for December 1. Likewise, our European business has recently announced another round of increases generally from 5% to 10% to drive price in 2022. Our commercial business has announced a price increase of up to 13% effective January 1st. And our residential business will be announcing another round of price increases in November to be effective heading into 2022. For 2021, we are narrowing our revenue and EPS guidance for the year. We are narrowing 2021 guidance for revenue from 12% to 16% to a new range of 13% to 15%. Foreign exchange is still expected to be a 1% favorable to revenue. We are narrowing 2021 guidance for adjusted EPS from continuing operations from $12.10 to $12.70 to a new range of $12.10 to $12.30. Our free cash flow guidance remains $400 million for the year. As the company continues to battle through the disruptions to production from the global supply chain and COVID-19, we are also positioning the company for the future. It's too early to set guidance for 2020, But as we think about next year, we expect strong pricing power to continue. The company yielded 4% in the third quarter, which had just one month of benefit from the third price increase this year. For 2022, we'll carry over price benefit from our June and September 2021 price increase. We have announced additional price increases in our next year. We'll have strong price benefit to offset commodity headwind next year. Looking at market drivers and our strong backlog position in order rates, we see residential, commercial, unitary, and refrigeration up in 2022. As you get more and more of the supply disruptions behind us, we expect to return to strong growth and profitability as we capitalize on market opportunities. Now, let me turn it over to Joe.