Lennox International Inc. (LII) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Lennox 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. . 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. Steve Harrison: Good morning. Thank you for joining us for this review of Lennox International's financial performance for the first quarter of 2021. I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier. 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 for today's conference call on our Web site at www.lennoxinternational.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 Lennox 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. Todd Bluedorn: Thanks a lot, Steve. Good morning everyone and thank you for joining us. In the first quarter we continued 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 was up 29% to a new first quarter record of $931 million. At 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 was up 37%, segment profit rose 197% and segment margin expanded 850 basis points to 15.9%. Replacement business is up more than 40% and new construction was up more than 25%. Joe Reitmeier: 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 was $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. Operator: . Our first question is from Jeff Hammond from KeyBanc Capital Markets. Please go ahead. Jeff Hammond: Hi. Good morning, guys. Todd Bluedorn: Hi, Jeff. Jeff Hammond: Good to see you back on the offensive. Just on mix, it seems like kind of Tale of Two Cities here with res mix 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. Todd Bluedorn: For residential, it’s just a 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 into commercial. That just has to do with the lumpiness of customers in the quarter. So we feel good about mix full year for commercial. Jeff Hammond: 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 -- as you look at the moving pieces of price cost, how you think about incremental into the selling season? Todd Bluedorn: 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 there's some timing involved here obviously, Jeff, as you know. 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 set of commodities and components in the numbers yet. So the incrementals will soften as we go through the year, but it will 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. Jeff Hammond: And where do you think price cost is the biggest challenge, like timing wise? Does that kick in, in 2Q or --? Todd Bluedorn: It will be second half of the year; third, fourth quarter. Jeff Hammond: Second half of the year, okay. Thanks. I’ll get back in queue. Operator: And our next question is from the line of Tommy Moll with Stephens. Please go ahead. Tommy Moll: Good morning and thank you for taking my questions. Todd Bluedorn: Good morning, Tommy. Joe Reitmeier: Hi, Tommy. Tommy Moll: Todd, I wanted to start on the resi market, specifically on your comment back on offense, good to hear. So I wanted to ask what levers you've pulled in the business behind that strategy. You mentioned a couple of 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 Lennox to the industry, it sounds like the outlook for units now went from mid to high singles. Should we think about Lennox is in line there, maybe outperforming or too early to tell for the full year? Todd Bluedorn: 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 resi 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 it seems like forever, 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 the dealers, we were sort of gaining their business and that's a multiyear effect. You start to get the flywheel going on new business development that really helps. We had really -- we've had strong momentum in our Allied business where there it’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. 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. Tommy Moll: Thank you, Todd. That's all helpful. One quick follow up on the stores. It sounds like 30 is still the number for this year. Rough timing you could give us on when you think you'll execute through that plan? And just given the strength to the market at least through one quarter, any potential that number might go higher? Todd Bluedorn: 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 and fourth quarters once we get through the summer selling season that we really start to stack up the stores. Tommy Moll: Great. Thank you. I’ll turn it back. Todd Bluedorn: Thanks. Operator: Our next question is from the line of Stephen Volkmann with Jefferies. Please go ahead. Stephen Volkmann: Great. Good morning, guys. Todd, can I just ask you to give us a little more on sort of the shift a little bit toward the first half from the second half? The 55% in the first half now, it used to be 50%. Is that all kind of Allied or distributor channels or anything in commercial that might be moving that at all? Todd Bluedorn: No, it's not commercial. A large part of it's the Allied reshuffling and that's sort of best expectations. Stephen Volkmann: 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? Todd Bluedorn: It's replacement. So it's -- I think about it as replacement rather than new systems. But yes, they have older systems. They're now comfortable that they're going to have financing and available capital to upgrade it. So they're doing that. They're talking a lot about indoor air quality. 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. Stephen Volkmann: Great. I appreciate it. Thank you. Todd Bluedorn: Thanks. Operator: Next, we’ll go to Julian Mitchell with Barclays. Please go ahead. Julian Mitchell: 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, second half was around $1 higher. So just wondered if you could help us understand year-on-year how that dollar decline breaks out, how much is just kind of resi volume versus bigger price cost headwind firm-wide, any other -- there's a day sales impact that you mentioned. Any other factors that I didn't capture there? Joe Reitmeier: If I'd put them in order, I think it would be inflationary pressure commodities, it would be the days impact. 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 the first quarter. And so we raised guidance by $0.85 for the full year after first quarter. I said I'd never ever do that. We did it. Let's get through second quarter, then we'll see – we’ll have a better clear view of what we should do for the full year guidance. Obviously, our guidance is our guidance right now. But let's go through second quarter and I think we’ll have a better clearer view of second half of the year. Julian Mitchell: Fair enough. Thank you. And maybe just to switch to commercial for 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 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? Joe Reitmeier: Again, not to get too hung up on the math of things, you make the adjustment for days, its low single digits. It's a good number. It's not quite impressive as high single digits. And then it was multiple verticals. It certainly wasn't K-12. It was some of our retail customers. But maybe the largest driver was the distribution customers, people like Amazon, building new distribution. Julian Mitchell: Got it. Thank you very much. Joe Reitmeier: Thanks. Operator: Next, we’ll go to the line of Jeff Sprague with Vertical Research. Please go ahead. Jeff Sprague: Thank you. Good morning, everyone. Todd Bluedorn: Hi, Jeff. Jeff Sprague: Todd, I missed a little bit at the open, but did you also comment on kind of the margin impact of kind of the revenue pull forward and if there's any kind of distortive effects on the margins in resi, in particular? Todd Bluedorn: I did, but short answer there really isn't. The revenue would have dropped through on the normal margin line. So when I think about the margin expansion in residential, I would hang my hat on the pool -- 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 in the fact that commodities and inflationary pressures haven’t worked their way into the numbers, Jeff. Jeff Sprague: And just thinking about the price given the inflationary pressure, it sounds like there's talk of kind of round two actions this year and some of those are out in the market I think already. But what do you see the kind of the likelihood of kind of a second bite of the apple one price and any kind of pushback in the channel on that? Todd Bluedorn: I think the second bite’s already taken place, Jeff, right? So we announced the price increase -- a second price increase effective June 1. Trane’s announced the second price increase, Daikin’s announced a second price increase, Rheem’s 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 give price to 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. Jeff Sprague: Great. Thanks. I'll leave it there. Todd Bluedorn: Thanks. Operator: And your next question is from the line of Nicole DeBlase with Deutsche Bank. Please go ahead. Nicole DeBlase: Good morning. Todd Bluedorn: Good morning, Nicole. Joe Reitmeier: Hi, Nicole. Nicole DeBlase: So Todd, you kind of alluded to some challenges on the supply chain side. Could you just provide a little bit more color on what you’re seeing and what the bottlenecks are, and I guess the level of concern as we see ? Todd Bluedorn: Yes. I think the highest level message I would give is, 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 shape 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 as -- 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's sort of has been the issue that we've wrestled with when Mexico was not going well, we had issues. And when U.S. was having some problems, we're having some issues. And then I think the final piece of it 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 when you pay people to stay at home, they're less likely to come to work. And we continue to wrestle with that. Nicole DeBlase: Got it. Thanks, Todd. That's really helpful. And I guess just one follow up 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? Todd Bluedorn: Yes. We think we're in really good position, as you know, but I'll say it for others on the phone call, 80% of our business is Lennox 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-side 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 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 inventory levels are 25 million higher than last year. At this point in time it’s a pull-forward inventory. Nicole DeBlase: Got it. Thanks, Todd. I’ll pass it on. Todd Bluedorn: Thanks. Operator: And next we’ll go to the line of Joe Ritchie with Goldman Sachs. Please go ahead. Joe Ritchie: Hi. Good morning, guys. Todd Bluedorn: Good morning, Joe. Joe Ritchie: 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 resi for Q1, you still come up against the easiest comp in 2Q. And it sounds like the backlog trends are really good. So is there any reason why like 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 portfolio? Todd Bluedorn: We’re set up to have a strong second quarter. So I hate the hypotheticals or any reason not -- yes, I come out with the reasons not, but we're set up for a strong second quarter and we obviously just need to execute. Joe Ritchie: Got it. And then just like talking through the comments you made earlier, I think to 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 the 7% to 11% looks like a beatable number at this point, it looks conservative. Todd Bluedorn: So let's try nuances . The guide’s the guide, number one. So the guide’s the guide. But as I said earlier, we never raise after first quarter. We raised $0.85 cents. I’ve learned many things 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 looked the pandemic and we're back to normal economy with all the government investments in the economy. I 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’s the guide is I guess the short answer. Joe Ritchie: Yes, I don't mean to back you in but that makes a lot of sense. I guess one last one is just thinking through the -- you mentioned the pull forward on the Allied side of the business this quarter. 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? Todd Bluedorn: I think there may be some effects. There may be some effects, but I think it's -- distributors right now want to make sure they have enough to get through the summer selling season. And they're willing -- they're going to pay what they need to do to make that happen. So I think they will 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 and there may be some pull forward. But again, that's 20% of our business. I don't think it'll be a material impact to us. Joe Ritchie: Got it. Nice quarter, guys. Thank you. Todd Bluedorn: Thanks. Operator: . And next we’ll go to John Walsh with Credit Suisse. Please go ahead. John Walsh: Hi. Good morning. Todd Bluedorn: Hi, John. John Walsh: I was just -- 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? Todd Bluedorn: 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 Saltillo, 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 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 and training and further ahead of our other competitors. And so we like that market and we're well positioned to compete there. John Walsh: 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? Todd Bluedorn: Yes, I'm not breaking any news. I would think about it and I'll say for others, I know you know this is we don't want to delever. So we'll do something with the cash. And we'll have dividends grow with earnings. And we will invest in the business. And we'll do type of M&A we've spoken about, but we've done one deal of any size since I've been here and then the balance will give back a share buyback. John Walsh: Great. Thank you for taking the questions. Todd Bluedorn: Thanks. Operator: Our next question is from the line of Nigel Coe with Wolfe Research. Please go ahead. Nigel Coe: Thanks. Good morning, Todd. Todd Bluedorn: Hi, Nigel. Nigel Coe: So I think I've got the numbers, the underlying numbers for Allied is plus 35% ex the days and ex 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? Todd Bluedorn: The 25 million is our best guess at the extent to the inventory. The 35 million is ex any pre-buy. Nigel Coe: Okay. So plus 35% is kind of an apples-for-apples, this is basically dealer market share gains, not inventory stock dynamics going on there. Todd Bluedorn: It is. The 35 versus say the 15 or 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. Nigel Coe: Okay, that’s fair. 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 on supply chain, but I'm just curious, all things being equal, is that low level of inventory, is that caused by just a surge in demand and then therefore completion of end equipments or was it some of the pricing constraints that meant you weren't able to replenish your inventory. Just curious in terms of what caused that level of inventory to be so low and your confidence in sort of rebuilding those levels? Todd Bluedorn: It’s primarily the demand. Look, I knew we were out first quarter. I didn't think resi was going to be up 37% six months ago. And so I think 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 if you're going to try and raise production 50%, 60% to get ahead of everything, then you run into integrated circuits and you're running away, but then you run into other things. So, look, I've said we're doing as well or better than anyone in the industry. 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. Nigel Coe: Right. Okay. Thanks, Todd. Todd Bluedorn: Thanks. Operator: Next question is from the line of Ryan Merkel with William Blair. Please go ahead. Ryan Merkel: Hi. 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? Todd Bluedorn: 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'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 at that same speed. Ryan Merkel: Okay, that's helpful. And then just talk about the resi new construction outlook, any signs of moderation or just full steam ahead there? Todd Bluedorn: I think it's full steam ahead. I think the only moderation is trades. The employment issues I spoke about, it 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. We feel pretty good about new construction for the balance of the year. Ryan Merkel: Got it. Thanks. Todd Bluedorn: Thanks. Operator: And next is from the line of Josh Pokrzywinski with Morgan Stanley. Please go ahead. Josh Pokrzywinski: Hi. Good morning, guys. Todd Bluedorn: Good morning, Josh. Josh Pokrzywinski: Todd, just on the mix front, I guess that number stood out to me on residential that it was plus 4, even with all that strong growth in Allied. I would imagine you have some sort of long-term model of like how much the industry should mix up or homeowners kind of buy up on features or SEER in a given year. Did we just jump like several years forward, like what's going on there? And how much ahead of where you would have been in recent years are we today on that mix dynamic? Todd Bluedorn: I wouldn't read too much long-term macro. And so I’d tell you what I might read into it is our highest margin business as far as 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 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 -- we've launched some new product that's helped us. But saying that we're going to be up full year 10 million of mix, that's sort of a normal guide. I think the bigger question was, why were we guiding flat in mix for a full year in resi? And the reason we are guiding flat was because we had uncertainty of what was happening with the pandemic, and whether people are 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. Josh Pokrzywinski: Got it. And then I guess just kind of thinking about entering the selling season here, first quarter I don't know is -- it's really indicative of much of all but we're kind of through April at this point. At what point does the industry, whether it's dealers or your independent distributors even though there's not the type of bulk of the business, at what point did they just say, okay, now we're ready? Are they still positioning inventory, thinking about what price level they want to be loaded at right now? Are they sort of saying we're ready to go for the season? Todd Bluedorn: And again, you know this, Josh, I’ll say for others, 80% of our business we're selling to dealers. They don't think that way. 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 -- well capitalized dealers may have a couple of weeks, but that's not how that works. For the independent distribution, the order rates remain strong. They still want inventory and they're still selling product right now, and demand is still high at the dealer -- excuse me at the homeowner level. And so they're coming out of a very good first quarter and they want more inventory and we're selling it to them. Josh Pokrzywinski: Got it, that's helpful. I apologize, I’m just going to try to squeeze in one more. The Allied color that you said where a lot of that growth is new distributors, any sense on kind of same-store growth within Allied versus the contribution from new customers there? Todd Bluedorn: Yes, I don't have a map in front of me because I tend not to think about same stores. 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 buying at 15%, 20% also, if that's what the end markets were growing. Josh Pokrzywinski: Got it, that’s helpful. Thanks. Todd Bluedorn: Thanks. Operator: Our next question is from the line of Gautam Khanna with Cowen. Please go ahead. Gautam Khanna: Thanks. Good morning, guys. Todd Bluedorn: Hi, Gautam. How are you? Gautam Khanna: Doing well, thanks. Two questions. First, 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, with the commercial market down nearly 20%, how quickly that catches up and how much of it catches on? Todd Bluedorn: Yes. Our experience here after financial crisis, and in my experience, I was at Carrier after 9/11 is marble rolls off the table and plan replacement goes down dramatically. And sort of at the trough last year, we were down 50%, 60% year-over-year on plan 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 we're pretty optimistic on the commercial end markets for next 18 to 24 months. Gautam Khanna: Got it. In fact, that math would suggest the guidance might be a little low. I'm recognizing nobody knows. Okay. And then just 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 nonrecurring? We saw the Tyler roof collapse at Trane. Goodman had issues last year. Just wondering if anything stood out to you one way or the other? Todd Bluedorn: Yes. Our competitors – or better stated, 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 had issues. 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 in 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 share, we win. And that's not a one-time thing. We sort of get it and we keep it and we keep moving. Gautam Khanna: I appreciate you not sticking to the script on that. Thank you very much. Todd Bluedorn: Thanks. Operator: And we have a question from the line of Chris Dankert with Longbow Research. Please go ahead. Chris Dankert: Hi. Good morning, Todd. Just thinking about R&D priorities, I guess where is the investment focus at the moment? Is it still controls and user experience? Is it efficiency? Is it footprint and noise reduction? I guess when you think about where you want to see the team’s prioritizing investment, kind of any rank order there, any thoughts on the targeting of that spend? Todd Bluedorn: Yes. I think you said some of them. I think number one is digitization of the business. We continue to make significant investments, both in product, on controls, but also significant investments in the e-commerce in 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 would call environmental sustainable product, 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. Chris Dankert: Got it. Yes, thanks so much for the color there. And again, second question, forgive me if you 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? Todd Bluedorn: 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 -- Grenade, Mississippi factory. But we continue to build our capabilities in Mexico; 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. Chris Dankert: Got it, makes sense. Just thinking about how having that ability to deflect the need was really brought to the fore just a couple of years ago. So thanks for the color. I appreciate it. Todd Bluedorn: Yes. And quite frankly, brought to the fore right now. 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 can -- that have significant overlap on what they produce, and we're able to sort of meet demands. Chris Dankert: Absolutely. Todd Bluedorn: Thanks. Operator: And our next question is from Steve Tusa with JPMorgan. Please go ahead. Steve Tusa: Hi, guys. Thanks for squeezing me in. Todd Bluedorn: Good morning, Steve. Steve Tusa: 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. Todd Bluedorn: And my guess is they're probably Trane and Carrier. Steve Tusa: Definitely not, JCI. So you mentioned that the Carrier businesses have gone out with price increases. Have you seen that across all their brands? Todd Bluedorn: What I have in front of me is we've seen it in the ICP brands. Steve Tusa: Okay. Steve Harrison: Carrier announced also, Todd. Todd Bluedorn: Carrier announced also? Yes. So Steve's helping me. He's in a different room for security reasons. But yes, so we've seen it in the Carrier brand also. So we've seen it in all our major competitors. Steve Tusa: Okay, got you. 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 in the second quarter? Todd Bluedorn: I think as you'd expect, right? So May was the nadir last year for the businesses. And so April will be up, May will be up. And I think June will be up. And again, it depends on the business, quite frankly. Residential didn't go as deep and came back relatively quickly. The commercial and refrigeration business was deep and stayed deep and didn't really start to come back until fourth quarter. Steve Tusa: Right. And I guess for sales in the second quarter, you mentioned the 55% EPS seasonality. Can you just 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? Todd Bluedorn: No. I quite frankly don't have it in front of me. I'm not going to give the revenue guide. We just want to give the EPS guide. Steve Tusa: Okay. And then just one last one. How much, I guess 2.5% of price for the total company, how much in resi should we assume a tick above that in resi, something in kind of the 3.5% range? Todd Bluedorn: No. I think if I was modeling, because we don't give segment price guide, I would assume 2.5% across the board. Steve Tusa: Okay. Todd Bluedorn: Resi is two-thirds of our business. So we give a guide and we don't delineate it then. I just assume resi is our guide. Steve Tusa: 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? That's a pretty decent sized number looking back historically. Todd Bluedorn: We did 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. Steve Harrison: Yes. Todd Bluedorn: I think we did close to 2.5%. But yes, we've done 2% as recent as 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. And better stated, it's just not raw copper, steel and aluminum. It's across the board because everyone sort of has 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 is equipment. And so whether it's 2% or 2.5%, it doesn't matter. The question is, are competitors doing the same thing? And it looks like they are. Steve Tusa: And you're sure that there's no – you haven't heard any anecdotes about contractors not necessarily saying, hey, your price is going to go up 2% if you don't replace it today. But that they're saying last year, there were real availability concerns. The industry is extremely tight. There's a new regulation coming in a couple of years from now. You don't think any of those conversations are going on at the kitchen table? Todd Bluedorn: I think those conversations always take place at the kitchen table. So the way it works is there's a catastrophic failure. Compressor breaks, $3,000 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 that 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 is working fine. You say, 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. And I don't -- there's price increases every year, there's refrigerant changes, there's a minimum efficiency changes. All of that takes place year-after-year-after year. And whether it's a 2% price increase or a 2.5% price increase, doesn't change that conversation. So in '18 and '19, we had a 2% price increase. Now we have 2.5%. That doesn't tip people over to replacement units in a wholesale way than they did before. So the answer is no. Steve Tusa: Yes. I don't think it's the price. 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 fair point. Todd Bluedorn: Our dealers have product. So they have it. Steve Tusa: Right. All right. Thanks a lot, guys. I appreciate the details as always. Todd Bluedorn: Thanks. Operator: And with no further questions, Mr. Bluedorn, I'll turn it back to you for any closing comments. Todd Bluedorn: 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 we look forward to a year of strong growth and profitability. Thanks again everyone for joining us today. Operator: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.LII Ratings Summary
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Related Analysis
Lennox Stock Upgraded at Goldman Sachs
Goldman Sachs analysts upgraded the rating for Lennox (NYSE:LII) from Sell to Buy and set a new price target of $455 per share.
The bank's rationale for this upgrade is based on several factors. They believe that the residential HVAC (Heating, Ventilation, and Air Conditioning) volumes have likely reached their low point and that advantageous pricing trends related to an upcoming refrigerant change will contribute to stronger growth in 2024.
Furthermore, the analysts anticipate improvements in commercial margins, suggesting that the company's profitability in this segment is not yet fully realized. They expressed confidence in Lennox's ability to continue to outperform market expectations.
Lennox Stock Upgraded at Goldman Sachs
Goldman Sachs analysts upgraded the rating for Lennox (NYSE:LII) from Sell to Buy and set a new price target of $455 per share.
The bank's rationale for this upgrade is based on several factors. They believe that the residential HVAC (Heating, Ventilation, and Air Conditioning) volumes have likely reached their low point and that advantageous pricing trends related to an upcoming refrigerant change will contribute to stronger growth in 2024.
Furthermore, the analysts anticipate improvements in commercial margins, suggesting that the company's profitability in this segment is not yet fully realized. They expressed confidence in Lennox's ability to continue to outperform market expectations.
