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Text: 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 requeue for any additional questions.
All comparisons mentioned today are against the prior year period.
For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.
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 earnings per share 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 points to 12.4%, and adjusted earnings per share from continuing operations rose 305% to a first quarter record $2.27.
Looking at our business segments for the first quarter, we've 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 was up more than 40% and new construction was up more than 25%.
Breaking it down between our Lennox business and our Allied business, Lennox revenue was up about 25%, and Allied was up about 70%.
Let me take a moment to unpack the strength we saw in Residential in the quarter.
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 the 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'd like to note that we had -- 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 Lennox 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 season of 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 was 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 Accounts Services revenue was up mid-single digits.
VRF revenue was up mid-30s percentage.
Some highlights to mention for Commercial.
Schools continue to be an area of focus for us.
We have a dedicated sales force and product line that will drive a multiyear growth opportunity for us in this market.
Today, K-12 schools are just a little under 10% of revenue for this -- equipment revenue for this segment.
This business is 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 K3 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 and energy efficiency.
The Model L features variable speed technology and an all-new advanced control system.
We're seeing high customer interest in this industry-leading product for 2021 and beyond.
Overall, for Commercial, entering the second quarter, momentum continues with backlog up double digits and strong order rates.
In Refrigeration for the first quarter, revenue was up 21%.
At constant currency, revenue is up 17%.
In North America, revenue was up more than 25%.
Europe Refrigeration revenue was up low single digits at constant currency, and Europe HVAC revenue was up mid-single digits at constant currency.
Refrigeration segment margin expanded 560 basis points to 6.3%.
The 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 and outlook for the second quarter and year, we are raising 2021 guidance.
We now expect 7% to 11% revenue growth and adjusted earnings per share 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 the 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.
I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating & Cooling.
In the quarter, revenue from Residential Heating & 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 & 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 year 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 year quarter.
Overall, SG&A was $145 million compared to $131 million in the prior year 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 year quarter.
Capital expenditures were approximately 25 -- $24 million in the first quarter and in the prior year 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.
We now expect the industry to see high single-digit shipment growth in Residential, Commercial Unitary and Refrigeration markets in 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 48% 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 earnings per share 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 earnings per share 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 Lennox Stores planned for this year, we will 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, eCommerce 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 million 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.

user
compname reports q1 adjusted earnings per share $2.27 from continuing operations.
q1 adjusted earnings per share $2.27 from continuing operations.
q1 revenue rose 29 percent to $931 million.
q1 gaap earnings per share $2.20 from continuing operations.
raising 2021 guidance for adjusted earnings per share from continuing operations from $10.55-$11.15 to $11.40-$12.00.
raising 2021 guidance for revenue growth from 4-8% to 7-11%.
raising 2021 guidance for gaap earnings per share from continuing operations from $10.55-$11.15 to $11.33-$11.93.
raising guidance for free cash flow from approximately $325 million to approximately $375 million for full year.

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