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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 second quarter, we continue to see strong momentum in our Residential business combined with continued rebound in Commercial and Refrigeration as the overall company set new record highs for revenue and profit.
Company revenue was up 32% to 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 earnings per share from continuing operations, up 72% to a record $4.51.
Total segment profit rose 45% to a record $222 million.
Total segment margin expanded 160 basis points of 17.9%.
And adjusted earnings per share 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% at 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%.
Lennox 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 run time data on air conditioners last year with most -- with many people at home due to the pandemic.
Adjusted for weather, air conditioners ramped 30% more during the summer season last year.
This summer, we may not be getting our run time impact of 30%, but there's still lot of people working from home and many will continue to work from home full time or like here at Lennox on a flexible schedule a couple days a week.
If the run time 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 lifespan 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 are still in the middle of summer, but the second quarter was even hotter than last year.
Where run time 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.
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 is significantly more expensive than 410A.
In many cases, it is cheaper to replace with the new 410A system, which is also more efficient and comes with the new warranty to repair the old R22 system.
This also accelerates replacement cycle.
We expect all these dynamics to lead to a strong residential market condition for years ahead.
On top of this, Lennox and Allied will be running their proven playbooks for market share gains.
Moving on to our commercial business.
Second quarter revenue was up 34% as reported and 33% at constant currency.
Segment profit rose 27%.
Segment margin was 17.9%, down 100 basis points on the timing of expenses and factory inefficiencies.
At constant currency commercial equipment revenue was up more than 30% in the quarter.
Within this, replacement revenue was up more than 40% with planned 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 was up more than 50% as market continues to rebound and benefit from the pent-up demand created last year.
Team won six new National Account equipment customers in the second quarter to a total nine in the first half.
On the service side, Lennox National Accounts Services revenue was up more than 30%.
VRF revenue was up more than 25%.
In Refrigeration, for the second quarter, revenue was up 37% as reported and 32% at constant currency.
North America revenues up more than 30%.
Europe Refrigeration revenue was up more than 30% at constant currency.
And Europe HVAC revenue was up more than 25% at constant currency.
Refrigeration segment margins expanded 90 basis points to 9.1% and segment profit rose 52%.
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 the revenue growth of 12% to 16% on a reported basis or 11% to 15% at constant currency.
We raised guidance for adjusted earnings per share 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 repurchase guidance to total $600 million for the year.
Joe will talk about the specifics, but inflationary pressures continue to ratchet up this year.
We were 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 the third price increase of up to 8% from 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 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 regards to our public guidance this year.
We have been incrementally moving the earnings outlook up one quarter at a time.
Now after the first quarter and again after the second quarter.
So our guidance is our guidance.
Given the unique uncertainty this year, we are remaining balanced on future guidance.
Lastly, as I'm sure most of you saw, the company announced on July 14 that after 15 years I plan to step down as Chairman and CEO of Lennox International by mid-2022.
There's never a perfect time for transition like this.
But with end market 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 made in product technology and distribution, we think it's a good time.
The board has commenced the 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 rank punching until the final bell.
I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating & Cooling.
In the second quarter, revenue from Residential Heating & Cooling was a record $838 million, up 30%.
Volume was up 27%, price was up 3% and mix was down 1%.
Foreign exchange had a positive 1% impact on revenue.
Residential segment profit was a record $190 million, up 49%.
Segment margin expanded 290 basis points to a record 22.6%.
Residential profit was primarily impacted by higher volume, favorable price, higher factory productivity, sourcing and engineering-led cost reductions, freight savings and favorable foreign exchange.
Partial offsets included unfavorable mix, higher commodities, tariffs and warranty costs, distribution investments and higher SG&A, including research and development and information technology investments.
Now turning to our Commercial Heating & Cooling business.
In the second quarter, Commercial revenue was $253 million, up 34%.
Volume was up 29%, price was flat and mix was up 4%.
Foreign exchange had a positive 1% impact to revenue.
Commercial segment profit was $45 million, which was up 27%.
Segment margin was 17.9%, down 100 basis points.
Segment profit was primarily impacted by higher volume and favorable mix.
Partial offsets included higher material, distribution, freight, tariffs and other product costs, factory inefficiencies and higher SG&A, including research and development and information technology investments.
In Refrigeration, revenue was $148 million, up 37%.
Volume was up 30%, price was up 2% and mix was flat.
Foreign exchange had a positive 5% impact to revenue.
Refrigeration segment profit was $14 million, up 52% and segment margin was 9.1%, which was up 90 basis points.
Segment profit was primarily impacted by higher volume, favorable price in sourcing and engineering-led cost reductions and partial offsets included higher commodity, freight and other product costs and higher SG&A, including research and development and information technology investments.
Regarding special items in the second quarter, the company had net after-tax charges of $2 million that included a charge of $1 million for restructuring activities, a net charge of $3.4 million for various other items in total and a benefit of $2.4 million for excess tax benefits from share-based compensation and other tax items.
Corporate expenses were $27 million in the second quarter compared to $19 million in the prior year quarter, primarily on higher incentive compensation.
Overall, SG&A was $168 million compared to $130 million in the prior year quarter.
SG&A was down as a percent of revenue to 13.5% from 13.8% in the prior year quarter.
In the second quarter, cash from operations was $192 million, up from $105 million in the prior year quarter.
Capital expenditures were $21 million in the second quarter compared to approximately $19 million in the prior year quarter.
We generated $170 million -- $171 million of free cash flow in the second quarter, up from approximately $87 million in the prior year quarter.
The company paid $29 million in dividends in the quarter and repurchased $200 million of stock.
The total debt was $1.24 billion at the end of the second quarter, and we ended the quarter with a debt-to-EBITDA ratio of 1.7.
Cash, cash equivalents and short-term investments were $47 million at the end of the second quarter.
We now expect the industry to see low-double-digit shipment growth in Residential, Commercial Unitary and Refrigeration markets in North America for the full year, up from our prior assumptions of high-single-digit growth.
This is an industry comment including competitors who ship primarily to independent distributors unlike our model.
As previously announced, on July 14, we raised guidance for 2021 revenue growth from 7% to 11% to a new range of 11% to 15% at constant currency.
We now expect a one point benefit from foreign exchange for revenue growth of 12% to 16% for the year at actual currency.
We raised guidance for 2021 GAAP earnings per share from continuing operations from $11.33 to $11.93 to a new range of $11.97 to $12.57.
And we raised guidance for 2021 adjusted earnings per share from continuing operations from $11.40 to $12 to a new range of $12.10 to $12.70.
As we previously mentioned, the first quarter of 2021 had a 6% benefit for more days than in the prior year quarter.
In the fourth quarter of 2021, we'll have a headwind of 6% from fewer days than the prior year quarter, as Todd mentioned.
For 2022, there are no days differences like this to highlight.
Let me now run through the key points in our guidance assumptions and the puts and takes for 2021.
First, for the items that are changing.
We now expect a benefit of $110 million from price for the year, up from our prior guidance of a $90 million benefit.
The new $110 million price guidance reflects the additional yield we are capturing from our first two price increases this year.
In addition, we have announced a third price increase for up to 8% that is effective September 1 for most of our businesses.
This will yield a price benefit on top of $110 million we are currently guiding for full year price this year.
Foreign Exchange is now expected to be a $10 million benefit, up from neutral or our previous assumption.
And we now expect an effective tax rate of approximately 20% on an adjusted basis for the full year compared to the previous guidance of approximately 21%.
Free cash flow is now targeted to be approximately $400 million for the full year, up from prior guidance of approximately $375 million on strong earnings performance in the first half and our current outlook.
We are raising stock repurchase guidance for the year from $400 million, which we completed in the first half to $600 million.
For the headwinds from prior guidance, commodities are now expected to be a headwind of $80 million, up from our prior guidance of $55 million.
With inflation in components, we are reducing our net savings from sourcing and engineering-led cost reductions to a $5 million benefit, down from prior guidance to be a $15 million benefit.
The higher material costs from inflationary pressures in 2021 are leading to a LIFO accounting adjustment of approximately $15 million this year.
Factory productivity is now expected to be a $10 million benefit, down from a $20 million benefit in our prior guidance.
And we are now planning for corporate expenses to be $100 million, up from $95 million in our prior guidance, primarily due to higher incentive compensation.
Now for the guidance items that remain the same.
We still expect residential mix to be a $10 million benefit.
With 30 new Lennox stores planned for this year, our distribution investments are up from last year to a more traditional run rate level, freight is still expected to be a $5 million headwind and tariffs are expected to be a $5 million headwind.
We are planning on SG&A to be approximately -- up approximately 7% for the year or headwind of approximately $45 million.
And 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.
Now for a few other final guidance points.
We still expect net interest and pension expense to be approximately $35 million.
We still expect 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 by the end of 2021 and to have the plant fully operational by mid-2022, and we expect nearly $10 million in annual savings from the third plant.
And finally, we still expect the weighted average diluted share count for the full year to be between 37 million to 38 million shares.
And with that, let's now go to Q&A.

user
compname reports q2 earnings per share of $4.51.
q2 adjusted earnings per share $4.57 from continuing operations.
q2 gaap earnings per share $4.51 from continuing operations.
q2 revenue $1.24 billion versus refinitiv ibes estimate of $1.18 billion.
raising 2021 stock repurchase guidance to a total of $600 million after $400 million of buyback in first half of year.

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