Earnings Call: Q1 2021

Apr 26, 2021

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. Good morning. Thank you for joining us for this review of Lennox International's financial performance for the Q1 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. 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.lennoxinternational 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. Thanks a lot, Steve. Good morning, everyone, and thank you for joining us. In the Q1, 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 $931,000,000 At constant currency, revenue was up 28 GAAP operating income was a 1st quarter record $114,000,000 up 2 13%. GAAP EPS from continuing operations was 1st quarter record $2.20 up 588 percent. Total segment profit rose 208 percent to a Q1 record of $116,000,000 Total segment margin expanded 7 20 basis points to 12.4 percent and adjusted EPS from continuing operations rose 305% to a 1st quarter record $2.27 Looking at our business segments for the Q1, we realized double digit revenue growth and margin expansion in all three businesses. In residential, we set new 1st quarter highs for revenue and profit. Residential revenue was up 37%. Segment profit rose 197 percent and segment margin expanded 8 50 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%. Strong growth rates. Let me take a moment to unpack the strength we saw in residential in the quarter. First, with strong operational 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. 2nd, residential benefited from the colder winter weather with heating degree days up 13% from the Q1 last year. You may recall we had a soft Q1 in 2020. 3rd, I'd like to note that we had 6 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 4 years as we reset the calendar. Conversely, the 4th 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 $25,000,000 of pull forward in the Q1 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 independent distribution. Overall residential segment revenue was up about 25%. We believe this compares to mid teens 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 seasonal quarters. In commercial, revenue, segment profit and margin were all 1st quarter records. Revenue was up 12%. At constant currency, revenue was up 11%. Segment profit was up 47% and segment margin expanded 3 30 basis points to 13.8 percent. In the Q1, we saw a 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 plan 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 was up mid teens, national account equipment revenue was also up mid teens. Our team won 3 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 I mentioned 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-twelve schools are just a little under 10% of revenue for this equipment revenue for this segment. This business was up more than 20% for us in the Q1. And given the recent stimulus package that benefits HVAC indoor air quality spending for schools, we expect K-three schools to be a growth vertical for us moving forward. Indoor air quality continues to be important focus for us with our Building Better Air initiatives. Most interest in activity we're seeing are in this K-twelve 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 in 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 2nd quarter, Momentum continues with backlog up double digits and strong order rates. In Refrigeration for the Q1, revenue was up 21%, At constant currency, revenue was 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%. Segment profit rose to $8,000,000 from $1,000,000 in the prior year quarter. Like in commercial, momentum continues for Refrigeration entering quarter with backlog up double digits and strong order flow led by North America. The strong performance for the company overall in the Q1 and outlook for the Q2 year, we are raising 2021 guidance. We now expect 7% to 11% revenue growth and adjusted EPS from continuing operations of $11.40 to $12 We are also raising free cash flow guidance $375,000,000 for the full year. We now assume about 55% of earnings in the first half of the year compared to the prior guidance about 50%. This reflects a strong first quarter performance and second quarter outlook. We repurchased $200,000,000 of stock in the Q1 and plan on another $200,000,000 for a total of $400,000,000 and our guidance for the year. Now I'll turn it over to Joe. 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 1st quarter record $606,000,000 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 1st quarter record $96,000,000 up 197%. Segment margin expanded 8 50 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 and A. Now turning to our commercial heating and cooling business. In the Q1, commercial revenue was a 1st quarter record $199,000,000 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 1st quarter record $27,000,000 up 47%. Segment margin was a 1st quarter record 13.8%, which was up 3 30 basis points. Segment profit was primarily impacted by higher volume, lower material costs and lower SG and A, partial offsets included unfavorable mix. In Refrigeration, revenue is $125,000,000 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 $8,000,000 in the first quarter compared to $1,000,000 in the prior year quarter. Segment margin was 6.3%, up 5.60 basis points. Segment profit was primarily impacted by higher volume, favorable price and mix, Lower material costs and higher factory productivity, higher SG and A was a partial offset. Regarding special items for the end of Q1, the company had net after tax charges of $2,700,000 that included a $2,000,000 net charge for other tax items, a $1,900,000 net charge in total for various and a $1,200,000 benefit for excess tax benefits from share based compensation. Corporate expenses were $16,000,000 in the first quarter compared to $131,000,000 in the prior year quarter. SG and A was down as a percent of revenue to 15.6% from 18.1% in the prior quarter. In the Q1, the company used $18,000,000 in cash from operations compared to a usage of $99,000,000 in the prior year quarter. Capital expenditures were approximately $24,000,000 in the Q1 and in the prior quarter. Free cash flow was a negative $42,000,000 in the first quarter compared to a negative $123,000,000 in the prior quarter. The company paid approximately $30,000,000 in dividends in the quarter and repurchased $200,000,000 of stock. Total debt was $1,170,000,000 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 $40,000,000 at the end of the Q1. Now before I turn it over to Q and A, I'll review current market assumptions and our updated guidance points for 2021. We now expect the industry to see high single digit shipment growth in residential, commercial unitary and refrigeration markets in North America for the 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 4% to 8% 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 EPS 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 EPS 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 $90,000,000 in price for the year, up from our prior guidance of $50,000,000 We now expect residential mix of $10,000,000 up from our prior guidance for neutral mix. We expect to benefit a $15,000,000 from sourcing and engineering led cost reduction actions, down from our prior guidance of $25,000,000 and this change reflects inflationary pressures from suppliers. For commodities, we now expect a $55,000,000 headwind, up from our prior guidance of $30,000,000 Corporate expenses are now expected to be approximately $95,000,000 up from prior guidance of 90,000,000 dollars primarily due to higher incentive compensation. And now for the guidance items that remain the same. We still expect a $20,000,000 benefit from factory productivity. With 30 new Lennox stores planned for this year, we'll be at a more normal run rate with distribution Investments compared to last year. Freight is still expected to be a $5,000,000 headwind and tariffs are also expected to be a $5,000,000 headwind. We are planning for SG and A to be up approximately 7% for the year or a headwind of about $45,000,000 Now within SG and A, we are making investments in R and D and IT for continued innovation and leadership in products, controls e commerce 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 $35,000,000 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 $135,000,000 this year, about $30,000,000 of which is for the 3rd plant at our campus in We expect construction to be completed at the end of 2021 and have the plant fully operational by mid-twenty 22. And and we expect nearly $10,000,000 in annual savings from the 3rd plant. Free cash flow is now targeted to be approximately $375,000,000 for the full year, up from prior guidance of approximately $325,000,000 on the strong earnings performance in the Q1 and our current outlook. And finally, we still expect the weighted average diluted share count for the full year to be between 37,000,000 to 38,000,000 shares, which incorporates our plans to repurchase $400,000,000 of stock this year. And with that, let's go to Q and A. You may withdraw your question at any time by repeating the 1 0 command. And if you're using the speakerphone, please pick up the handset before pressing the numbers. Our first question is from Jeff Hammond with KeyBanc Capital Markets. Please go ahead. Hey, good morning guys. Good to see you back on the offensive. Just on mix, it seems like kind of tale of 2 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. For residential, it's just 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 in the commercial. That just has to do with the lumpiness customers in the quarter. So we feel good about mix full year for commercial. 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 incrementals into the selling season? I mean, 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 COVID, manage the factories well. We executed on MCR. But I mean there's some timing involved here, obviously, Jeff, as you know, and that's why you asked Question, we're getting the benefit of the price increase and we're getting benefit of lapse lapping the SG and A cuts that we did in April of last year, but we don't have the full inflationary pressure shed of commodities and components in the numbers shed. So The decrementals excuse me, the incrementals will soften as we go through the year, but they'll still be overall for a full year basis Nice, but they won't be as strong as they are in Q1 balance of the year. And where do you think price cost is The biggest challenge like timing wise, is that kick in 2Q or? It'll be second half of the year, 3rd, 4th quarter. Second half of the year. Okay. Thanks. I'll get back in queue. And our next question is from the line of Tommy Moll with Stephens, please go ahead. Good morning and thanks for taking my questions. 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, 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? 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. The point about being on back on the offense is for it seems like forever, but it's certainly been since Mid-twenty 18, we had a tornado, then we had the pandemic, and so we sort of installed 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 to dealers. We were sort of gaining their business and that's a multiyear effect. I mean, you start to get the flywheel going on new business development, It really helps. We had really we've had strong momentum in our Allied business where there is 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. I mean 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. 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 of the market at least 1 quarter, any potential that number might go higher? I don't know if the number will go higher just in terms of the lead time to define 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 Q1, we'll put some in Q2, but it's really 3rd and Q4, especially once we get through the summer selling season that we really start to stack up the stores. Great. Thank you. I'll turn it back. Thanks. Our next question is from the line of Steven Volkmann with Jefferies. Please go ahead. Great. Good morning, guys. Todd, can I just ask you to give us a little more on the sort of the shift a little bit toward The first half from the second half to 55 percent in the first half now used to be 50%? Is that all kind of Allied or distributor channels or anything in Commercial that might be moving that at all? No, it's not commercial. I mean a large part of it's the Allied reshuffling. And that's sort of best expectations. Okay, thanks. And then you talked about the K-twelve K-twelve 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? It's replacement. So it's I wouldn't 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's really isn't what moves the needle. What moves Great. I appreciate it. Thank you. Thanks. Next, we'll go to Julian Mitchell with Barclays. Please go ahead. 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's 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 headwinds wide, any other there's a day sales impact that you mentioned any other factors that I didn't capture there? I mean, if I had put them in order, I think It would be inflationary pressure commodities. It would be the day's impact. And then it would be I understand there's lots of questions about and rightfully so 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 And so we raised guidance by $0.85 for the full year after Q1. I said I'd never ever do that, we did it. Let's get to Q2 and 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 get to Q2 and I think we'll have a better clear view of second half of the year. Fair enough. Thank you. And maybe just to switch To commercial 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? Again, not to get too hung up on the math of things. I mean, you make the adjustment for days, it's low single digits. It's a good number. It's not quite as impressive as high single digits. And then it was multiple verticals. I mean, it certainly wasn't K-twelve. It was some of our retail Customers, but maybe the largest driver was the distribution customers, people like Amazon building new distribution. Got it. Thank you very much. Next, we'll go to the line of Jeff Sprague with Vertical Research. Please go ahead. Thank you. Good morning, everyone. Good morning, Chad. Todd, I missed a little Good morning. I missed a little bit of 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 distorted effects on the margins and resi in particular? I didn't. 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 And residential, I would hang my hat on the pull forward. I quite frankly would hang my hat on factory productivity, the SG and A cuts that we took at the end of last year, the ability to get price and the fact that commodities and inflationary pressures haven't worked away into the numbers yet. And just thinking about the price given the inflationary pressure, it sounds like there's talk of kind of round 2 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 at the apple on price and Any kind of pushback in the channel on that? I mean, I think the 2nd bite has already taken place, Jeff, right? So we announced a price increase, a second price increase Effective June 1, Trains announced a second price increase, Daikin announced a second price increase, Reem's announced a second price increase, Goodman's announced Carrier businesses have announced a second price increase. So we've all announced second price increases. And we feel, as you know, we get price to offset commodities as recently as 2019, 2018. We got 2% on 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. Great. Thanks. I'll leave it there. Thanks. And our next question is from the line of Nicole DeBlase with Deutsche Bank. Please go ahead. Yes. Good morning. So Todd, you kind of alluded to some challenges on the supply chain side. Could you just provide a little bit more And what the bottlenecks are and I guess the level of concern as we demand? Yes. I mean, 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 Q2. We think we're as good or better shape than anyone else in the industry. That's what we hear from our customers. The areas that we're wrestling with and I think everyone And our industry, if not Corporate America is wrestling with this 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 Hot Scotch 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 North The U. S. Is having some problems, we're having some issues. And then I think the final piece, we've talked about Over the years, it went away last year. It's now back. It's just shortage of direct labor that in our factories and 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 on the 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 them. Got it. Thanks, Todd. That's really helpful. And I guess just One follow-up. Can you talk 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 Yes. I mean, we think we're in a really good position. As you know, but I'll say it for others on the phone call, we 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 are carrying inventory. I saw one sell side analyst note that suggested maybe because of price increases homeowners were deciding to preemptively replaced 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 saw at independent distribution, we talked about the $25,000,000 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 their inventory levels are $25,000,000 higher than last year at this point in time as they pull forward inventory. Got it. Thanks, Todd. I'll pass it on. Thanks. And next we'll go to the line of Joe Ritchie with Goldman Sachs. Please go ahead. Hey, good morning guys. Good morning, Jeff. So Todd, maybe my first question, just starting on just the growth outlook for the rest of the year. If I think about The Q2, if we normalize resi for Q1, you still come up against your easiest comp in 2Q And it sounds like the backlog trends are really good. So I mean, is there any reason why like the second quarter growth number can't be as good as we as you put up in Q1 again kind of normalizing for resi days and the inventory pull forward? We're set up to have a strong Q2. So I mean, I hate the hypotheticals or any reason not. Yes, I mean, I come out with the reasons not, We're set up for a strong Q2 and we obviously just need to execute. 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, looks conservative. I always try to nuance this. I mean, the guide is the guide, number 1. So the guide is the guide. But As I said earlier, we never raised after Q1, we raised $0.85 I've learned anything since the tornado and the pandemic as 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 whooped the pandemic And we're back to normal economy. With all the government investments in the economy, we're going to have a nice run for a couple of years at 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 is the guide, is I guess the short answer. Yes. I Don't mean to back you in, but that makes a lot of sense. I guess one last one, in just thinking through that you mentioned the pull forward on the Allied side of the business this quarter. Do 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? I think there may be some effect. There may be some effect, 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 there'll 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 There may be some pull forward, but again, that's 20% of our business. So I don't think it will be a material impact to us. Got it. Nice quarter, guys. Thank you. Thanks. And next we'll go to John Walsh with Credit Suisse. Please go ahead. Hi, good morning. Hey, John. Hey, was just you mentioned heat pumps earlier. Just wanted to get kind of your temperature Sure. On where your capacity is for this product and if you might be spending any CapEx to Increased production of heat pumps in particular? I mean, 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 Satillo, 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 or came out with a high of 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 5 years ago we lag the competitors in our heat pump offering. I'd say now we're on par with the big boys Carrier Train and further ahead of our other competitors. And so we like that market and we're well positioned to compete there. 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 buyback stock? Or might there be anything in terms of M and A bolt on or otherwise we should be thinking about? Yes. I'm not breaking any news. I mean, 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 cash and we'll have dividends grow with earnings and we will invest in the business and we'll due type of M and As 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. Great. Thank you for taking the questions. Thanks. Our next question is from the line of Nigel Coe with Wolfe Research. Please go ahead. Thanks. Good morning, Todd. Hey, Nigel. So I think I've got the numbers, the underlying numbers So Allied plus 35 percent ex the days and ex the $25,000,000 Just to be clear, the $25,000,000 is that the full extent of the inventory restock Dynamic or is there some inventory restock within the plus 35% as well? The 25,000,000 Our best guess are the extent of the inventory. The $35,000,000 is ex any pre buy. Okay. So the plus 35% is kind of an apples to apples. This is basically dealer market share gain, No imagery stock dynamics going on there. Well, it is the 35 versus say the 15 That I said was sell through. The difference is we're winning new distributors. And when you win new distributors and 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 bond. Okay, that's clear. 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 in terms of supply chain. But I'm just curious, All things being equal, is that low level of injury, was that caused by just a certain demand and then therefore depletion of And the equipment, or was there some surprising 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 that those levels? It's primarily the demand. I mean, look, I knew we were in our Q1, I didn't think resi was going to be up 37% 6 months ago. And so I think that's a primary issue. And then once you see the light 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, then you run into labor, 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. Right. Okay. Thanks, Phil. Next question is from the line of Ryan Merkel with William Blair. Please go ahead. Hey, thanks for fitting me in. So first off, you mentioned K-twelve and a good outlook there. If everything goes well with the stimulus money, what kind of growth rates you see from K212 the next couple of years? I understand the question. I'll be honest with you, we haven't really modeled it in any great detail. Seeing some of the sell side notes, including Erisorta take cracks at it. We think it could be a material opportunity for us. And I know people are modeling it I just want to give the number that it'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 be will grow that same speed. Okay, that's helpful. And then just talk about the resi new construction outlook, Any signs of moderation or just full steam ahead there? I think it's full steam ahead. I think the only moderation is Trades, the employment issues I spoke about 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 And there's not much inventory on used or existing homes right now. And so builders are trying to build. So excuse me, we feel pretty good about new And next we're in the line of Josh Pokrzywinski with Morgan Stanley. Please go ahead. Hey, good morning guys. Good morning, Josh. 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? I wouldn't read too much long term macro into it. I tell you what I might read into it is, our highest margin business is furnace. 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 an 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 $10,000,000 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 were guiding flat was because we had an uncertainty of what was happening with 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. Got it. And then I guess just kind of thinking about entering the selling season here. 1st quarter, I don't know if 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 that's not the 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 levels they want to be loaded at right now? Or are they sort of And we're ready to go for the season. I mean, 80 and again, you know, it's Josh, I'll say, for others, I mean, 80% of our business, we're selling to dealers. They don't think that way. I mean, 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 deal excuse me, at the homeowner level. And so they're coming out of a very good Q1 and 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? Yes, I don't have that math 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. Got it. That's helpful. Thanks. Thanks. Our next question is from the line of Gautam Khanna with Cowen. Please go ahead. Yes, thanks. Good morning, guys. Hey, Gautam. How are you? Doing well. Thanks. I had 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 up? Yes. I mean, our experience here after financial crisis and in my experience, I was Carrier after nineeleven is marble rolls off the table on planned replacement goes down dramatically and Sort of at the trough last year, we were down 50%, 60% year over year on planned 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 the next 18 to 24 months. Got it. In fact, that math would suggest the guidance might be a little low. I mean, I'm recognizing nobody knows. Okay. And then 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 non retrained. We saw the Tyler Roof collapse of train, Goodman had issues last year. Just wondering if anything stood out to you one way or the other. Yes. I mean, our competitors I mean, better stated, Steve always gets worried when I 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 have had issues. I mean, 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 I appreciate you not sticking to the script on that. Thank you very much. Thanks. And we have a question from line of Chris Dankert with Longbow Research. Please go ahead. Hey, good morning, Todd. Just thinking about R and D priorities, I guess, where is the investment focused at the moment? I mean, 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 teams prioritizing investment, Kind of any rank order there or any thoughts on the targeting of that spend? Yes, I think you said some of them. I think number 1 is digitization of the business. We continue to make significant investments both in product on controls, but also significant investment 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 will 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 3 the 2 big areas, right? It's about digitization of the business and environmental sustainability of our product line. Those are the areas. 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? 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 Grenada, Mississippi factory. But we continue to build our capabilities in Mexico. It started as cooling, then went to furnace, then it was just entry level, now continues to be almost a full product line. So we continue to develop our capabilities in our Mexico facility. Got it. Makes sense. Yes, just thinking about how Having that ability to deflect as needed was really brought to the fore just a couple of years ago. So thanks for the color. I appreciate it. Yes. And quite frankly brought to the fore right now. I mean, 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. Absolutely. Thanks. And our next question is from Steve Tusa with JPMorgan. Please go ahead. Hey guys, thanks for tuning in. Thanks. 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. And my guess is they're probably a trading carrier. Definitely not. JCI, JCI. So you mentioned that the carrier businesses have gone out with price increases. Have you seen that across all their brands? What I have in front of me is we've seen it in the ICP brands. And carriers announced also, Todd. Carrier announced also, yes. So Steve is 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 on all our major competitors. Okay, got you. And then how do you kind of expect the kind of I know this is not a typical question, but obviously what happened last year, how do you kind of Back the monthlies to play out in the second quarter? I think as you'd expect, right? So May was the nadir last 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. It came back relatively quickly. The commercial and refrigeration business was deep and stayed deep and didn't really start to come back until Q4. Right. And I guess for sales in the second quarter, you mentioned You know the 55% EPS seasonality, can you just, maybe update us on what you would what you expect kind of from a sales seasonality perspective on that front, Whether it's resi or the total company? No. I mean, I quite frankly don't have it in front of me. I mean, I'm going to give the revenue guide. We just want to give the EPS guide. 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? No, I think if I was modeling because we don't give segment price guide, I would assume 2.5 across the board. Okay. Res is 2 thirds of our business. So, if we give a guide and we don't delineate it, then I just assume res is not guide. 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? I mean, that's a pretty decent sized number looking back historically? I mean, we did $70,000,000 $71,000,000 2019, we did $72,000,000 in 2018. Steve, I didn't have the number that went back. I think in 2011, 2012 as a Because we were a lot smaller back then. Yes. I think we did close to 2.5%. But yes, I mean, we've done 2% as recent twice 2 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 a, what I would call, COVID surcharge of inefficiencies that they're trying to pass on. So I feel very confident we'll pass 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's equipment. And so whether it's 2 or 2.5 doesn't matter. The question is, are competitors doing the same thing? And it looks like they are. And you're sure that there's no you haven't heard any anecdotes from 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. I mean, you don't think any of those conversations are going on at the kitchen table? I think those conversations always take place at the kitchen table. So the way it works is there's a catastrophic failure. Compressor breaks, dollars 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 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 happened. What happens is that 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 Minimum efficiency changes, all 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 2018 2019, we had a 2% price increase. Now we have 2.5%. That doesn't tip people over to replace units in a wholesale way that they did 4. No. So the answer is no. Yes. I don't think it's a price. I mean, 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. I mean our dealers have product, so they have it and they can Right. Okay. Thanks a lot guys. Appreciate the details always. Thanks. And with no further questions, Mr. Bluedorn, I'll turn it back to you for any closing comments. Thanks. To wrap up, 2021 is off to a strong start and momentum continues in the Q2. The company is executing well to capitalize on market growth and share gain opportunities and look forward to a year of strong growth and profitability. Thanks again everyone for joining us today. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.