Earnings Call: Q4 2020

Feb 2, 2021

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International 4th Quarter Earnings Conference Call. At the request of your host, all lines are currently in a listen only mode. There will be a question and answer session at the end of the presentation. As a reminder, this call is being recorded. I would now like to turn the conference over to Mr. 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 Q4 full year of 2020. I'm here today with Chairman and CEO, Todd Bluedorn and CFO, Joe Reitmeier. Todd will review key points for the quarter, Joe will take you through the company's financial performance for the quarter year as well as the outlook for 2021. To give everyone time to ask questions during the Q and A, please limit yourself to a couple of questions or follow ups and re queue for any additional questions. In the earnings release we issued this morning, we have included the necessary reconciliation of the non GAAP financial measures that will be discussed to GAAP measures. All comparisons mentioned today are against the prior year period. You can find a direct link to the webcast of today's conference call on our website at www.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. Thanks, Steve. Good morning and thank everyone and thank you for joining us. In the Q4, we continued to see strong momentum in our residential business and year over year improvement in commercial and refrigeration. Overall for the company, revenue was up 3% and hit a new 4th quarter high of $914,000,000 GAAP operating income was $139,000,000 compared to $192,000,000 in the prior year quarter that included $93,000,000 net gain from insurance recoveries. GAAP EPS from continuing operations was $2.91 compared to $2.92 in the prior year quarter that included $93,000,000 in insurance benefit, I mentioned, and a $39,000,000 pretax pension settlement. In addition to record 4th quarter revenue, the company set new 4th quarter highs for total segment profit and margin and adjusted EPS from Continuum operations. As reported, total segment profit was a 4th quarter record, dollars 139,000,000 up 5 percent from the prior year quarter that included $25,000,000 of insurance recovery. Total segment margin was a 4th quarter record 15.2%, up 10 basis points. Adjusted EPS from continuing operations rose 18% to a 4th quarter record of $2.89 From an operating perspective, excluding the $25,000,000 of insurance benefit in the prior year quarter, total segment profit was up 29% and segment margin expanded 300 basis points. Looking at our business segments for the Q4. Residential set new 4th quarter records for revenue, profit and margin. Residential revenue was up 11% on double digit growth in both replacement and new construction business. Residential indoor air quality revenue was up more than 30% in the quarter. Segment profit rose 18% and segment margin expanded 130 basis points to 20.9%. From an operational perspective, adjusting for the $25,000,000 of insurance benefit in the prior year quarter, residential prop rose 58% and margin expanded 6 30 basis points. In commercial, 4th quarter revenue was down 13% and profit was down 11%. Segment margin expanded 40 basis points to a 4th quarter record 19.4%. We continue to see year over year improvement in the business in both replacement and new construction as well as in national accounts in the regional and local business. Commercial equipment revenue overall was down mid teens in the quarter. Within this, replacement revenue was down low single digits at constant currency with planned replacement down high single digits and emergency replacement up low double digits. New construction revenue was down mid-20s percentage. Breaking out revenue another way, regional and local business revenue was down low double digits. National accounts equipment revenue was down mid teens. On the service side, Lennox national accounts service revenue was down high single digits. Some highlights to mention for commercial. Our team added 6 new national account equipment customers in the quarter to bring the total to 32 for the year. While small today, we are seeing fast indoor air quality revenue growth led by our new Building Better Air initiative. And in the Q1, we are on track with the launch of 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 are seeing high customer interest in this industry leading product for 2021. Overall, commercial backlog is up double digits. In Refrigeration for the 4th quarter, revenue percent as reported and up 3% at constant currency. North America revenue was up low single digits. Europe Refrigeration revenue was up mid single digits as reported and low single digits at constant currency. In Europe, HVAC revenue was up mid teens as reported and up high single digits at constant currency. Refrigeration segment profit declined 28% and margin contracted to 360 basis points to 7.5 percent on the timing of expenses in the quarter and unfavorable mix with the strong growth in Europe HVAC. Currently, Refrigeration backlog is up double digits led by North America, and we are seeing strong order flow. We expect segment margin to be up year over year starting in the Q1 and be up for the full year in 2021. For the company overall in 2021, we are reiterating guidance. We expect revenue growth of 4% to 8% this year and GAAP and adjusted EPS from continuing operations of $10.55 to $11.15 for the full year. While there's an economic and market uncertainty, momentum continues for the company and we are well positioned for a year of strong growth and profitability. Given the outlook and the company's strong balance sheet and cash generation, we are restarting our stock purchase program in 2021 and plan to buy back $400,000,000 this year. I'll now turn it over to Joe. Thank you, Todd, and good morning, everyone. Let me start with a quick summary of our full year 2020 for the company and then the financial details on the business segments for the quarter full year. Overall for the company, revenue for 2020 was $3,630,000,000 down 5% on a GAAP basis and down 4% on an adjusted basis, excluding the impact from the divestitures in the prior year. Foreign exchange was neutral to revenue. GAAP operating income was $479,000,000 compared to $657,000,000 in the prior year that included a $179,000,000 net gain from insurance recoveries. GAAP EPS from continuing operations was $9.26 compared to $10.38 in the prior year that included the $179,000,000 insurance benefit and $99,000,000 in pre tax pension settlements. Total adjusted segment profit for the full year was $507,000,000 compared to $610,000,000 in the prior year that included a $99,000,000 of insurance recovery. Total adjusted segment margin was 13.9% for the year compared to 16.2% in the prior year with the insurance benefit. Adjusted EPS from continuing operations was $9.94 compared to $11.19 in the prior year with the insurance benefit and pension settlements. From an operational perspective, excluding the $99,000,000 of insurance benefit in the prior year, total segment profit was down 1% and total segment margin was up 40 basis points. Now turning to the business segments for the quarter the year. In the 4th quarter, revenue from residential heating and cooling was a 4th quarter record $553,000,000 up 11%. Volume was up 10%, price was up 1% and mix was flat with foreign exchange neutral to revenue. Residential profit was a 4th quarter record $116,000,000 up 18%. Segment margin was a 4th quarter record 20.9%, up 130 basis points. And as Todd mentioned, operationally, profit was up 58% and margin expanded 6 30 basis points. Segment profit was primarily impacted by higher volume, favorable price, lower material and other product costs, higher factory productivity and lower SG and A. Partial offsets include $25,000,000 of non recurring insurance proceeds in the prior year quarter, the COVID-nineteen pandemic and higher tariffs, freight, distribution and warranty. For the full year, residential segment revenue was a record $2,360,000,000 up 3%. Volume was up 2%. Combined price and mix was up 1% with both up. Foreign exchange was neutral to revenue. Residential profit was $429,000,000 down 8% from the prior year that had the $99,000,000 of insurance recovery. Segment margin was 18.1 percent, down 2 20 basis points as reported. Operationally, excluding the insurance recovery in the prior year, segment profit was up 17% and margin expanded 2 10 basis points. Now turning to our commercial heating and cooling business. In the Q4, commercial revenue was $226,000,000 down 13%, volume was down 8%, price was flat and mix was down 5%. Foreign exchange was neutral to revenue. Commercial segment profit was $44,000,000 down 11%. Segment margin was a 4th quarter record 19.4%, up 40 basis points. Segment profit was primarily impacted by the COVID-nineteen pandemic, lower volume, unfavorable mix in higher freight, distribution and SG and A. Partial offsets included lower material and other product costs, higher factory productivity, lower warranty and tariff exclusions and refunds due to exclusions. For the full year, commercial revenue was $801,000,000 down 15%. Volume was down 14%, price was flat and mix was down 1%. Foreign exchange was neutral to revenue. Segment profit was $137,000,000 down 17%. Segment margin was 17.1%, down 40 basis points. In Refrigeration, revenue was $135,000,000 up 7%. Volume was up 3%, price was up 1% and mix was down 1% and foreign exchange had a favorable 4% impact on revenue. Refrigeration segment profit was $10,000,000 in the 4th quarter, down 28%. Segment margin was 7.5%, down 3 60 basis points. Segment profit was primarily impacted by the COVID-nineteen pandemic, unfavorable mix, higher distribution, warranty and other product costs and the timing of SG and A expenses. Partial offsets included higher volume, favorable price and lower material costs. For the full year, refrigeration revenue was $472,000,000 down 12%. Volume was down 14%, price was up 1% and mix was flat. Foreign exchange had a favorable 1% impact. Segment profit was $33,000,000 down 47% and segment profit margin was 7%, down 4 70 basis points. Regarding special items in the Q4, the company had net after tax gain of $800,000 that included a net gain of $3,400,000 for insurance recoveries related to damage at the company's manufacturing facility in Iowa, a benefit of $2,300,000 related to environmental liabilities, a benefit of $1,500,000 for excess tax benefits from share based compensation. For charges, we had $2,700,000 for asbestos related litigation, $1,500,000 for special product quality adjustments, dollars 1,400,000 for personal protective equipment and facility deep cleaning expenses Now looking at special items for the full year, Now looking at special items for the full year, the company had net after tax charges of $26,000,000 and they included a charge of $8,500,000 for other tax items, dollars 8,400,000 for restructuring activities, dollars 6,200,000 for personal protective equipment and facility deep cleaning expenses incurred due to the COVID-nineteen pandemic, dollars 4,200,000 for asbestos related litigation, a net loss of $2,300,000 related to damage to the company's manufacturing facility in Iowa, a net charge of $600,000 in total for various other items and a benefit of $4,200,000 for excess tax benefits from share based compensation. Corporate expenses were $30,000,000 in the 4th quarter $92,000,000 for the full year. Overall, SG and A was $143,000,000 for the 4th quarter or 15.7 percent of revenue, down from 16.3% in the prior year quarter. For 2020, overall SG and A was $556,000,000 or 15.3 percent of revenue, down from 15.4% on an adjusted basis in the prior year. For 2020, the company had cash from operations of $612,000,000 compared to $396,000,000 in the prior year. Capital expenditures were approximately $78,000,000 for the full year compared to $106,000,000 in the prior year and proceeds for damage to property and disposal of property were $1,000,000 compared to $81,000,000 in the prior year. Free cash flow was $535,000,000 for the year compared to $371,000,000 in the prior year. In 2020, the company paid $118,000,000 in dividends and repurchased $100,000,000 of company stock. Total debt was $981,000,000 at the end of the 4th quarter and we ended the year with a debt to EBITDA ratio of 1.7 and cash and cash equivalents were $124,000,000 at the end of the year. Now before I turn it over to Q and A, I'll review our outlook for 2021. Our underlying market assumptions for the year remain the same. We expect industry to see mid we expect industry to see mid single digit shipments growth in residential, commercial unitary and refrigeration markets in North America. The company's guidance for 2021 remains the same as we presented at the December Investment Community Meeting. Our guidance for 2021 revenue growth is 4% to 8% with neutral foreign exchange impact. We still expect GAAP and adjusted EPS from continuing operations in a range of $10.55 to $11.15 with about half of the earnings in the first half of the year and half in the second half of the year. Let me now run through other key points on our guidance assumptions and the puts and takes for 2021, all of which are unchanged. We expect the benefit of $50,000,000 in price for the year. We expect the benefit of $25,000,000 from sourcing and engineering led cost reductions and a $20,000,000 benefit from factory productivity. We are guiding for residential mix to be neutral and we anticipate that foreign exchange will be neutral as well. For the headwinds in 2021, we expect a $30,000,000 headwind from commodities. Freight is expected to be a $5,000,000 headwind. We will be at a more normal run rate with distribution investments this year with 30 new Lennox stores planned. Tariffs are 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 Within SG and A, we'll be making investments in R and D and IT for continued innovation and leadership in products, control, e commerce, factory automation and productivity. A few other guidance points. Corporate expenses are targeted at $90,000,000 net interest and pension expense is expected to be approximately $35,000,000 We expect an effective tax rate of approximately 21% on an adjusted basis for the full year. We are planning capital expenditures to be approximately $135,000,000 this year, about $30,000,000 of which are for the 3rd plant at our campus in Mexico. We expect construction to be completed by the end of 2021 and have the plant fully operational by mid-twenty 22. We expect nearly $10,000,000 in annual savings from the 3rd plant. Free cash flow is targeted $325,000,000 as we reinflate working capital to support strong growth. And over the long term, we expect free cash flow to approximate net income on average. And finally, we 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, John, let's now go to Q and A. Certainly. And first, we'll line up Jeff Hammond with KeyBanc. Please go ahead. Hey, good morning, guys. Good morning, Jeff. Hey, Todd, good to see the execution was much better than your football team. Hey, I think we're both watching other people's teams this weekend. Yes, yes. Just I want to understand on resi margins, just the strength there. I mean, it was considerably higher and just what were the big drivers and if there was any real impact as you kind of produce more to kind of restock and if that continues into 1Q? Yes. I mean, I read your pre note. Yes, the short answer is there was some benefit from absorption as we continue to produce in Q4 for the demand rolling into 2021. But even more important than that as the drivers of the margin were the aggressive SG and A costs that the team took out early in the year. We haven't added back a lot of them and so we had great SG and A leverage. Also, we had very strong quarter material costs. And just in the factories themselves, even above absorption, some of the productivity initiatives really kicked in second half of the year and you saw the benefit. So absorption helped, and it will help as you suggest as we roll into next year. But there was benefits across or there was strong performance across the board in resi. Okay. And then maybe switching over to commercial, can you just did book to bill was book to bill positive in 4Q? Did you see order acceleration? Do you think that backlog starts to flow out in sales growth? Thanks. We're seeing sales growth in Q1 so far. I mean, it's starting to accelerate in the Q1. Orders have taken a bit of a pause during the 1st 3 weeks in January, which I think is normal as you go into a new year. That's not unusual for us. I think there's a little bit of uncertainty out there in the commercial marketplace, but we're set up for a nice quarter in Q1 and the backlogs starting to build for the Q2 balance of the year. Okay. Thanks a lot. Thanks. Next, we'll go to Julian Mitchell with Barclays. Please go ahead. Hi, good morning. Hey, Julien. Hey, just a first question on the incremental margins. So just wanted to sort of check on your conviction in being able to get that 30% incremental for the year across the company. And then any segment color you'd provide? I suppose particularly in Refrigeration, how should we think about operating leverage there this year? The good news for anyone who's ever worked in a large corporation, the good news after having a tough year is the next year you have great comps and I think that's true on the refrigeration business. So I think we'll have positive news in refrigeration. Overall for the corporation, we guided 30% incrementals. We're still feeling pretty good about that. We're going to have price of $50,000,000 that will offset commodity headwind of $30,000,000 freight and tariff headwind in each of $5,000,000 so $40,000,000 of costs in those three buckets offset with price and the MCR and additional volume. So as we talked about in December, we feel pretty good about the 30% incremental. Thank you. And maybe just following up on the commercial side. If you could just give any color around sort of different verticals that you're seeing, any update as well on the sort of competitive landscape in commercial and how quickly we can expect revenue to turn positive? Is it Q2 or perhaps earlier in terms of year on year? Yes. I understand. I'm not going to answer that last part. We said we have double digit backlog going into the year. Where we saw the pickup in order rates in 4th quarter were in planned replacement as large national account customers got more comfortable on placing orders. And I also think some of them had capital at the end of the year that they didn't spend because of uncertainty earlier in the year. And so we had we didn't deliver those units, but we booked those business and that will flow into the first half of this year. Emergency replacement was up in Q4, so that continues to flow. I think the area that's weakest right now, quite frankly continues weak, is commercial new construction, given the uncertainty that still exists around the recovery from COVID. Great. Thank you. Thanks. Next, we'll go to John Walsh with Credit Suisse. Please go ahead. Hi, good morning. Hey, John. Question around your opportunity as you see it in the K through 12 vertical. We're starting to hear people talk about some of these executive actions that President Biden took, trying to get students and teachers back into schools healthily and quickly in his 1st 100 days. Are you seeing any of that, in your commercial business? Schools tend to move relatively slow. So from the time there's sort of a mandate on top until the time that you see the revenue flow through the business takes time. We have a very strong K-twelve program, if you will. We have dedicated salespeople just for that vertical. Our indoor air quality product serves that market. Our high efficiency product serves that market. So we're in lots of dialogues with people, but I don't think there's been a light switch turned on, on that market. Got you. And then I guess, maybe not necessarily surprising a bunch of the detailed items in the guidance walk didn't change, but I guess I'm a little bit surprised on the commodity costs still in line with the December outlook given the move in steel. Maybe you could just remind us, I know you have a hedging program on copper. I thought you bought a little bit more spot steel, but maybe can you just help us understand that a little bit better? Well, I'll give you the specific answer and then I'll directly answer the broader question of why it didn't change. Narrowly, we buy steel a couple of different ways. We have some fixed contracts. We have some contracts that are tied to scrap. And then majority of it is we buy from the mills based on CRU pricing the prior quarter. When you so when we're predicting copper and aluminum, we have a large hedge already in our books. And so we have a pretty good view of what we're going to have. For steel, we have to sort of predict what's going to happen. And honestly, the answer is in December, we were depending, I guess, what side of trade you were on, whether they're bearish or bullish, but we assumed steel was going to go up and we rolled that into our guide. And so it's plus or minus commodities is still a $30,000,000 headwind. Great. Thank you. Appreciate it. Thanks. Our next question is from Gautam Khanna with Cowen. Please go ahead. Good morning. Thanks guys. Hi Gautam. How are you? Doing well. Thank you. I was curious just can you speak to any changes in the competitive dynamics? We heard that Daikin's Goodman facility was it was some COVID outbreaks and then you saw kind of the big channel refill in resi in Q4. And I'm just curious, like any sort of things to think about year over year as we kind of comp the weirdness of 2020 in resi competitively? Yes. I mean, I think the most important thing is what I spent a ton of time talking about in December, which is the broader your the larger your independent distribution network is, the more our belief is that you pulled volume from 2021 into 2020. And that distributors not only were reloading for inventory that was down, but sort of the scarcity mindset was taking over and they were trying to make sure they had lots of inventory in case OEMs ran into production issues. And so our sense is people with independent distribution haven't inflated sales numbers in 4th quarter and that will bleed off as you go through the year compared to us, which is we delivered in resi up 11% overall. And that we think in fact, we know in our Lennox business, which is 80% of our residential, we see demand when the customer is buying the unit to a vast large degree. So I think that's the one thing to model for. And as we talked about with us narrowly that sort of the timing of EPS or earnings is a little bit different than normal that we expect about half of our EPS to come in first half and about half of the EPS in second half, which is a little different weighting than what we've had in the past. That's helpful. And Todd, maybe I know you used to work at Carrier. I'm just curious, have you seen any change in their behavior competitively now that it's an independent company? Anything you can speak to just based on your No. I think short answer is no. Carrier has always been a very good competitor and they publicly different things happen and they say different things on the earnings call. But on the ground, it's the same tried and true sales force and strong dealer network and they've always had good product. And they haven't changed their pricing strategy. They haven't changed, I don't think how they buy components and commodities or sourcing strategies. So we and they haven't changed their distribution strategy. So from where we sit, it's very similar to what we've seen in the past. Thank you. Next, we'll go to Nicole DeBlase with Deutsche Bank. Please go ahead. Yes, thanks. Good morning, guys. Good morning, Nicole. So the commentary around the first half versus second half split is definitely helpful. But Todd, anything you want to say about calibrating expectations for 1Q based on what you guys have seen like into January? I'll answer the question obliquely. In residential, we continue to see strong momentum And in commercial and refrigeration, as I talked about, backlogs are up double digits as we ended the year. And so we're hitting Q1 at a pretty stiff pace. We'll see how the balance of the quarter goes, but we feel pretty good as we start the year. Okay, got it. Thanks. And then on the seasonality of free cash flow, how do we think about the quarters in 2021 relative to what you normally see? Just thinking about how the cadence of working capital use could look throughout the year. I think it will be more of a normal year where we'll sort of peak in working capital early and then burn it off second half of the year, where 2020 was abnormal that we never sort of reloaded on working capital second half and so we outperformed on free cash flow. I think it will be more of a traditional year. And again, just to connect some of the dots, I'll take your question and expand on areas that I want to talk about, maybe Nicole, that you didn't directly ask, but I would just sort of underline the free cash of 535,000,000 dollars to 2020, which is a record. We're guiding for $325,000,000 next year. Over the 2 year period, it's about 110% of net income. So 2020 out of 2021, over the 2 year period, 110% of our adjusted net income, which is a pretty strong performance in cash flow over a couple of year period. And we'll go to Nigel Coe with Wolfe Research. Please go ahead. Thanks. Good morning. So we had a pretty thorough bit in 'twenty one back in December. So just not so much for me, but I'm curious the 10% volume growth in residential during 4Q, how does that look by brands, Allied versus Lennox brands? Yes. Overall, we're up 11%. Our Lennox was up high single digits and our Allied grew mid-20s. And so what we saw in our business is what we've been saying others are seeing, which is our independent distribution business, Allied grew much stronger than our Lennox business, but not because they're winning share, just we have distributors who are reloading and quite frankly with a scarcity mindset trying to pull some volume in. Thanks. The Hardy data, I mean, I'm not sure how accurate that is, but the Hardy data showed a big pickup in shipper shipments in December. And I'm curious if you saw the same pattern with your last brands in terms of the sell through to dealers. It made sense from a weather perspective. I'm just curious what you saw. No, I mean, we didn't I mean, just from a weather perspective, it wasn't so cold in January this year versus last excuse me, December this year versus last year. We saw some pickup in December, but not near the Hardy data. Again, I think you're right that the Hardy data in any given month is suspect. I think it directionally over a 12 month rolling data sort of gives you the right area for the number, but I think in any given month could be a little misleading. Okay. Thanks, Phil. Okay. And next we'll go to Steve Tusa with JPMorgan. Please go ahead. Hey, good morning. Good morning, Steve. Can you just maybe clarify the margin kind of color resi? I think to Julian's question, you mentioned refrigeration will be good. I just didn't catch what you said on resi specifically. Reframe the question. I'm not sure he asked me a question on residential margins. Sorry, I thought he asked about residential margins. You had said overall guide 30% incrementals and positive, but Refrigeration would be pretty positive. So what's kind of the what's the resi kind of view? Yes. I think on the round, they're all plus or minus 30. So from a resi viewpoint, 30%, commercial 30% and refrigeration, I was probably a little bit higher, but that's such a small part of our business. The other 2 will drive it and then what we do in corporate expenses. Got it. And then just lastly, kind of looking out over the next couple of years, I know there's another efficiency regulation coming in. Is there any kind of change to your approach on product development beyond 'twenty two? Do you see the industry shifting more towards these kind of hybrid ductless products with the inverters in them beyond that with this new step up in cost on this efficiency regulation? And are you guys what are you doing to kind of address that vertical, that kind of hybrid ductless inverter based product vertical? Yes. I mean, the hybrid ductless, again, we can develop whatever product we want, but 80% of the product's replacement and the ducts are already in the home. And so the lowest cost solution for the 80% that's out on replacement is our ducted systems. We are coming out with a 28 SEER unit in Q1 that we talked about. We think we have as good or better variable speed technology with our compression partners. And so we think we're playing right in the sweet spot, which is to have the lowest cost point, to have the highest efficiency in the marketplace. And we think with our compression technology, our coil strategy and our Mexican assembly facility, we're able to do that. Got it. And when you look out to the next couple of years, I mean, do you expect pre buy in 'twenty two? What's kind of your what's your latest and greatest on kind of the multi year view? I don't think there'll be a pre buy in any meaningful way. Again, it always comes down to the fine tuning of the actual details. Which was a more normal way to do it, you had sort of months to prepare and get it correct and you don't have this huge step function change like we did back in or the industry had back in 2,006, 2000 and 7. So I think there may be a bit of pre buy, but not like there's been in the past. Got it. So there won't be that much of a change in competitive landscape coming away from this in your mind? No. And again, it's when we went from 10 to 13 or the industry I wasn't here, but we went from 10 to 13 and it's been the 1st major jump in a while. That really screwed up the premium competitors in retrospect and big one it was Goodman because all of a sudden differentiation got collapsed. 1, I think everybody's understood that. And so one of the reasons we come out with 28 SEER in 2021 is to prepare to sort of have the high end stretched out for when we have to make the transition. And then the other is, it's a much smaller bite. When you're going from 14 to 15, that's much difference than going from 10 to 13 as a percentage obviously. So you just don't have this huge cost shock to the system and size shock to the system with the big units back in 2,006, 2,007. So I view it as sort of not quite ho but pretty close to ho And then the other thing that's on the horizon residential regulatory wise is change in refrigerants to lower greenhouse gas emissions. And with the current administration, it looks like it's going to be national rather than just in a few states. And again, we'll be prepared for that as I think the rest of the industry will do. But that California reg was pushed, right, more or less? California reg was pushed, but it looks like it's going to divide the administration. Our best understanding is it will drive it as a national implementation, just not a card. Okay, got it. Thanks a lot. Appreciate the color. Our next question is from Joe Ritchie with Goldman Sachs. Please go ahead. Thanks. Good morning, everybody. Good morning. Good morning. Hey, maybe just starting off on Refrigeration Margins. I know you mentioned there were some mix issues in the quarter and some step up in SG and A. Can you guys just maybe parse that out a little further and help quantify some of the impacts this quarter? Yes. I mean, the 2 I gave you were sort of the or the 2 you rattled off were the 2 big drivers. It was the fact that we were up in HVAC in Europe and down in our North America Refrigeration business had a significant impact on the margins. And then the other piece was just the timing of costs and getting to the accounting sort of accrual adjustments and sort of year over year differences and Q4 took a hit compared to Q4 last year. As I think I mentioned in the script, we expect to have margins up in Q1 in Refrigeration and for them to be up full year. Got it. Todd, as you maybe take a look at your backlog in Refrigeration, and it sounds to me like there's going to be a mixed benefit then in 2021. Are you seeing the North America PCA business growing lots of growth in Europe at this point? Yes. Yes. Okay, cool. And then my just one follow-up question going back to commercial for a second. On planned replacement, I'm just curious, it seems like you saw an uptick there in the quarter. I'm just curious, I guess, in terms of like getting on premise access for your services, like how do things compare today with coronavirus cases surging versus what we saw maybe earlier in 2020? Can you you broke up a little bit right in here. Can you re ask the question one more time? Sure. No problem. Sorry about that. So the question is really just around getting on premise access to do your plant replacements today versus what you thought 10 months ago? We have no issue. We're able to get on the job site, do what we need to do. Our guys are masked up and commercial customers have no issue. All right, great. Thank you. Thanks. And with no further questions in queue, I'll turn it over to you, Mr. Bluedorn, for any closing comments. Thanks, everyone. To wrap up, as I mentioned in Q and A and during the script, momentum continues in Q1 and 20 21 is off to a nice start. Lenox team is executing well to capitalize on market growth and share gains and we look forward to a year of strong growth and profitability. Thanks again for everyone for joining us today. Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.