Earnings Call: Q4 2019

Feb 4, 2020

Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International 4th Quarter 2019 Earnings 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. Now I'd 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 Q4 and full year 2019. I'm here today with Chairman and CEO, Todd Bluedorn and CFO, Joe Reitmeier. Todd will review key points for the quarter year, and Joe will take you through the company's financial performance and outlook. 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. Thanks, Steve. Good morning, everyone, and thank you for joining us. Let me start with a quick review of 2019 overall and then discuss some Q4 highlights. For 2019, the company reported record adjusted revenue, margin and profit and had strong cash generation. As you talked about over the course of the year, weather was a significant headwind to growth in the second, third and finally 4th quarters. GAAP revenue overall for the company was $3,810,000,000 for the year, down 2%, including a negative 5% impact from divestitures. GAAP operating income rose 29 percent to a record 657,000,000 rose 18% to $10.38 On an adjusted basis for 2019, excluding the impact from divestitures, revenue was up 3% to a record $3,770,000,000 Total segment profit rose 12% to a record 610,000,000 dollars and total segment margin expanded 140 basis points to a record 16.2%. Adjusted EPS from continuing operations increased 18% to a record $11.19 Of note, in 2019, we completed the divestitures of our non core refrigeration We operationally recovered from the tornado and resumed capturing share in the market. And we introduced new products and continued to make investments for future growth and profitability that position the company well for 2020 and beyond. Turning to our business segments for the year. Residential reported new record highs for revenue, margin and profit. Residential revenue rose 3% on comparable growth in both replacement and new construction business. Residential prop rose 16% and segment margin expanded 230 basis points to 20.3%. For the year, residential had negative tornado impact of $109,000,000 to revenue and $59,000,000 to segment profit, offset by $99,000,000 of insurance recovery for net benefit of $40,000,000 to segment profit. Our commercial business set new records for profit and margin for the year. Commercial revenue and profit rose 5%. Segment margin was flat with prior year's record level of 17.5%. Commercial equipment revenue was up mid single digits for the year with both replacement and new construction up mid single digits. Looking at the business another way, revenue from regional and local business was up low single digits. National account equipment revenue was up high single digits for the year. On the new business front, the company won 25 new national account customers across diverse vertical markets in 2019. On the service side, Lennox National Account Services revenue was up high single digits for the year. In the Refrigeration segment on an adjusted basis that excludes impact from divestitures, revenue was up 1% at constant currency and down 1% on a reported basis. Segment profit was down 12% and margins were down 140 basis points to 11.7%. At constant currency, North America revenue was up low single digits. Europe Refrigeration was down mid single digits and Europe Commercial HVAC was up high single digits. Turning to the 4th quarter. Company revenue on a GAAP and adjusted basis was $885,000,000 GAAP revenue was up 5%. Adjusted revenue, excluding the impact from divestitures, was up 8% to a new 4th quarter high. GAAP operating income rose 64% to a 4th quarter record $192,000,000 GAAP EPS from continuing operations was up 57% to 4th quarter record $2.92 On an adjusted basis, total segment profit rose 19 percent to a 4th quarter record of $133,000,000 and total segment margin expanded 140 basis points to a 4th quarter high of 15.1%. Adjusted EPS from continuing operations rose 24% to 4th quarter record of 2.45 dollars Looking at our business segments for the 4th quarter. Residential reported new 4th quarter records for revenue, profit and margin. Revenue residential revenue was up 8% on a high single digit growth in replacement business and a mid single digit growth in new construction business. Segment profit was up 20% and segment margin expanded 190 basis points to 19.6%. As provided in December, the residential business had a negative tornado impact of $23,000,000 to revenue and $13,000,000 to segment profit in the 4th quarter, offset by $25,000,000 of insurance recovery for a net benefit of $12,000,000 to segment profit. In Commercial, revenue, profit and margin were all new 4th quarter records. Commercial revenue was up 12% and profit rose 24%. Segment margin expanded 180 basis points to 19%. Commercial equipment revenue was up low double digits in the quarter. New construction revenue was up mid teens and replacement revenue was up high single digits. Looking at the business another way, revenue from regional and local business was up high single digits. National account revenue was up low double digits in the quarter. On the service side, Lennox National revenue was up mid teens. In Refrigeration for the 4th quarter, revenue was relatively flat at constant currency. Refrigeration profit rose 5% and segment margin expanded 70 basis points to 11.1%. At constant currency, North America revenue was up low single digits. Europe Refrigeration was down high single digits and Europe Commercial HVAC was up low single digits. Looking ahead for the company overall in 2020, we are reiterating guidance. We expect adjusted revenue growth of 4% to 8% this year and GAAP and adjusted EPS from continuing operations to be $11.30 to $11.90 for the full year. The company has a strong cash generation profile, including $371,000,000 of free cash flow in 2019. Beyond our investments for the future performance of the business, we plan to continue to grow the dividend and repurchase stock, including $400,000,000 this 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 full year, starting with Residential Heating and Cooling. In the Q4, revenue from Residential Heating and Cooling was a 4th quarter record $499,000,000 up 8%. Volume was up 3%, price was up 2% and mix was up 3%. Foreign exchange was neutral to revenue. Residential profit was a 4th quarter record $98,000,000 up 20%. Segment margin was a 4th quarter record 19.6 percent, up 190 basis points. Segment profit was favorably impacted by the benefit from insurance and tornado recovery year over year, higher volume, price and mix and lower material, tariff and warranty costs. Partial offsets included lower factory efficiency, higher distribution, freight and other product costs. For the full year, residential segment revenue was a record $2,290,000,000 up 3%. Volume was up 1%, price was up 2% and mix was flat. Foreign exchange was neutral to revenue. Residential profit was a record $465,000,000 up 16% and segment margin was a record 20.3 percent, up 2 30 basis points. Turning to our commercial heating and cooling business. Commercial revenue was a 4th quarter record $260,000,000 up 12%. Volume was up 12%, price and mix were flat and foreign exchange was neutral to revenue. Commercial segment profit was a 4th quarter record $49,000,000 up 24%. Segment margin was a 4th quarter record 19%, up 180 basis points. Segment profit was favorably impacted by higher volume and price, lower material and other product costs and lower SG and A. Partial offsets included unfavorable mix, lower factory efficiency and higher distribution, warranty and tariff costs. For the full year, commercial revenue was $947,000,000 up 5%. Volume was up 2%, price was up 1% and mix was up 2%. Foreign exchange was neutral to revenue. Segment profit was a record $165,000,000 up 5%. Segment margin was 17.5% flat with last year's record level. In Refrigeration on an adjusted basis, 4th quarter revenue was $127,000,000 down 2 Volume was up 2%, price was up 1% and mix was up 1%. Foreign exchange had a negative 2% impact on revenue. Refrigeration segment profit was $14,000,000 in the 4th quarter, up 5%. Segment margin was 11.1%, up 70 basis points. Segment profit was favorably impacted by price and mix, lower material, distribution and tariff costs and higher joint venture income. Partial offsets include lower volume and factory efficiency, higher warranty and other product costs, higher SG and A and unfavorable foreign exchange. For the full year, refrigeration revenue was $534,000,000 down 1 percent. Volume was flat, price was up 1% and mix was flat. Foreign exchange had a negative 2% impact. Segment profit was $62,000,000 down 12%. Segment profit margin was 11.7%, down 140 basis points. Regarding special items in the 4th quarter, the company had a net after tax gain totaling $18,700,000 This included a gain of $51,000,000 for insurance recoveries received for property damage incurred from the natural disaster, a benefit of $4,000,000 for excess tax benefits from share based compensation, a charge of $28,900,000 for pension settlements and a total charge of $7,400,000 for various other items net. For the full year, the company had net after tax special charges totaling $31,100,000 This included a charge of 74 point $4,000,000 for pension settlements, a charge of $7,700,000 for restructuring activities, a $6,500,000 net loss on the sale of businesses and related property and a total charge of $13,200,000 for various other items. Also included in the gain also included is a gain of $59,800,000 for insurance recoveries received for property damage incurred from the natural disaster and a benefit of $10,900,000 for excess tax benefits from share based compensation. Corporate expenses were $28,000,000 in the 4th quarter $82,000,000 for the full year. Overall, SG and A on an adjusted basis was $144,000,000 in the 4th quarter or 16.3 percent of revenue, down from 16.7% in the prior year quarter. For 2019, overall SG and A on an adjusted basis was $581,000,000 or 15.4 percent of revenue, down from 15.5% in the prior year. For 2019, the company had cash from operations of $396,000,000 compared to $496,000,000 in the prior year. Capital expenditures were $106,000,000 for the full year compared to $95,000,000 in the prior year and proceeds for damage to property and disposal of property were $81,000,000 compared to $11,000,000 in the prior year. Free cash flow was 3 $71,000,000 for the year compared to approximately $411,000,000 in the prior year. In 2019, the company paid approximately $111,000,000 in dividends and repurchased $400,000,000 of company stock. Total debt was 1,170,000,000 at the end of the Q4 and we ended the year with a debt to EBITDA ratio of 1.7. Cash and cash equivalents were $37,000,000 at the end of the year. Now before I turn it over to Q and A, I'll review our outlook for 2020. Our underlying market assumptions for the year are unchanged. For the industry overall, we expect North American Residential HVAC shipments to be up mid single digits. We expect North American Commercial unitary shipments to be flat and we expect North American refrigeration shipments to also be flat. The company guidance for 2020 remains the same as we presented at the December Investment Community Meeting and we continue to expect adjusted revenue growth from 48% with Nutra foreign exchange. And we still expect GAAP and adjusted EPS from continuing operations in a range of $11.30 to $11.90 would like to highlight that we expect the flow of EBIT over the quarters for 2020 to be a bit different this year than historical seasonal averages due to some effects stemming from the tornado that I will detail in a moment. Specifically, Q1 historically averaged about 14% of annual EBIT. This year, we expect about 11% of the annual EBIT to flow through the Q1 with the difference coming in the second half of the year, which will be which will then be higher than historical seasonal averages. There are a couple of primary reasons for this. The first relates to factory productivity. As mentioned previously, we have incremental depreciation from the new equipment in our Iowa facility and we also have lower factory absorption in the Q1. As you recall, we made the decision to more level load the Iowa factory in the 3rd Q4 of 2019 to pre build ahead for the 2020 summer season. We mentioned the decision not to do a typical season ramp down in that factory to avoid the disruption in the labor force and production in that facility post the tornado. The second reason relates to lower margin business we expect to have in winning back business after the tornado impact. This lower margin business is planned for in our annual guidance and is expected to primarily impact the first half of twenty twenty. Now let's run through the other key points in our guidance assumptions and the puts and takes for 2020, all of which are unchanged. We expect a benefit of $30,000,000 in net price for the year. Commodities are expected to be a $20,000,000 benefit and freight a $10,000,000 benefit. We expect a $25,000,000 benefit from sourcing and engineering led cost reductions and $10,000,000 of benefit from residential factory productivity. Residential mix is expected to be a $5,000,000 benefit. For the headwinds in 2020, we expect $5,000,000 of headwind from tariffs. We are planning $15,000,000 for distribution investments. As part of that, we are resuming Lennox store openings and have 20 planned for 2020. Within SG and A, we will continue to make investments in research and development and IT for continued innovation and leadership in products, controls, e commerce, factory automation and productivity. A few other guidance points. Net interest expense, net interest and other expenses is expected to be approximately $50,000,000 Corporate expenses are targeted at $90,000,000 We expect an effective tax rate in the range of 21% to 22% on an adjusted basis for the full year. Capital expenditures are still planned to be approximately $153,000,000 including $53,000,000 funded by insurance proceeds received in 2019. And finally, we continue to expect the weighted average diluted share count for the full year to be between 38000000 to 39000000 shares, which incorporates our plans to repurchase $400,000,000 stock this year. And with that, let's go to Q and A. Thank you. Our first question is going to come from the line of Deepa Raghavan from Wells Fargo. Please go ahead. Good morning all. Thanks for taking the question. Of course. Todd, can you talk about the momentum in your residential business, especially how we should think about weather actually normalizing weather normalizing being a plus or minus to your existing guide. I guess it wasn't pretty clear to us at the Investor Day, how we should think about if based on how you're thinking about weather impacting guide in fiscal 2020? I'll answer what I think the question is. I think weather last year was cooler and especially in the summer selling season and then as we've gone into November December, it was warmer in the furnace season. And so in a more normalized year, I would expect weather to be a tailwind in 2020. When I think about our guide, we call for the market to be up mid single digits in resi. If we get a warm summer, then the market will do better than that. Got it. Yes, that was my question. Is there a way to normalize how we should think about fiscal 2020? But thanks for that. My follow-up would be on Q2. I mean, you called out obviously Q1 now you reset it a little bit for us, but and you're expecting everything to be second half loaded at this point in time, whatever delta has been captured. Anything with Q2 we should think about? I mean, do things just start to get normal from Q2 on? Or is there some impact from this Q1 falling into Q2 as well? The exact words that Joe used when he was talking about the lower margin business, we expect to have, he referred to it, the lower margin business is planned in our annual guidance and is expected to primarily impact the first half of twenty twenty. So as you know, we don't give quarterly guidance, but we in essence just did for Q1. But there'll be a lingering impact in Q2. So the way I think about it is we spent quite a bit of time at the December Analyst Day, which obviously you were at, talking about the rebates and the different things we had to do to win back some of the lost share. And we start to lap that mid year, although it will be most pronounced in first quarter, there will be a lingering effect in Q2 also. All right. Thanks very much. I'll pass it on. Thanks. Thank you. Our next question will come from the line of Julian Mitchell from Barclays. Please go ahead. Hi, good morning. Hi, John. Hey, maybe just a question on the commercial business, very good performance in terms of sales as well as incremental margins. So just wondered if there was anything on the revenue line you'd call out that surprised you. And on the margin front, the margin performance in commercial was a bit volatile quarter to quarter the past sort of 6, 7 quarters. Do you think that we're now on a sustainable footing for steady margin expansion in commercial? First on the revenue point, as you well know, joint commercial unitary commercial can be lumpy. We obviously if you just look at 1 quarter, we obviously significantly outperformed the market in Q4. That was driven, as you heard in Joe comments, a nice quarter in national accounts, nice quarter in new construction. That all doesn't repeat itself as we go into 2020 the whole year, but we still think we're going to we call for the market to be flat, maybe the market does a little bit better. I think momentum in commercial is stronger than what it was even a month ago when we had the December Analyst Day and our business is gaining share. On the margin impact, our plan is that we're going to have more steady margin improvement in 2020. The item that really sort of bounced 2 items have bounced around in 2019 was 1, our factory performance and we've talked in some detail around that, the major driver being labor availability and we've addressed that in multiple ways as we talked about in December. And then just the mix of the business and that can bounce around. We do better, have higher profit with national accounts and so in a strong national account month like we did in the Q4 then we see even stronger margins. But I would think the sign curve amplitude starts to dampen and it's an upward trend rather than an up and down trend. Thank you. And then my follow-up would be on residential. Just wondered, you talked in December about the lower margins or lower operating leverage coming through on some of that market share recapture. So even with that, you still had very good gross margins firm wide in Q4. So maybe just any update on how that incremental margin in resi is trending versus what you'd thought? No changes from what we talked about at the Analyst Day. So there was nothing in Q4 that materially changed. Again, we gave the guide in mid December, so we had pretty good view of what was happening. And so everything I said in December is standing today. Great. Thank you. Thanks. Our next question then is going to come from the line of Jeff Hammond. Please go ahead. Hey, good morning guys. Hey, Jeff. Hey, just on kind of share recapture progress. We're hearing in the channel people kind of discounting to hold on some of that borrowed share. Just what are you seeing? And kind of what where do you think share captures kind of played out in the Q4 versus expectation? I mean, it played out where we broadly where we expected it to, Jeff. I mean, we called it in December that we were going to get back 80% or so of the loss share and we roughly did that in Q1 and we're feeling pretty good about where we're at. I mean, it's as you know, it's always competitive marketplace and but broadly a disciplined structure. We announced price increases for 2020 that we're going to get $30,000,000 of price and that's net of any of this matching that we have to do to hang on or win back some of our lost shares. So, I know some of the sell side notes yours, but others have sort of talked a little bit about this. I don't think it's much different than it's been in past years. Now we've called out that there's going to be some impact in our decrement our incrementals are 20%, so the normal 30% in 2020 and that's part of this, but that's all accounted for in our guide. Okay. And then it sounds like some of the commercial issues in the plan are resolved and your margins are going to be more stable. Can you just speak to any kind of labor inflation inefficiencies in Refrigeration or Residential and kind of how those play out through the year in terms of normalizing? We feel I think the guide that we gave, I'm just checking my fact sheet here. We guided in December that we'd have $10,000,000 of factory productivity in 2020. We had negative factory productivity. I think that's called inefficiency in 2019. And so we're feeling better about things across doing more level loading. We've done that across the enterprise and as well as quite frankly have made some management changes and sort of stream some talent into our factories to improve things. And so we're feeling much better going into 2020. Obviously, we need to do it, but we feel better at this point in the year than we quite frankly felt the last couple of years. Okay. I don't know if I missed it. Did you give independent versus company owned distribution growth in 4Q? We did not. Thank you. I'm not afraid to give it, so I'm just turning to make sure we got it. If I can find it if someone can find it in the fact sheet, we'll call it. I think roughly they were the same in Q4. We didn't have the outgrowth that we've had in prior quarters. Quite frankly, we just spiked it out in the script, but we'll dig that up and make sure we say it. Okay. Thanks a lot. Our next question then is going to come from the line of Nigel Coe from Wolfe Research. Please go ahead. Thanks. Good morning. So, hey, Todd, so you mentioned the level loading back in December. Just is this the way it's going to be going forward? Or is it because we've got a new setup at Marshalltown, maybe a tight labor market? Obviously, you don't necessarily want inventory to build up too much, but is this do you plan to level load more going forward? Most likely the answer is yes, but I mean we have the flexibility to sort of as need be. But I again there's a benefit quite frankly to inventory and cash management when we adjust up and down, especially when the sensitivity that we had around the labor force. We've always done quite frankly some amount of level loading. We never go to 0 and then ramp back up. So in some ways, it's on the margins. And so we'll retain some flexibility. But I think we'll most like unless labor loosens up, we'll most likely do it for a while. Okay, great. That's great. And then Joe, appreciate all the color on the bridge and the 1Q seasonality. Does the 1Q seasonality also embed a slightly weaker market growth in 1Q? And I'm just curious how January might have trended relative to 4Q? No, I mean the guide or the earnings had nothing to do with revenue growth. It was the thing that Joe talked about. It was gross margins both around factory productivity and around the lower margin business. January was a little soft. I mean the weather was warm. If you look at degree heating days, it was down 20% from a year ago. So January is a little soft, but look, March is half the quarter. And March is as much about dealer sentiment and confidence. And at AHRI, dealers are confident. We spend a lot of time with our dealers. They're confident. We just came out of a sales meeting, people are ready to go. So it's too early to be nervous about anything because of the weather. So we'll see how it goes. But Q1 guide didn't have anything to do with revenue. Okay. Thanks, Doug. Appreciate it. Just to go back to the question that Jeff asked, we had the people in charge of the Iowa caucus print this out sort of real time. So our independent business was up high single digits in 4th quarter and our Lennox business was also up about the same. So they both had roughly the same growth rate, which was the overall growth rate. Our next question then will come from the line of Nicole DeBlase from Deutsche Bank. I was wondering if you could talk a little bit about what you saw with respect to backlog within Commercial and Refrigeration? In Commercial, our backlog is relatively flat year over year. We sold a lot in Q4 and so it drained it a bit, so it's flat, slightly down. But again, when we're looking at the order quoting activity, we still feel pretty good about 2020 Q1. On Refrigeration, it's up slightly year over year. And again, it's seasonally a light time to really be looking at backlog. It becomes a bit more important as we get into Q1. Okay, got it. Thanks, Todd. And then my follow-up just around Refrigeration margins. You guys saw that year on year expansion come through. It looks pretty good in the Q4. Any like major drivers to call out or like sustainability of that level of improvement through 2020? Again, it's similar conversation I had around commercial. Our big issues well, slightly different. I mean, our big issues in refrigeration in 2019 around margins were 1 factory productivity or lack thereof. And just like commercial, I think that's now behind us both at our U. S. Factory and our European factories. And then the other issue in our Refrigeration business was mix, that we had a stronger year in our Europe business than our North America business. Our North America business has higher margins. And the other issue year over year in 2020 was from 2019 was from 2018 to 2019, we had less of a refrigerant allocation change that impacted us. Got it. Thanks. I'll pass it on. Our next Do you actually have an estimate for how much the share recapture contributed to the revenue in 4Q for resi? The way I'd calculate and I don't have the math sheet in front of me, Robert, is take the impact from Q4 last year, that revenue that we guided to in order of magnitude, it's 80%. And so when I talk about the 80 percent share gain back, I look back a year and multiply times 0.8 and that's order of magnitude, the number that we've been talking about. Got it. And so with the difference between if we back that out and what you actually did versus a mid single digit number all be weather? Or do you think kind of the underlying fundamentals in the market were also just weaker? I think it was exclusively weather is the short answer, if I understood the question right. But I think it's hard to sort of back us out that way. But I think if you look I think about it this way, if you look at industry data, the market was flattish in Q4. And so that's how I would think about what the market did. Got it. And then I just did want to follow-up on this comment about the, I guess, the mix impacts of the share recapture, make sure I'm understanding that. It was my impression that the share that you lost because of the tornado is generally very rich mix, like 50s, 60s plus incrementals that there'd be a lot of room for discounting and still have above average incrementals on that business as it comes back. Is that inaccurate or? I think there is some of the I think it's a mix of the mix. So I think clearly there are some very high profitable and we saw the drop through on that. But there's also sort of this mid tier dealer, if you will, that we've had to come back and we've had decremental margins because of it. Got it. All right. Thanks, guys. I'll pass it on. Our next question will come from the line of Steve Tusa from JPMorgan. Please go ahead. Hi, good morning, Todd. Good morning, Joe. This is actually Pat Baumann on for Steve Tusa. Thanks for taking my question. Just with regard to the lower margin business you're winning back that's first half weighted. Can you update us on your assumptions for just the overall market share recaptured resi in 2020 and the expected cost to win that share back? And then any reason why that's expected to be a first half versus the second half thing? Well, I'll answer the first or second part of the question first. It's because we had already started gaining share back during the second half of the year. So it's really a lapping effect, right? So we started gaining share back in Q3 when the factories were fully running mid half of the year. And then in Q4, I just called out that we in essence gained back the 80%. And so it completely lapped in 4th quarter, partially lapped in 3rd quarter. So the real impact is in 1st and second quarter. And the guide is no different than what we talked about at the December Analyst Day that it's a 20% incremental drop through and we went through at the December Analyst Day the impact of that lower margin business and none of those guide points have changed. And I guess with Q1 margin softer in resi, I assume resi, so there's no change in how you think about resi margin for the entire year. What is your guide on that for the year versus the 20% in 2019? I don't think you gave a guide on the actual margin, did you for resi? No, we don't give segment. No, we don't give segment guides for margins. And so the 20% was incremental drop through for the corporation, but we haven't given a resi margin guide. Okay. But no change in it's just the profile of the year versus what we had in our models versus anything that you were expecting that's different? Yes. I mean, the way I'd characterize what we talked about new here was we talked about both those effects, both the factory productivity and lower margin business in some great detail in December. What we didn't do was calendarize it and we're using this as an opportunity to revisit the exact same things we talked about. Full year impact hasn't changed. Our assumptions haven't changed. Nothing's changed. We just want to be more transparent around the cadence of it during the calendar year, quite frankly. So there wasn't a disconnect between how investors were anticipating things and how we were anticipating things in 2020. Yes. Okay. Yes. Appreciate the color. Thanks for the time. Thanks. Our next question then will come from the line of John Walsh from Credit Suisse. Please go ahead. Hi, good morning. Hi. Good morning, John. Hi. So really good performance on the commercial side of the business. It sounds like from walking around AHR, we're going to see a lot more competition in that space around kind of refresh product, etcetera. 1, I don't know if you agree with that characterization and then maybe what are you doing from a new product or pricing perspective as we think about commercial? I mean, we think we have a very, very good product line. Our Ultra Energenesis is the best in the market for high efficiency and our Landmark and Raider is as competitive as it gets at entry level. There's always a long or better stated, there's a time lag from people announcing that they have a new product to the market accepting and going. I think one of the competitors you're talking about also sort of bragged about the new residential product line they were having a year or 2 years ago. And I think in Q4, they were down mid single digits, York and residential. So there's a gap between we have a great new widget to the market accepts the widget, your sales force can sell the widget, your sales force can inspect the widget. So we'll put our product against anyone in the marketplace. We'll certainly put our unitary sales force. So, yes, I'm not worried that they had a big booth at AHRI and are talking about new products. Got you. And then maybe you can just remind us obviously with VRF you have the partnership there. As we think about also heat pump versus kind of gas furnace, can you just remind us your mix there as we think about electrification? Yes. I don't know if we publicly talked about our mix of heat pump. But we have a very strong heat pump lineup. We view it as an integral part of what we do and we make significant investments there. And when we come out with new products, we heat pump is part of it. So again, we're as good as anybody with our heat pump product line, continue to make investments there. Great. Thank you. Super. Thanks. And at this time, I have no further questions in queue. Thanks, everyone. To wrap up, we're well positioned for a year of strong growth and profitability in 2020 and look forward to driving performance to another record year. I want to thank everyone for joining us today. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation for using AT and T Executive Teleconference. You may now disconnect.