Q4 2020 Lennox International Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Lennox International fourth quarter earnings Conference call at the request of your host all lines are currently in a listen only mode.
Will be a question and answer session at the end of the presentation. You may enter the queue to ask a question by pressing one and zero on your phone.
<unk> zero again exits for the Q 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.
Thank you for joining us for this review of Lennox International's financial performance for the fourth quarter and full year of 2020.
Im here today, with chairman and CEO, Todd <unk> and CFO, Joe Reitmeier, Todd will review key points for the quarter and Joe will take you through the company's financial performance for the quarter and year as well as the outlook for 2021.
To give everyone time to ask questions. During the Q&A. Please limit yourself to a couple of questions or follow ups and 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 for today's conference call on our website at Www Dot Lennox International Dot com.
The webcast will be archived on the site for replay.
We'd 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.
Now, let me turn the call over to chairman and CEO Todd <unk>.
Thanks, Steve Good morning, and thanks, everyone and thank you for joining us.
In the fourth quarter, 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 a new fourth quarter high of $914 million GAAP operating income was 139 million compared to $192 million in the price.
For year quarter that included 93 million 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 million in insurance benefit.
Mentioned and at 39 million pre tax pension settlement.
In addition to record fourth quarter revenue the company set new fourth quarter highs for total segment profit and margin and adjusted EPS from continuing operations as reported total segment profit was a fourth quarter record of $139 million up 5% from the prior year quarter that include.
$25 million of insurance recovery.
Segment margin was a fourth quarter record 15, 2% up 10 basis points adjusted EPS from continuing operations rose, 18% to a fourth quarter record of $2.89 from.
From an operating perspective, excluding the $25 million 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 fourth quarter.
Residential set new fourth quarter records for revenue.
<unk> and margin residential revenue was up 11% on double digit growth in both replacement and new construction business.
<unk> indoor air quality revenue was up more than 30% in the quarter.
Segment profit rose, 18% and segment margin expanded 130 basis points to 29%.
If I'm or operational perspective, adjusting for the $25 million of insurance benefit in the prior year quarter residential profit rose, 58% and margin expanded 630 basis points.
In commercial fourth quarter revenue was down 13% and profit was down 11%.
Segment margin expanded 40 basis points to a fourth quarter record 19, 4%.
We continue to see year over year improvement in the business from both replacement and new construction as well as in national accounts and regional and local business <unk>.
Commercial equipment revenue overall was down mid teens in the quarter within this replacement revenue was down low single digits at constant currency with <unk> with planned replacement down high single digits and emergency replacement up low double digits, new construction revenue was down mid twenties 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.
<unk> added six new national account equipment customers in the quarter to bring the total to 32 for the year for small today, we are seeing fast indoor air quality revenue growth led by our new building better air initiatives.
And in the first quarter, we on track with the launch for our new motto Al rooftop unit as we continue to lead the field in energy efficiency. The motto L features variable speed technology and an all new advanced control system. We're seeing high we are seeing high customer interest in this industry leading product for 2021.
Overall commercial backlog is up double digits.
In refrigeration for the fourth quarter revenue was up 7% as reported and up 3% at constant currency north.
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.
Europe HVAC revenue was up mid teens as reported and up high single digits at constant currency for.
Refrigeration segment profit declined 28% and margin contracted.
Contracted to 360 basis points to seven 5% on the timing of expenses in the quarter and unfavorable mix with strong growth in Europe. HVAC. Currently refrigeration backlog is up double digits led by North America, and we are seeing strong or order flow, we expect segment margin to be up year over year Star.
In the first quarter and be up for the full year in 2021.
For the company overall in 2021, we are reiterating guidance, we expect revenue growth of 48% this year and GAAP and adjusted EPS from continuing operations of $10 55.
For $11 15 for the full year.
There is 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.
Restarting our stock purchase program in 2021 and plan to buy back $400 million a share 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 and full year.
Overall for the company revenue for 2020 was 363 billion 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 from neutral to revenue GAAP.
GAAP operating income was $479 million compared to $657 million from the prior year that included a $179 million net gain from insurance recoveries.
GAAP EPS from continuing operations was $9 26.
Compared to $10.38 from the prior year that included the $179 million insurance benefit and $99 million in pre tax pension settlements.
Total adjusted segment profit for the full year was $507 million compared to $610 million from the prior year that included a $99 million 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 million 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 and the year.
Excuse me in the fourth quarter revenue from residential heating and cooling was a fourth quarter record $553 million up 11%.
Volume was up 10% price was up 1% and mix was flat with foreign exchange neutral to revenue.
Residential profit was a fourth quarter record $116 million up 18%.
Net margin was a fourth quarter record, 29% up 130 basis points and as Todd mentioned operationally profit was up 58% and margin expanded 630 basis points.
Segment profit was primarily impacted by higher volume favorable price lower material and other product costs higher factory productivity and lower SG&A.
Partial offsets included $25 million of nonrecurring insurance proceeds in the prior year quarter, the COVID-19, pandemic and higher tariffs freight distribution and warranty.
For the full year residential segment revenue was a record $2 $3 6 billion 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 million down eight.
Percent from the prior year that had the $99 million of insurance recovery.
Segment margin was 18, 1% down 220 basis points as reported.
Operationally, excluding the insurance recovery in the prior year segment profit was up 17% and margin expanded 210 basis points.
Now turning to our commercial heating and cooling business in the fourth quarter commercial revenue was $226 million 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 million down 11% segment margin was a fourth quarter record 19, 4% up 40 basis points.
Net profit was primarily impacted by the COVID-19, pandemic lower volume unfavorable mix and higher freight distribution and SG&A part.
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 million down 15% volume was down 14% price was flat and mix was down 1%.
Foreign exchange was neutral to revenue.
Segment profit was $137 million down 17% segment margin was 17, 1% down 40 basis points.
In refrigeration revenue was $135 million up 7% volume was up 3% price was up 1% and mix was down 1% and foreign exchange had a favorable for percent impact on revenue.
Refrigeration segment profit was $10 million in the fourth quarter down 28% segment margin was seven 5% down 360 basis points.
Segment profit was primarily impacted by the COVID-19, pandemic unfavorable mix higher distribution warranty and other product costs and the timing of SG&A expenses.
Partial offsets included higher volume favorable price and lower material costs for the full year refrigeration revenue was $472 million 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 million down, 47% and segment profit margin was 7% down 470 basis points.
Regarding special items in the fourth quarter. The company had net after tax gain of $800000 that included a net gain of $3 4 million for insurance recoveries related to damage at the Companys manufacturing facility in Iowa.
A benefit of $2 3 million related to environmental liabilities of.
A benefit of $1 5 million for excess tax benefits from share based compensation.
For charges, we had $2 7 million for asbestos related litigation $1.15 million for special product quality adjustments $1 4 million for personal protective equipment and facility deep cleaning expenses incurred due to the COVID-19 pandemic and a net change charges of 800.
<unk> thousand dollars in total for various other items.
Okay.
Now looking at special items for the full year the company had net.
After tax charges of $26 million and they included a charge of $8 5 million for other tax items.
<unk> $8 4 million for restructuring activities $6 $2 million for personal protective equipment and facility deep cleaning expenses incurred due to the COVID-19 pandemic.
For 2 million for asbestos related litigation.
Net loss of $2 3 million related to damage the company's manufacturing facility in Iowa.
Our net charge of $600000 in total for various other items and a benefit of $4 2 million for excess tax benefits from share based compensation.
Corporate expenses were $30 million in the fourth quarter and $92 million for the full year.
Overall, SG&A was $143 million for the fourth quarter or 15, 7% of revenue down from 16, 3% in the prior year quarter.
For 2020, overall, SG&A was $556 million or 15, 3% of revenue down from 15, 4% on an adjusted basis in the prior year.
For 2020, the company had cash from operations of $612 million compared to $396 million from the prior year.
Capital expenditures were approximately $78 million for the full year compared to $106 million in the prior year and proceeds for damage to property and disposal of property for $1 million compared to $81 million in the prior year.
Free cash flow was $535 million for the year compared to $371 million from the prior year.
In 2020, the company paid $118 million in stock in dividends and repurchased $100 million of company stock.
Total debt was $981 million at the end of the fourth quarter and we ended the year with a debt to EBITDA ratio of one 7% and.
<unk> cash and cash equivalents were $124 million at the end of the year.
Now before I turn it over to Q&A I'll review our outlook for 2021.
Our underlying market assumptions for the year remain the same we expect industry to see mid C. We expect industry to see mid single digit shipments growth in residential commercial unitary and refrigeration markets in North America. The Companys guidance for 2021 remains the same as we presented at the December investment community.
Meeting.
Our guidance for 2021 revenue growth is 48% with neutral foreign exchange impact.
We still expect GAAP and adjusted EPS from continuing operations in a range of $10 55 to.
To $11 15.
With about half of the earnings in the first half for the year and half in the second half of the year.
Let me now run through other key points in our guidance assumptions and the puts and takes for 2021 all of which are unchanged.
We expect a benefit of $50 million in price for the year.
We expect a benefit of $25 million from sourcing and engineering led cost reductions and a $20 million 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 million headwind from commodities.
For Adas is expected to be a $5 million headwind.
We will be at more.
At a more normal run rate with distribution investments this year with 30, new Lennox stores planned.
Tariffs are expected to be a $5 million headwind we.
We are planning for SG&A to be up approximately 7% for the year or a headwind of about $45 million.
Within SG&A, while making investments in R&D in it for continued innovation and leadership in products controls E Commerce factory automation and productivity.
A few other guidance points.
Corporate expenses are targeted at $90 million net interest and pension expense is expected to be approximately $35 million.
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 million for this year about $30 million of which are for the third 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 2022, we expect nearly $10 million in annual savings from the third plant.
Free cash flow is targeted at $325 million as we reinflate working capital to support strong growth and.
And over the long term, we expect free cash flow to approximate net income on average.
And finally, we expect a weighted average diluted share count for the full year to be between 37 to 38 million shares which incorporates our plans to repurchase $400 million stock this year.
And with that John Let's now go to Q&A.
Certainly and just as a reminder, ladies and gentlemen, you may enter the queue to ask a question by pressing one and zero on your phone and pressing one and zero again, we'll have you exited the queue.
And first one line of Jeff Hammond with Keybanc. Please go ahead.
Hey, good morning, guys good morning, Jeff.
Todd good to see the execution was much better than than you football team.
[laughter] I think we're both watching other people's teams this week and yes, yes.
Just just wanted 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 restocking and if that continues into into <unk>.
Yeah, I mean I read your pre note yes. The short answer is there was some benefit from absorption as we continue to produce in fourth quarter for the demand rolling into 2021, but even more important than that is the drivers of the margin were.
For the aggressive SG&A costs at the team took out early in the year, we haven't added back a lot of them and so we had great SG&A leverage.
Also we had very strong quarter material cost and just in the factories themselves even above absorption. Some other productivity initiatives really kicked in second half of the year and we saw the benefit so absorption helped.
And it will help as you suggest as we roll into next year.
But there was benefits across there was strong performance across the board in RASM.
Okay and then.
Maybe switching over to commercial can you just.
Book to Bill was book to Bill positive in <unk> did you see order acceleration when when do you think that backlog starts to flow out in sales growth. Thanks.
We're seeing sales growth in first quarter, so far I mean, it's starting to.
The acceleration in first quarter orders have taken a bit of a pause during the first three weeks in January which I think is normal as you go into a new year.
Not unusual for us.
And I think theres, a little bit of uncertainty out there in the commercial marketplace.
But we're set up for a nice quarter in Q1 in the backlog starting to build for the for second quarter and balance of year.
Okay. Thanks, a lot.
Thanks.
Next we'll go to Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Hey, just a first question on the incremental margin.
So just wanted to sort of check on your conviction and being able to get that 30% incrementals for the year.
Across the company.
Any.
Segment color you could provide I suppose particularly in refrigeration.
How should we think about operating leverage this year.
The good news for anyone who has ever worked in a large corporation and good news after having a tough years for next year, you have great comps and I think thats true on the refrigeration business. So I think we'll have positive news in refrigeration overall for the Corporation.
We guided 30% Incrementals were still feeling pretty good about that.
Going to have price of $50 million that will offset the commodity headwind of $30 million freight and tariff headwind each of $5 billion for a $40 million of cost 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% Incrementals.
Thank you and then.
Maybe just following up on the commercial side.
And if you could just give any color around sort of different verticals.
We are seeing.
Any update as well on the sort of competitive.
Landscape in commercial.
How quickly we can expect revenue to turn positive is it Q2 or perhaps earlier in terms of year on year.
Yeah, I understand I'm not going to answer that last part.
We said, we had double digit backlog going into the year.
Where we saw the pickup in order rates in fourth quarter.
We're 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 customer uncertainty earlier in the year and so we had we didn't deliver those units, but we book does business and that will flow into the first half of this year.
Emergency replacement was up in fourth quarter. So that continues to flow I think the area. That's weakest right now quite frankly continues weak as commercial new construction given.
Given the uncertainty that still exists around the recovery from Covid.
Yes.
Great. Thank you.
Thanks.
Yeah.
Next we'll go to John Walsh with Credit Suisse. Please go ahead.
Hi, good morning.
Hey, Jonathan.
Question around.
Your opportunity as you see it in the K through 12 vertical where <unk>.
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 and as for 100 days are you seeing any of that.
In your commercial business.
Aye.
Schools tend to move relatively slow so from the time they are 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 12.
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.
We're in lots of dialogues with people, but I don't think theres been a light switch turned on on that market.
Yeah.
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 ill directly answer the broader question of why it didn't change it narrowly we.
We buy steel a couple of different ways, we have some fixed contracts. We have some contracts that are tied to scrap and in majority of it is we buy from the mills based on CRE pricing the prior quarter.
When you when you so when we're when were quote unquote 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 what we're going to have for steel we have to sort of predict what's going to happen and honest answers in December we were <unk>.
Depending I guess what side of the trade you were on where their bearish or bullish, but we assume steel was going to go after and we rolled that into our guide.
So, it's plus or minus commodities is still a $30 million headwind.
Great. Thank you I appreciate it.
Thanks.
Yeah.
Our next question is from Gautam Khanna with Cowen. Please go ahead.
Good morning, Thanks, guys.
Adam how are you doing.
Doing well. Thank you I was curious just.
Can you speak to any changes in the competitive dynamics, we had heard.
<unk> Goodman facility was.
It was from Covid outbreaks, and then you saw Canada, the big channel refill and.
<unk> in Q4, and I'm, just curious I guess any sort of things to think about year over year as we.
Kind of comp the weirdness of 2020 and Ramsey competitively.
Okay.
Yeah, I mean, I think the most important thing is what I spent a ton of time talking about in December which is.
The broader year 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 we're 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 and fourth quarter.
And that will bleed off as you go through through the year compared to US which is we delivered in <unk>.
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 customers 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.
So to the timing of EPS, our earnings is a little bit different than normal that we expect about half of our EPS to come in first half.
Half and half of the EPS in second half, which is a little different weighting that wont be that 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 is an independent company anything you can speak to.
It is based on.
Yeah, No I think short answers now.
Carrier has always been a very good competitor in.
Okay.
They publicly different things happen and they say different things on the earnings call, but on the ground at the same.
<unk> tried and true sales force and strong dealer network and <unk> always had good product.
They haven't changed their pricing strategy. They haven't changed I don't think how they buy components and commodities are sourcing strategies.
And they haven't changed their distribution strategy, so from where we set it.
Tom.
Similar to what we've seen in the past.
Thank you.
Hum.
Next we'll go to Nicole <unk> with Deutsche Bank. Please go ahead, yes.
Yes. Thanks, Good morning, guys good morning, Nicole.
And so the commentary around the first half versus second half, but is definitely helpful. Todd anything you want to say about calibrating expectations for one Q based on what you guys have seen like into January.
I'll answer the question of obliquely.
In residential we continued continuing 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 first quarter net at a pretty stiff pace, we will 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 out of working capital.
We use could could look throughout the year.
I think it will be more of a normal year where will.
Sort of peak in working capital early in and 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.
It'll be more of a traditional year in.
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 underlying the free cash flow of $535 million.
In 2020, which is a record.
We're guiding for 325 next year over the two year period, it's about 110% of net income. So 2020 added to 2021 over that two year period of 110% of our adjusted.
Net income, which is a pretty strong performance in cash flow over a couple year period.
Okay.
Got it and thanks for expanding I'll pass it on.
Thanks.
And we'll go to Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning.
So because we had a pretty thorough that in in 'twenty one back in December so.
So for me, but I'm curious the 10% volume growth in residential.
<unk> for Q, how does that look by brands like vs large brands.
Yes.
<unk>.
Overall were up 11%.
Our Lennox was up high single digits, and our Allied grew mid Twenty's and so while we saw in our business is what we've been saying other are seeing which is.
Our independent distribution business Allied grew much stronger than our Lennox business, but not because they are winning share just we have distributors, who are reloading and quite frankly for.
For the scarcity mindset trying to pull some volume in.
Alright. Thanks.
The housing data I mean, I'm not sure how accurate that actually is but how do your data showed a big pickup in distributor shipments.
In December and I'm curious if you saw the same pattern.
Strength in terms of the sell through to casinos.
It makes sense from weather perspective, Im just curious what you saw.
No I mean, we didn't I mean, just from a weather perspective.
<unk>.
It wasn't so called in January this year versus last for excuse me December this year versus last year.
We saw some pickup in December but not near the Hardy data.
I think youre right that the Hardy data in any given month.
Got it.
As suspect I think directionally over a 12 months rolling data sort of gives you the right area.
For the for the number but I think in any given month it could be a little misleading.
Okay. Thanks.
Okay.
And next we'll go to Steve Tusa with Jpmorgan. Please go ahead.
Hey, good morning.
Good morning.
Can you just maybe clarify the margin.
Kind of color on <unk> I think to Julians question Hugh.
You mentioned refrigeration will be good I, just didnt catch what you said on resi specifically.
I reframe the question I'm not sure. He asked me a question on residential margins sorry, I thought he asked about residential margins that you had said overall guide, 30% Incrementals and positive refrigeration would be.
Pretty positive so what whats kind of the what's the <unk>.
Kind of view yeah.
I think on the round there are plus or minus 30, so from a resi viewpoint 30, commercial 30 and refrigeration.
Probably be a little bit higher, but thats, such a small part of our business. The other two will drive it and net while we do on corporate expense got it.
And then just lastly kind of looking out over the next couple of years I know there is another.
<unk> fee regulation coming in.
Is there any kind of.
The change to your approach on 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 that vertical that 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 products for placement.
And the docs are already in the home and so the lowest cost solution for the 80% that's out on a replacement as our duct it systems.
We're coming out with a 28 seer unit.
In first quarter 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 in 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.
Kind of your whats 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 how it's implemented.
But the last time, we did this.
Which was a more normal way to do it you had.
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 for the industry had back in 2006 2007.
I think there may be a bit of pre buy but not like theres 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 its when we went from 10 to 13 or the industry I wasn't here, but we went from 10 to 13.
And it had been the first major jump in awhile that really screwed up the premium competitors in retrospect and the big winner was Goodman, because all of a sudden differentiation got collapsed one I think everybody has understood that and so one of the reasons we come out of the 2008 share in 2021 is to prepare to sort of have the high end stretch.
<unk> for when we have to make the transition and then the other is its a much smaller bite.
When you're going from 14 to 15, that's much different than going from 10 to 13 as a percentage. Obviously so you just don't have a huge cost shock to the system in some shock to the system with the big units back in 2006 2007.
I view, it as sort of not quite Ho hum, but pretty close to home.
And then the other thing Thats on the horizon and residential regulatory wise change in refrigerants.
To lower greenhouse gas emissions and.
With the 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 rush for the industry, but but that California, Reg was pushed rate 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 cart.
Wow, Okay got it thanks, a lot appreciate the color.
Our next question is from Joe Ritchie with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning, everybody.
Morning.
Good morning, maybe just maybe just starting off on refrigeration margins I know you mentioned.
There were some mix issues in the quarter.
And then step up in SG&A can you guys, just maybe parse that out a little further and help quantify some of the impacts this quarter.
Yes.
The two I gave you were sort of or the two you rattled off are the two big drivers it was.
The fact that we were up in.
H back 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.
Getting to the accounting sort of accrual adjustments and sort of year over year differences in fourth quarter took ahead compared to fourth quarter last year.
I think I mentioned in the script, we expect to have margin ends up in Q1 in refrigeration and for them to be up for year.
Got it Todd.
Take a look at your backlog in refrigeration.
Yeah. It sounds to me like there's going to be a mixed benefit than in 2021 are you seeing the north American piece of your business growing a lot quicker than Europe at this point.
Yes, yes.
Yes.
Okay Cool and then.
One final question going back to commercial for a second.
On planned replacement I'm just curious it seemed 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 other things compare today.
Coronavirus cases surging versus what we saw maybe earlier in 2020.
Can you broke up a little bit or I Didnt hear can you re ask the question one more time.
Sure no problem sorry about that.
The question is really just around getting on premise access to do your planned replacement day, but.
Yes, what you thought and I forgot it.
We have no issue, we're able to get on the job site do what we need to do.
<unk> for mashed up and.
And commercial customers have no issues in Yemen.
Alright, great. Thank you.
Yes.
And with no further questions in queue I'll turn it over to you Mr. <unk> for any closing remarks.
Thanks, everyone.
To wrap up as I.
Mentioned in Q&A and during the script continued momentum continues in the first quarter in 2021 is off to a nice start Lennox 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.
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