Q3 2021 Watsco Inc Earnings Call
Good morning, and welcome to the Watsco third quarter 2021 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Albert <unk> CEO. Please.
Crowe head.
Good morning, everyone.
Welcome to our third quarter earnings call.
First I hope everyone is safe and healthy given the virus is going on.
But this is al <unk>, chairman and CEO and with me is a J <unk> president.
Our two executive.
Vice President and Paul Johnston, and Barry Logan and Rick Gomez Vice President.
Before we start our normal cautionary statement. This conference call forward looking statements as defined by S. C. C laws and regulations that are made pursuant to the safe Harbor provisions of these various laws.
Ultimate results may differ materially.
The forward looking statements.
No.
I am pleased to share that watsco delivered another record quarter.
New records were achieved in virtually every performance metric.
Earnings per share jumped 31% to a.
A record $3 62 per share on a 32% increase in net income.
Sales grew 16% or nearly $250 million during the quarter to a record $1.780 billion.
Gross profit increased 29%.
With gross margins expanding 280 basis points.
Operating income increased $50 million or 32% to a record $207 million.
Operating margins expanded 100 basis points to a record 11, 6%.
And.
So for the quarter was a record $238 million.
Today's results are all the more positive when considered against last year's record results and in light of the industry wide supply challenges that are still going on.
Our teams throughout all of Watsco.
Cattle are doing an extraordinary job taking care of customers and that has made a big difference.
I wanted to say thanks to all of you.
We also ended the quarter with a strong balance sheet with virtually no debt and cash of $137 million.
This financial strength provides us the flexibility.
Watsco to invest in most any size opportunity.
Our press release summarizes important fundamentals that are critical to understand as we continued to invest and build further scale in what is a very fragmented $50 billion in North American market.
But it's an important fundamental is watsco geographic coverage and our large number of low cases across many markets.
The diversity of markets, we serve it reduces volatility and provides stability during a difficult operating environment.
Such as the one we are witnessing.
Also our large.
And growing customer base is increasingly equipped.
With our state of the art technology that helps our customers grow their business and purchase more from us.
Another advantage now and into the future is our offerings of the broadest variety of products and brands in the industry the depth and diversity of our product offerings should continue.
Large service well.
We're optimistic about current market conditions, let me say that again optimistic about current market conditions and recent trends.
End market demand remains strong and we see signs of improvement in our oem's ability to help us fulfill that demand.
Looking ahead, the industry will experience more change in the years to come as minimum seer standards rise strongly well done by the federal government by the way and refrigerant changes that take shape in the coming years.
And with changes come opportunities.
We believe that our long term focus our scale speed the market.
Relationship with Oems.
Technology offerings.
Position us better than anyone to capitalize on these upcoming changes.
We are living in unusual times, but could not be more.
I'm excited about the future of the industry and our role in it.
Now, let's go onto our Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your hands.
Positive for pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Nigel Coe with Wolfe Research. Please go ahead.
Nigel.
No.
Okay.
Yes.
Mr. Taylor Your line is open on our end.
I don't like you.
[laughter].
Yeah.
Okay moving on our next our first question is coming from Tommy Moll with Stephens. Please go ahead.
Handset.
Morning, Tommy Good morning, and thanks for taking my questions sure.
You referenced increasing engagement with some of your OEM partners and and an increased ability to to help you meet the robust underlying demand.
At.
Ahead in the year I Wonder if you've started to talk to some of the initiatives for 2022 planning.
And so what if what if any insight can you give us an on the go.
I like that question because all of us in the industry are fighting just to get enough product to continue to meet the demand.
At this point.
But 2022 but that's done for that I think as Paul Johnston.
Yeah first of all I'd like to say that we're not increasing our conversation with the Oems, where we have been continually communicating with our Oems and them with us so.
So the relationship there all during the pandemic and even.
Independent we're working with them on.
Product planning and delivery planning and all of that.
Yeah right now we're looking at in 2022.
You're trying to straighten the inventories out a bit.
What we ended up with was some of our inventories ended up to be a little bit lopsided on indoor.
Before this outdoor type units. So we're working with them trying to balance that out so we can sell complete systems.
We've been working with them on what's the transition plans, obviously youre going to be.
Given that next year as it was a big year, when we're going to be transitioning in 2023 to the our 2022 and.
In 2002.
<unk> to the to the new seer levels.
So it's been a it's a full agenda that we have with our with our OEM partners as far as communicating them and planning with most of them as you recognize where one of their largest.
Largest customers if not their largest customer and so were important.
To each other.
Yeah.
Thank you both if I could I wanted to pivot to a to the customer side.
Of the business for you how receptive have they've been of late two price increases and I asked that because clearly there.
There isn't but inflation on the OEM side, presumably in this environment customers are going to be pretty receptive to to your passing that through.
It would occur to me that if you've got product available.
There's less concern around pricing, which is going to be pretty well pass through to the.
The end user anyway, but any context, you can give us on that dynamic.
Your thought process is a good one but let's see if Paul can fill in the holes there.
Yes, we always talk about the equipment yes.
So the most recognized price increases that we have and the theater.
Tractors have been accepting of them, especially those who are in the replacement business.
A little more resistance from people who are on the on the new construction side.
But you know we are also they are also experiencing upticks in commodity pricing with copper going up above $4.70 here recently a pound.
We're seeing <unk> go up double digit.
Pretty much every every three to six months.
So a lot of a lot of the other products that go into actually installing the units are going up at the same time.
So I think we're all a little bit numb to it including our contractors and then accepting it.
And trying to pass it on as best we can given the timing of how many price increases we've had here in the last 12 to 18 months, but it doesn't seem to be slowing demand our demand is strong.
Okay.
I appreciate the context I'll turn it back.
And the next question is from Steve Volkmann with Jefferies. Please go ahead good morning.
Good morning, guys. Just following up on that last one how are you guys seeing any change in your mix relative to the type of equipment customers are willing to pay for it at this point.
Well, that's a very enlightening question.
Because there is a chip shortage so we.
We see high efficiency demand, there, but were unable to fulfill it.
Given the.
The supply of that product.
Paul do you want to fill in.
That's very true.
It takes more hours for now.
Question to make a high efficiency to make an 18 or 20 ship product.
And so the focus has been pretty much on the on the 16 Seer 15, Seer 14, Seer 13 seer product.
So a little bit of a shift there where we're seeing a bump in 16 seer sales.
And obviously 14th Thirteenths here sales in small.
OEM and 18 twenties here.
Having said that 18 20 Shira has never been a major portion of the market and obviously its something we would like to have is a major portion of the market.
And hopefully with the new energy standards will be able to expand.
The very high efficiency products as a greater percentage of our sales.
Decline just to just add a thought to that just so it's clear on the data what the data says the the high efficiency mix increased again this quarter. Its almost 11 straight years of quarters, where it increased but that ultra high efficiency is where the is where the missing link is in didn't did not contribute but overall.
She grew at a faster rate than the base efficiency.
So it almost sounds like as or if maybe I should say if the supply chain issues ultimately normalize and we have these kind of seer changes happening in 'twenty three.
We may actually see a better mix shift.
Efficient going forward.
I would agree we will absolutely happen.
We're going to see a better mix change because of the efficiency going up too.
Our teams here in the north in 15 in the South so which was extended by the federal government. Yeah. Yeah. So we're going to see that regardless you know our focus as you know we really wanted to make sure that that ultra high.
You can see that Barry refers to.
Grows at a faster rate and becomes a more material piece of the market.
Understood. Okay. Thanks, and then a quick follow up I think you mentioned in your prepared.
Police that SG&A spending was a little bit elevated and you expected that to normalize as we go forward.
I think obviously gross margin was also a very good do you also expect gross margin to normalize going forward or do you think you can kind of hold the rate that we have.
Wow, that's a very perceptive question.
Looking into the future.
Ward.
Theoretically that's my Joe who wants to take a barrier ball.
Alright that sounds like your question [laughter].
So, let's get SG&A first because that's easier to try to think about obviously everything.
And I just wanted to say this also so it's off the table for the rest of the call.
Sales volume in the second quarter was up 29% on a same store basis, I think something like that.
So this has been an extraordinary summer if you look at things as a combined.
The last six months, let's not just talking.
We've sort of let's look at our seasonal.
Reality is what we dealt with extraordinary demand.
SG&A that needed to deal with a lot of stuff going on in terms of supply chain to make it work.
A lot of austerity that came off last year's comparison that is now in this year's numbers.
And just a again as I said drinking through a fire hose over the last six months so SG&A.
We wanted to highlight some things very specific to SG&A that are big buckets.
Uh huh.
The word normalized usually means goes down or declines.
Cortes way, there's a lot of variable cost that that increased those costs remain variable and will adjust themselves to whatever the sales volume is.
Over the next 12 months.
As al suggested in our remarks, we're not necessarily seeing a slack in demand as we get out of season right now.
Let's put it in fact, we're seeing increased demand as we're getting out of season from from let's say recent days.
And so our SG&A will normalize but again.
I will tell and the variable cost should it should adjust over time.
Gross profit as a more interesting question.
Uh huh.
Actually I've said this for a carrier and we said this in our comments over many years inflation as.
It's something that we pass through and pass on.
It adds to our gross profit equation and makes more money for us there's no question of that.
We're also doing immense work with technology.
Improved pricing and margin.
And to optimize pricing.
That doesn't necessarily mean, just getting higher margins that means improving our pricing profile.
Across customers competitors products and so on.
There's a benefit this year and that equation, which is only just the beginning.
Or a pricing discussion.
And I think you know mix also obviously has the benefit and you heard Pauls comments earlier about mix may be looking for it.
But that's a big crystal ball to look into.
The honesty.
But some of the undercurrent of inflation and mix.
Yeah.
<unk>, two <unk> and incentives and the way, we pay salespeople and commission our sales force.
All of those things are pulling in that direction stolen.
Next year I'll tell you more when we know more but that's not what I would tell you today.
Alright fair enough. Thank you guys.
Okay.
The next.
Technology is from Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, guys good morning.
Hey, so just a follow on on the gross margin it looks like if I if I do the math right. The gross margins on the acquisitions are higher than your blended average and they ask Jay seems higher.
Question on a blended basis is there.
Anything I know like T. C. I think is the biggest acquisition contributor, but maybe just speak to those dynamics.
Those impacts.
I got to say Barry will answer that but.
That's a $6 billion a year business and.
Higher what you're talking about it or.
Small.
Relative to the overall AR and revenue.
I can't imagine that that's driving the overall.
Number is that you perceive but Barry go ahead.
Yes, Jeff I mean, and again it was very isolated to what we've acquired lately on yes.
The margin and yes, the cost of doing business is higher that's unique and eccentric too.
2222 T E C and it's part of their legacy and profile of how they go to market. So.
They've had an exceptional.
Last six months, so as part of Watsco, they've had an exceptional year.
<unk> coming into this year end.
Very proud and happy that they're part of watsco.
Yeah.
Okay, great. Thanks.
Thanks for all the color on the 'twenty one performance that was really helpful. Just.
Sticking to the price dynamic I think you've called out 6%.
Increase in average selling price.
For the year to date I'm, just wondering if that number overall as higher within the context of <unk> and then.
Theres any noticeable difference in that 6% between equipment.
Equipment versus not.
Non equipment.
Yeah.
Take a first stab at Barry do you want to take the second half, but you know is there a is there a difference between equipment and non equipment yes.
Anything that is commodity based has a.
As an external profile, where the pricing fluctuates on a daily weekly basis, and as I mentioned earlier things like copper refrigerant steel.
<unk> have definitely been a been on the incline and they've gone up faster than.
For the last 18 months have gone up faster than equipment equipment has a more slower cadence to it because.
There has to be an announced period of time before we have a recognized price increase so normally we get.
Anywhere from $60.
Multi day lead time on the announcement before it's implemented so it gives us an opportunity to adjust ourselves so.
Timing is is.
It's not unique to the third quarter or to a 2021 so far.
Okay.
The next question is from David Manthey with Baird. Please go ahead David.
Thank you good morning, good morning, everyone.
So just definitional Lee when you are talking about the 6% year to date price increase on.
Residential HVAC is that the typical.
Mix definition that you've given us historically.
Yes, yes. It is yes it is.
Okay. Thank you.
And then.
As far as the increased investment that you outlined and thanks for doing that adding that clarity is some of that.
Price on the gross margin being elevated here and Barry you noted that some of the variable expenses will obviously naturally flex down if things moderate a bit next year, but if gross margin moderates.
And sales moderate.
A fluid.
And can you put on modifying that investment plan if things.
Moderate a bit next year.
Okay.
Maybe that question with you.
Answer is of course [laughter].
No.
I mean this is <unk>.
Plans are 70% or 73 location managers managing p&l's.
It's.
30 to 35.
Superpower presidents running markets.
It's a data platform, suggesting and telling them.
And reminding and monitoring margins and costs and profitability every.
600 minutes a day.
It's our incentive systems that bet that geared toward EBIT growth.
Cash flow production.
Yeah, I mean culturally you know the intent and the obvious.
Culture is profitability growth.
Responsible waves.
Every single is what the mission is so.
It may be different in Texas than in Massachusetts next year.
It may be different in California than it is in Chicago.
So theres decentralization and data flow that goes on in markets is how we operate.
And when I say of course, it's because all of those dynamics get measured.
And carried out in different ways in different markets. So so.
So clearly all of these all these moving pieces that are going on are different everywhere.
And so we're culturally every Friday morning, we spent a few hours together and go through it all together and act and react accordingly so.
The answer is of course.
There'll be actions and reactions going on as things change.
Yeah got it okay, and just quickly as it relates to technology investments or other sort of corporate level decisions I know, there's not that many of those but.
What about those and those are obviously not controlled by the.
Markets individually or those subject to are those set in stone.
Yeah, let me deal with that I agree that <unk>.
Control of the way you stated that lets have AJ respond to that.
Yeah, well as you saw in our release our investments in technology continue to grow.
And that's because we are.
Maturing things that are already in flight and were taking on new projects and programs.
All with the intent of continually improving and modernizing everything we do all focused around helping our customers do business with us and helping them grow their businesses.
As we see more and more opportunity.
On a continuing.
We are not.
In other words, we are we are dedicated to the long term.
And as I said it but.
We don't see any reason not to continue to invest regardless of what's going on and fluctuations from season to season.
Got it thanks very much guys.
The next question is from Jeff Sprague with vertical research. Please go ahead. Good morning, Jack Good morning, Good morning, gentlemen.
Thanks for the questions I was wondering if you could give us your early thoughts on behavior around the potential for pre buying next year.
I asked the question kind of in the spirit that.
Folks are program for prices to move up and so is there actually much logic or much to be gained from the distributors wanting to pre buy into that efficiency change.
Well right now the reality is a pre buy doesn't help anything.
We can't get what we want.
Now and we don't seem to be.
We don't see an end to that yet.
So we don't even face those pre buy decisions, what we need now is enough product to meet the demand seem to be having.
At record levels.
And I ended up going into the fourth quarter.
Again, we will be adjusted pre buys of course, we would we have a lot of data that and a lot of software that tells us how to manage our our investment in inventory.
But right now it's a scramble.
You would be interested.
Are you buying.
Along maybe historical patterns, if the product was available to do so.
No.
No I don't I don't think that would be the case, we just want what we have on order we want to bring it in exactly all spot on.
I don't see a pre buy of we don't see it.
Pre buy.
And pre NAD as we wanted to make sure we get the inventory that we need to meet current demands as well as early part demand.
You know I don't think anybody is looking at carrying a huge amount of inventory into 2022, because there's going to be different government regulations, which are going to have different requirements.
Where and how you can sell.
So I don't think its going to be an issue this year.
Yeah, I was sort of meaning pre buying in 'twenty, two not right now but.
It sounds like the answer is probably the same regardless.
Yep Yep.
And sort of related to that what percent of your sales now is above the minimum.
Minimum efficiency standards.
Across the platform.
Well, they all have to be.
100, Pratt are above minimum.
Thanks.
<unk> got 80, or 90% I would think at right I guess the question is whats the percentage.
Above.
Above the minimum that's a good question do we have that data available, yes, it's it's quite a bit higher than you think it's.
Yes.
Higher than 50% is actually above the minimum.
Interesting that is higher than I would've guessed alright, thanks for the color I appreciate it you bet.
You've got a lot of other rules that apply to it such as the E. P. A.
You know on new new home construction in order to get your.
Your sticker from the EPA you have to have a higher efficiency product.
And there there's an awful lot of the 14 seer product that actually goes to 15.
Interesting okay. Thank you.
I appreciate it sure.
The next question is from Chris Dankert with loop capital. Please go ahead Chris.
Hey, good morning, Good morning, everyone. I guess, maybe this one's a little more targeted AJ you did highlight some new projects I guess anything specifically you're right discuss over at the Skunk works watsco yet.
Yet.
[laughter] anything noted.
To talk about there.
You got about a week.
Yeah exactly exactly they're all long term thing.
Our long term company. So I wouldnt, we don't need to highlight things that are just in early stage development.
How are you.
Some of the earlier things that are getting a little bit more mature, which we I don't know if they couldn't in this quarter's release, but our Oncall air.
As our tool to help a contractor itself.
To their customers and credit for comfort, which is a companion tool to help them sell a financing they're both continuing to grow.
And very exciting.
And customers that are using those tools and really our technology and general continuing to be better customers for us meaning they are stickier their attrition rates are much lower and their growth rates are much higher.
So all the data shows that.
These technology investments are paying off and having a nice return.
Got it I mean, you've given us some of the numbers in the past I guess are you guys willing to comment on kind of what E. Commerce growth was in the third quarter here. Yeah. We can give you that sure.
Who's got that number.
Alright, Rick anybody.
15%, 16% was the growth in e-commerce for the quarter.
Rick I was trying to get children, but very cut you off.
Yes.
[laughter] good deal. Thanks, so much guys I appreciate it.
[laughter].
The next question is from Ryan Merkel with William Blair. Please go ahead.
Right.
Hey, good morning, everyone.
So I think our I think it was al maybe you mentioned.
Oh supply chain was going to get better in the fourth quarter is that all of your equipment Oems are certain Oems doing better than others.
Let me say that.
It's not got better it just yet.
It's and when I say that I'm talking about all of them.
Where we're hoping.
That got better in the fourth quarter.
But as I said earlier the demand is so high now that it's not easy.
But then to catch up and it's all of them and there's not one that's better than the other I mean, there as you know were probably the biggest customer for all of them that we represent their brands no I would still say it's.
It will get they'll catch up.
I don't see okay.
Any.
Solutions to supply chain yet.
But we're optimistic.
Okay and I don't know if you mentioned this but did you leave revenue on the table.
Because you just didn't have okay, probably hard to quantify that.
Cereal or Oh, yeah, yeah.
Okay.
Yeah.
We would take a shot at that Paul I don't remember.
Let's not speculate I'd rather.
Your speculation you know if you listened to the salesmen. It's you know it's a lot higher.
When you listen to the data.
It's a way.
Yeah.
Brian.
D O aims are running flat out and we.
They're doing the best they can and I'm talking about all of them that we buy from them.
We have you know.
Besides the <unk>.
Three major equipment Oems we have.
There are numerous other Oems and they're doing the best they can have they caught up not even close.
We see some.
Improvement as the quarter proceeds I think so.
Okay. That's helpful and then I.
The only thing Theres more private equity interest.
And each back distribution lately and I'm. Just curious are you seeing multiples ryzen space and.
Is there more competition for deals.
Well that that question answers itself sure with private equity gets involved.
There is more competition is it affecting how we think about our strategy.
And eight we won't we will not chase pricing because we're in for the long term I don't know how long theyre going to be in it.
In terms of valuations for businesses, so, but you know they're there.
A large number of distributors, what's our latest count Barry more or less.
And so in terms of acquisitions 60.
No no no.
Available distributed independent distributors, how many are they 113 high there so theres room for.
Yeah lots of stuff for us.
Okay helpful. Thanks, guys.
The next question is from Steve Tusa with Jpmorgan.
Go ahead, Hello, Steve Good morning, guys.
How's your dad do it.
How does my dad doing yeah, he's a watsco Cheryl Lee told me [laughter], Yeah, that's that since like 2004. So you.
I guess, he's I guess he's doing fine.
Please.
So on price you guys booked 12% Asps and <unk>.
Second quarter, 2% in the first quarter, then you are saying its up 6% year to date can you just give us what the I mean, given the seasonality I guess, we could kind of do the math, but what.
The third quarter.
Asps for U S resi.
Year over year.
Very consistent with the overall, 6%.
So why why did that D cell no I'm missing something on kind of like the comps.
Most guys are thinking things continue to accelerate with all these pricing.
What was coming through.
Any any particular reason why that decelerated quarter to quarter.
I'm not sure in season things changed very much in terms of price during the course of the season. There were some some late quarter price increases that flow in I think September that will flow into the fourth quarter, but N seasons theater was not much variation.
And Clinton.
And you know with.
The kind of volatility that went on I'm not going to surmise much over the last 90 days just given what was going on.
We we sense that there will be more price increases in the near future.
All right. So today would suggest.
Are you sure that your U S resi volume was down a little bit in the quarter right now.
It was up slightly.
No yeah, yeah yeah.
Volume there was not that it was up slightly you know amongst all of our major most of our major resin suppliers.
The price increase that they had in the third quarter was September.
Yes that you didn't get impacted.
Or do you think you guys took market share in the quarter like as the industry.
I mean, if if if you guys you know.
Chip market share that means the industry was down in the quarter right.
Yeah.
You know you really don't know for the quarter until all the data comes out I think we said this.
Guy that's called the shipment.
The shipment data versus movement that has been so out of out of sorts here for about the last 12 months I think gets thrown all of our models off.
What I'd like to say, we gained market share well you know August shipments as you know we're down.
And the last one 2% our July was down five 6% so.
We werent down so we must have gained market share but.
I don't think that's a hello, Hello statement.
Yep.
And then so for these price increases that are coming through should we expect price.
What accelerate here in the fourth quarter I mean can you get to.
Kind of high.
I think back to that kind of high single double digit level for the fourth quarter.
No idea.
No I really can't predict that.
Yes.
The actual demand is in the fourth quarter, and we don't know what that's going to be.
Got it and then one last one just on inventories they were flat quarter to quarter.
Hard to tell what would be kind of volume and what would be.
Some sort of inflation there.
Usually it's down a bit seasonally.
Is there I'm trying to reconcile that with kind of the the supply constraints.
That are out there can you guys look like you're pretty good on inventory, how do you feel your own inventory situation as well Barry.
Barry gave you a clue on that in terms of having.
Inventory, particularly in equipment.
Yep.
We only have part of the system not all of the system. So we are carrying unusually high.
High numbers of this decided but it doesn't we don't have the matching part yet.
The of the unit Barry you want to elaborate on that.
Yeah, just just do some math to the our version of inventory turns which we can calculate you know usually monthly averages Hartford, you ought to do that but the monthly average inventory.
In turn as of September 30th was identical to the prior 12 months so.
And all the all the investment level. If you will is the same.
The the mix of that investment is what we're talking about that needs to improve and so on.
And Oh, Steve there's not a great story, there or is there some inflation yes.
There's some shortages yes.
There's.
A lot of product being moved around as we mentioned in the press release in terms of our of.
Our logistics to handle customer needs.
And all of that balances out and should help the inventory position as we go into next year.
Okay, well, it's still dependent on <unk>.
Which means normal lead times are normal.
The normal ceiling in terms of order flow and we're not there yet right.
Right right well congrats on executing continually hearing.
Pretty challenging environment. Thanks for the info. Thank you. Thank you.
Please excuse any mispronunciation. The next question is from Jeff.
Poke Winski zelinsky from Morgan Stanley. Please go ahead good morning.
Well at least I know, who I am.
Good morning, guys.
[laughter] you should make them you should make them spell out without looking at.
It was good to take myself off mute as soon as you started on the on the presentation comment. So good morning, guys. Thanks for.
Quick question.
I guess, maybe first question on some of the availability stuff I know, we've kind of tried in this path a lot already but.
Even though it is not a critical market to watsco, we are transitioning into furnace season, you guys do have some exposure there in a few regions of course is that availability you look any different than.
Okay.
C market I mean, obviously the lines aren't the same components aren't fungible like any any improvement just by virtue of turning on furnaces. This year.
Yeah furnaces are an important part of watsco.
Put it that way, especially with the acquisitions that we've made.
Over the last several years.
With Peirce Phelps in T E C and internet supply and desktop et cetera.
Furnaces right now what we're what we're seeing there is kind of an inversion of little bit to the air conditioning, we need more of the what we call. The standard furniture right now and there seems to be some shortage on standard furnaces, where we're getting some of the.
And furnaces.
Just got off a call with one of our groups on furnaces and and.
And a manufacturer and we're trying to supplement that and make sure we get them in.
There may be a little bit later than normal normally we're able to do a pre season with the contractors to presell furnaces into the marketplace.
And this year it looks like.
Hi, maybe a little bit of a delay coming up with the preseason broken.
Got it and then just on the refrigerant transition or I guess, the the phase out on our 'twenty two I think some of the other Oems have described it.
Sort of de facto $1000 office system, because it's cost avoidance on having to.
That recharge the system that had worked on or how to weak.
I guess, maybe a couple questions off that.
What is sort of the.
Pricing on our 22 today and how does that work into homeowners who manage and.
I feel like if we would have this conversation I don't know seven eight years ago.
Recycling refrigerant was something that was.
A little bit more of a topical moment in time like isn't that helping at all so just maybe speak to like how much of these upgrades or replacement is driven by the.
The refrigerant piece and maybe some of the numbers behind that if you wouldn't mind.
Well.
The number of R. 22 units is decreasing obviously every year.
My Best estimate is it's probably.
2025% of what it was when we when we did the transition so.
Theres fewer units out there that we have to service.
But the other side of R 22 is.
With drop in replacements.
From both Dupont as well as from.
From arc, <unk> arc, <unk> and Arkoma debt.
We're able to able to work around any sort of.
Higher prices of shortages in our 'twenty two we continue to see 22 sales Thats just a raw gas.
Is that they are on the residential side at least continue to move down.
Okay. So the actual like homeowner economics, havent change that much because of these dropdowns.
No it really hasnt it and if you think back to how many years, it's been since he's 20 since we went with the 410 across the board.
You know a lot of those units that are have become replacement vehicles and as we move forward into <unk>.
Obviously into the phase down of of the refrigerants that we currently are using the <unk> and such.
I think there'll be a slight acceleration on the remaining balance of those 22 units coming forward.
Third to be replaced.
Okay. That's helpful. Yes, that's our hope.
Got it thanks Paul.
Again, if you have a question. Please press Star then one.
The next question is from Nigel Coe with Wolfe Research. Please go ahead.
Good morning, guys good morning.
Hi, al sorry about.
So then what happened there, but not a thank you page problem at all thank you basically all my questions have been answered at this point. So [laughter] remaining I just wanted to clarify the point on pricing.
You mentioned.
You got 60 90 days notice from the OEM.
Price increases does that.
Allow you a chance to maybe get ahead of that.
The mismatch between price you realized from from your customers. This is what you pay out.
Well it's interesting.
The 90 days is kind of 69 days.
Okay, I think that's right.
Answer the question, though.
Yes.
Yes of course, we can we can move ahead of that.
Okay.
I just want to say that and then on the commercial refrigeration.
So when you talk to your sales, but it's not been so much time here, but it was up 27%. So I'd be curious what drove that extraordinary strength.
All yours Paul.
Okay.
Generally what drove that is.
A lot of it has to do with restaurants supply.
Ice machines.
Region coolers that type of thing was really driving that progress.
Okay rebound than it is.
Okay.
So okay that makes total sense and then just a quick one if I may on.
The other HVAC products outgrew HVAC equipments.
Was that because of the availability issues with them a slight shift towards repair versus replace.
In the quarter.
Opened you just couldn't get product out.
Yes.
So anybody who studied that mix no I have not Barry.
I can take a quick look I mean first is about.
And I've said this for a long time too there is over 100 product lines and 600 vendors in that bucket anything from duct tape too.
Because sunglasses to refrigerant to copper tubing and so on.
So and replacement parts as a component of that.
Replacement parts does not account for the increase because it's it's a single digit increase.
And parts during the quarter. So it's everything else is across you know again.
So 100 different product lines.
So measure of inflation going on as Paul suggested in some of the what I'll call. The building materials in there, which would be flagstar copper tubing.
Other products. It's also been a mission of our business units to grow that part of our business. It has much higher margin.
That's part of the consequences.
Our margin across watsco as well in the quarter.
So not theres not one story, there Nigel and the story is not.
Repair versus replace.
Okay I didn't know you sell sunglasses, so that's something I've done today. So thanks for that [laughter] very stylish right actually you should look at.
Safety.
The hydro plant.
Okay. Thanks.
Thanks, a lot.
It's safety glasses with safety first right.
Right.
This concludes our question and answer session I would like to turn the conference back over to Albert <unk> for any closing remarks.
Well, thanks again for your interest in our company.
We hope.
Hope that you'll join us for more of these calls and follow with as we progress scaling the company. Thanks again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
<unk>.
[music].
Yes.
[music].
Yeah.
[music].
[music].
Good morning, and welcome to the Watsco third quarter 2021 earnings Conference call, all participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please.
Note. This event is being recorded I.
I would now like to turn the conference over to Albert <unk> CEO. Please go ahead.
All right everyone.
Welcome to our third quarter earnings call.
First I hope everyone is safe and healthy given the virus that's going on.
But this is Alan.
Amit Chairman and CEO and with me is a J <unk> president.
Our two executive Vice President and Paul Johnston, and Barry Logan and Rick Gomez Vice President.
Before we start our normal cautionary statement.
Conference call and that forward looking statements as defined by the SEC laws and.
Regulations that are made pursuant to the safe Harbor provisions of.
These various laws.
Ultimate results may differ materially.
Forward looking statements.
Now I am pleased to share that watsco delivered another record quarter.
New records were achieved in.
Every performance metric.
Earnings per share jumped 31% to a record $3 62 per share on a 32% increase in net income.
Sales grew 16% or nearly $250 million during the quarter to a record 1 billion.
$780 million.
Gross profit increased 29% with gross margins expanding 280 basis points.
Operating income increased $50 million or 32% to a record $207 million.
Operator.
Virtuous expanded 100 basis points to a record 11, 6%.
And cash flow for the quarter was a record $238 million.
Today's results are all the more positive when considered against last year's record result, and in light of the industry wide supply challenges.
Colleges that are still going on.
Our teams throughout all of Watsco are doing an extraordinary job taking care of customers and that has made a big difference.
I wanted to say thanks to all of you.
We also ended the quarter with a strong balance sheet with virtually no debt and.
Cash of $137 million.
This financial strength provides us the flexibility to invest in most any size opportunity.
Our press release summarizes important fundamentals that are critical to understand as we continued to invest.
Best and build further scale in what is a very fragmented $50 billion North American market.
An important fundamental is watsco geographic coverage and our large number of low cases across many markets.
The diversity of markets, we serve it reduces volatility and provides.
Its stability during a difficult operating environment such as the one we are witnessing.
Also our large and growing customer base is increasingly equipped.
With our state of the art technology that helps our customers grow their business and purchase more from us.
Another advantage now and in the future.
<unk> is our offerings of the broadest variety of products and brands in the industry the depth and diversity of our product offerings should continue to serve us well.
We're optimistic about current market conditions, let me say that again optimistic about current market conditions and recent trends and market demand.
<unk> remained strong and we see signs of improvement in our oem's ability to help us fulfill that demand.
Looking ahead, the industry will experience more change in the years to come.
Minimum seer standards rise strongly well done by the federal government by the way and refrigerant.
Changes that take shape in the coming years.
Yeah.
And with changes come opportunities, we believe that our long term focus our scale speed the market.
Relationship with Oems.
Technology offerings.
Position us better.
Better than anyone to capitalize on these upcoming changes.
We are living in unusual times, but could not be more positive and excited about the future of the industry and our role in it.
Now, let's go onto our Q&A.
We will now begin the question and answer session.
To ask a question. He may present Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Nigel Coe with Wolfe Research. Please go ahead.
Morning Nigel.
Yeah.
Mr. <unk>. Your line is open on our end.
I don't like you.
Yeah.
Okay moving on our next our first question is coming from Tommy Moll with Stephens. Please go ahead.
Morning, Tommy.
You referenced increasing engagement with some of your OEM partners.
And an.
Increased ability to to help you meet the robust underlying demand.
At this point in the year I Wonder if you've started to talk to some of the initiatives for 2022 planning.
And so what if what if any insight can can you give us on that.
I.
Question, because all of us in the industry are fighting just to get enough product to continue to meet the demand.
But 2022 but that's done for that I think as Paul Johnston.
Yeah first of all I'd like to say that we're not increasing our conversation with the Oems were under we've been continually.
Communicating with our Oems and them with us.
So the relationship there all during the pandemic and even before the pandemic, we were working with them on.
On product planning and delivery planning and all of that.
Yeah right now we're looking at in 2022 is.
What you're trying to straighten the inventories out a.
A bit.
What we ended up with was some of our inventories ended up to be a little bit lopsided on indoor versus outdoor type units. So we're working with them trying to balance that out. So we can sell complete systems.
We've been working with them on what's the transition plans, obviously, you're going to be.
Given that next year as it was a.
Big year, when we're gonna be transitioning in 2023 to the our 2022 and 2023 to the to the new sheer levels.
So it's been a it's a full agenda that we have with our with our OEM partners as far as communicating them and planning with most of them as you recognized.
We're one of their largest.
The largest customers if not their largest customer and so.
We're important to each other.
Yeah.
Thank you both if I could I wanted to pivot to.
To the customer side of the business for you.
<unk>.
Have they been of late two to price increases and I asked that because clearly there's input inflation on the OEM side, presumably in this environment.
Customers are going to be pretty receptive to to your passing that through.
It would occur to me that if you've got product.
<unk>.
There's less concern around pricing, which is going to be pretty well pass through to the to the end user anyway, but any context, you can give us on that dynamic well I think your thought process is a good one but let's see if Paul can fill in the holes there.
Yeah.
We always talk about the equipment.
<unk>.
Those are the most recognized price increases that we have.
And the theater contractors have been accepting of them, especially those who are in the replacement business, perhaps a little more resistance from people who run on the new construction side.
We are also they are also experiencing an uptick.
Yes in commodity pricing with copper going up above $4.70 here recently a pound.
We're seeing flex start go up double digit.
Pretty much every every three to six months.
So a lot of a lot of the other products that go into actually installing the units are going up.
<unk> same time.
So I think we're all a little bit numb to it including our contractors and accepting it.
Trying to pass it on as best we can given the timing of how many price increases we've had here in the last.
12 to 18 months, but it doesn't seem to be slowing demand our demand is strong.
But just.
I appreciate the context I'll turn it back.
The next question is from Steve Volkmann with Jefferies. Please go ahead.
Good morning, guys just following up on that last one how are you guys seeing any change in your mix.
None of the tips to the type of equipment customers are willing to pay for it at this point.
Well, that's a very and.
Lightning question, because there is a chip shortage so well.
We see high efficiency demand, there, but were unable to fulfill it.
Given the.
The supply of that product.
Uh huh.
Paul do you want to fill in.
Very true.
It takes more hours for an OEM to make a high efficiency to make an 18 or 20 ship product.
And so the focus has been pretty much on the on the 16 Seer 15, Seer 14, Seer 13 seer product.
So a little bit of a shift.
Shifting there, where we're seeing a bump in <unk> sales.
And obviously 2014 13 share sales in the small decline in the 18 twenties here.
Having said that 18 20 seer has never been a major portion of the market and obviously its something we would like to have is a major portion of the market.
With.
The new energy standards will be able to expand.
The very high efficiency products as a greater percentage of our sales.
Yes, just to just add a thought to that just so it's clear on the data what the data says the the high efficiency mix increased again this quarter its almost 11 straight years of.
Here's where it increased but that ultra high efficiency is where the.
What are the missing link is in didn't did not contribute but overall high efficiency grew at a faster rate than the base efficiency.
So it almost sounds like as or if maybe I should say if the supply chain issues ultimately normalize.
Lies and we have these kind of seer changes happening in 'twenty three.
We may actually see a better mix shifts going forward.
I would agree we will absolutely happen.
I'm going to see a better mix change because of the efficiency going up to.
Cortines here in the north in 15 in the South so which.
Quarter ended by the federal government Yeah, Yeah. So we're going to see that regardless you know our focus is we really want to make sure that that ultra high efficiency that Barry refers to.
Grows at a faster rate and becomes a more material piece of the market.
Understood. Okay. Thanks, and then a quick follow up.
As you mentioned in your prepared release that SG&A spending was a little bit elevated and you expected that to normalize as we go forward. Obviously gross margin was also a very good do you also expect gross margin to normalize going forward or do you think you can kind of hold the rate that we have.
I think well that's it.
Very perceptive question.
Looking into the future [laughter] theoretically that's my Joe who wants to take a barrier ball.
Alright that sounds like your question [laughter].
So let's get SG&A first because that's easier to think about obviously everything we've said and I just want to say this also so it's off the table for the rest of the call.
Sales volume in the second quarter was up 29% on a same store basis, I think something like that.
So this has been an.
An extraordinary summer if you look at things as a combined.
Last six months, let's not just talking quarters, let's look at our seasonal realities of what we dealt with extraordinary demand.
SG&A that needed to deal with.
A lot of stuff going on in terms of supply chain to make it work.
A lot of austerity that came off last year's comparison that is now in this year's numbers.
And just a again as I said drinking through a fire hose.
Over the last six months. So SG&A, we wanted to highlight some things very specific to SG&A that are big buckets.
And.
And.
The word normalized usually means goes down or declines.
Let's put it this way there's a lot of variable cost that that that increased.
Costs remain variable and will adjust themselves to whatever the sales volume is.
Over the next 12 months.
As al suggested.
In the remarks, we're not necessarily seeing a slack in demand as we get out of season right now.
In fact, we're seeing increased demand as we're getting out of season from from let's say recent days.
And so our SG&A will normalize but again.
Time will tell and and and and the variable costs.
Sure that should should adjust over time.
Gross profit as a more interesting question.
Obviously I've said this for a career and we said this in our comments over many years inflation as.
It's something that we pass through and pass on.
It adds to our gross profit equation.
Equation and makes more money for us there's no question of that.
We're also doing immense work with technology to improve pricing and margin.
And to optimize pricing.
Isn't necessarily mean, just getting higher margins that means improving our pricing profile.
Across customer.
Competitors' products and so on.
There's a benefit this year and that equation, which is only just the beginning of.
Of a pricing discussion.
I I think you know mix also obviously has the benefit and you heard Pauls comments earlier about mix may be looking for it.
But that's a big crystal ball to look.
Customers are to be honest and.
But some of the undercurrent of inflation and mix.
And technology and incentives and the way, we pay our salespeople and commission on our sales force.
You know all those things are pulling in that direction stolen.
Next year I will tell you more when.
Into more but that's that's what I would tell you today.
Alright fair enough. Thank you guys.
The next question is from Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, guys. Good morning, John.
Hey, so just a follow on on the gross margin it looks like.
If I do the math right.
When we know the gross margins on the acquisitions are higher than your blended average and they ask Jay seems higher on a blended basis is there.
Anything I I know like T. C. I think is the biggest acquisition contributor, but maybe just speak to those dynamics those impacts.
Well I got to say Barry will answer that but.
This is a $6 billion a year business and what you're talking about it.
Small.
Relative to the overall AR and revenue.
I can't imagine that that's driving the overall.
The numbers that you.
But Barry go ahead.
Yes, Jeff I mean, and again it was very isolated to what we've acquired lately and yes, the margin and yes. The cost of doing business is higher that's unique and eccentric too.
2222 T E C and it's part of their legacy and profile of how they go to market. So.
Okay.
They've had an exceptional last six months as part of Watsco, there's an exceptional year coming into this year and great.
Very proud and happy that they're part of watsco.
Yeah.
Okay, great. Thanks.
Thanks for all the color on the 'twenty one performance I was really helpful.
So just sticking.
We're sticking to the price dynamic I think he's called out 6%.
Increase in average selling price for the year to date I'm, just wondering if that number overall as higher within the context of <unk> and then if there's any noticeable difference in that 6% between.
Equipping.
<unk> versus <unk>.
The non equipment.
Yeah.
Okay.
Yeah, I'll take a first stab at Barry do you want to take the second half, but you know is there a is there a difference between equipment and non equipment yes.
Anything that is commodity based has a.
As an external profile or the pricing.
<unk> fluctuate on a daily weekly basis, and as I mentioned earlier things like copper refrigerant steel has definitely been a bit on the incline and they've gone up faster than.
For the last 18 months have gone up faster than equipment equipment has a more slower cadence to it because.
It has to be an announced period.
<unk> nine before we have a recognized price increase so normally we get.
Anywhere from 60 to 90 day lead time on the announcement before it's implemented so it gives us an opportunity to adjust ourselves.
So timing is is.
It's not unique to the third quarter or to a 2000.
A ton so far.
Okay.
The next question is from David Manthey with Baird. Please go ahead David.
Thank you good morning, good morning, everyone.
So just definition really when you're talking about the six.
<unk> 20th that year to date price increase on.
Residential HVAC is that the typical price mix definition that you've given us historically.
Yes, yes. It is yes it is.
Okay. Thank you.
And then.
Yes.
6% the increased investment that you outlined and thanks for doing that adding that clarity.
Is some of that incumbent on the gross margin being elevated here and Barry you noted that some of the variable expenses will obviously naturally flex down if things moderate a bit next year.
As far as if gross margin moderates.
And sales moderate is is this a fluid plan do you plan on modifying that investment plan if things.
Moderate a bit next year.
That question.
But the answer is of course [laughter].
[laughter].
I mean, this is 670 673 location managers managing p&l's.
You know 30 35.
Superpower presidents running markets.
It's a data platform.
With that I'm, suggesting and telling them.
And reminding and monitoring margins and costs and profitability every single minute of the day.
It's our incentive systems that bet that geared toward EBIT growth.
Cash flow production.
So yeah, I mean culturally.
That's our intent and all of the obvious obvious culture as profitability growth.
Responsible waves as what the Michigan so.
It may be different in Texas than in the in the Massachusetts next year.
It may be different in California than it is in Chicago.
So the centralization and data.
The flow that goes on in markets is how we operate.
And when I say of course, it's because all of those dynamics get measured and.
Carried out in different ways in different markets. So.
So clearly all of these dynamic all these moving pieces that are going on are different everywhere.
And so but culturally.
The answer is of course.
It'll be actions and reactions going on as things change.
Yeah got it okay, and just quickly as it relates to technology investments or others.
Every friday, but level decisions I know theres not that many of those but.
What about those I mean, those are obviously not controlled by the the markets individually or those subject to or the set in stone Island, Yeah. Let me deal with that I agree that that's that control. The way you stated, but lets have AJ respond to that.
Yeah, well as you saw in our release our investments in technology continue to grow.
And that's because of where we are maturing things that are already in flight and were taking on new projects and programs all with the intent of continually improving and modernizing everything we do all focused around.
Helping our customers do business with us and helping them grow their businesses.
So as we see more and more opportunity we're going to continue on that.
In other words okay.
We are we are dedicated to the long term.
And as I said, it but we don't see any reason not to.
Continue to invest regardless of what's going on and fluctuations from season to season.
Yeah got it thanks very much guys.
The next question is from Jeff Sprague with vertical research. Please go ahead. Good morning, Jack Good morning, Good morning, gentlemen.
Thanks for the questions.
I was wondering if you could give us.
Your early thoughts on behavior around the potential for pre buy next year and I asked the question kind of in the spirit that.
Folks are program for prices to move up and so is there actually much logic or much to be gained from the distributor.
<unk> wanting to pre buy into that efficiency change.
Well right now the reality is a pre buy doesn't help anything we can't get what we want.
Now and we don't seem to be.
We don't see an end to that yet.
So we don't even face those pre buy decisions.
Theaters now has enough product to meet the demand there seem to be having a.
At record levels.
Into the going into the fourth quarter.
Yes.
The adjusted pre buys of course, we would we have a lot of data that and a lot of software that tells us how to manage our our.
We need and in inventory.
<unk>.
But right now it's a scramble.
You would be interested in pre buying.
Along maybe historical patterns, if the product was available to do so.
No no I don't I don't think that would be the case, we just want what we have on order.
Our investment and bring it in exactly al spot on.
I don't see a pre buy we don't see it.
Pre buy coming at US we want to make sure we get the inventory that we need to meet current demands as well as early part demand.
I don't think anybody is looking at care.
Carrying a huge amount of inventory into.
<unk> will be 'twenty, two because there's going to be different government regulations, which youre going to have different requirements for where and how you can sell them. So I don't think it's going to be an issue this year.
Yes, I was sort of meaning pre buying in 'twenty, two not right now but.
And it sounds like the answer is probably the same regardless.
Yep.
20th and sort of related to that what percent of your sales now is above.
The minimum efficiency standards.
Across the platform.
They all have to be.
100 <unk> minimum.
Thanks.
Ben you got 80, or 90% I would think at right I guess the question is.
What's the percent above.
Above the minimum that's a good question do we have that data available, yes, it's it's quite a bit higher than you think it's.
Yes.
Higher than.
50% is actually above the minimum.
Interesting that is higher than I would've guessed alright, thanks for the color appreciate it.
You've got a lot of other rules that apply to it such as the EPA.
On new new home construction in order to get your.
Your sticker from the EPA you have to have a higher efficiency product.
And Theres, an awful lot of the 14 seer product that actually goes to 15.
Interesting okay. Thank you I appreciate it sure.
The next question is from Chris Dankert with loop capital. Please go ahead Chris.
Hey, good morning, good morning, everyone.
Maybe this one's a little more targeted AJ you did hire.
Some new projects I guess anything specifically, you're right discuss over at the Skunk works watsco yet.
[laughter] noted.
To talk about there.
You got about a week.
Yeah exactly exactly they're all long term thing.
Hi, lower long term company so.
We don't need to highlight things that are just in early stage development, but I'll tell you. Some of the earlier things that are getting a little bit more mature, which we I don't know if they couldn't.
In this quarter's release, but our Oncall air.
Which is our tool to help a contract or sell.
To their customers.
She and her comfort, which is a companion bill to help them sell a financing they're both continuing to grow.
And very exciting and customers that are using those tools and really our technology and general continuing to be better customers for us meaning they are stickier their attrition rates are much lower and their growth rates are much higher.
In credit all the data shows that.
These technology investments are paying off and having a nice return.
Got it and you've given us some of the numbers in the past I guess are you guys willing to comment on kind of what E. Commerce growth was in the third quarter here. Yeah. We can give you that sure.
Who's got that number.
Alright, Rick anybody.
16% was the growth in e-commerce for the quarter.
Rick I was trying to get you in but very touch Oh, sorry.
[laughter] good deal. Thanks, so much guys I appreciate it.
[laughter].
The next question is from.
Ryan Merkel with William Blair. Please go ahead.
Alright.
Hey, good morning, everyone.
So I think our I think it was al maybe you mentioned that supply chain is going to get better in the fourth quarter is that all of your equipment Oems are certain Oems doing better than others.
Let me say that.
It's not got.
Bedroom just yet.
And when I say that I'm talking about all of them.
We're hoping it will get better in the fourth quarter.
But as I said earlier the demand is so high now that it's not easy.
But then to catch up and it's all of them and there's not one that's.
It's better than the other I mean, there as you know were probably the biggest customer for all of them that we represent their brand no I would still say, it's it's still catch up.
I don't see okay.
Any.
Solutions to supply chain yet.
But we're optimistic.
Okay, and then I don't know if you mentioned this but did you leave revenue on the table you think just because you just didn't have okay, probably hard to quantify that.
Cereal or.
Yeah Yeah.
Okay.
Yeah.
We'd take a shot at that Paul.
I remember.
Let's not speculate I'd rather.
Pure speculation.
And to the salesman. It's you know it's a lot higher than it is when you listen to the data.
It's a way.
Yeah.
Brian.
Oh amps are running flat out and we.
They're doing the best they can.
And I'm talking about all of them that we buy from them.
I think we have been.
Besides the.
The three major equipment Oems, we have numerous other Oems and they're doing the best they can have they caught up not even close.
Will we see some.
Improvement as the quarter proceeds.
Think so.
Okay. That's helpful and then noticing theres more private equity interest in Asia, HVAC distribution lately and I'm. Just curious are you seeing multiples ryzen space in our.
Is there more competition for deals.
Well that that question to answer.
Sure with private equity gets involved.
There is more competition is it affecting how we think about our strategy.
We won't we will not chase pricing because we're in for the long term I don't know how long theyre going to be in it.
In terms of valuations for businesses so but.
So they're there.
A large number of distributors, what's our latest count very more or less.
And so in terms of acquisitions 65, no no no.
Available distributed independent distributors, how many.
Yeah, Hi.
Hi, there so theres room for.
Yeah lots of stuff for us.
Okay helpful. Thanks, Scott.
The next question is from Steve Tusa with Jpmorgan. Please go ahead, Hello, Steve Good morning, guys.
How's your dad do it.
Has my dad doing yeah, he's a watch for Cheryl Lee Tillman.
[laughter] yeah.
You know, it's like a 2000 and for so.
I guess I guess he's doing fine.
So on price.
[noise] booked 12% Asps and a second.
Quarter, 2% in the first quarter, I think you're saying it's up 6%.
That state can you just give us what the I mean, given the seasonality I guess, we could kind of do the math, but what was the third quarter.
ASP for U S resi.
A year.
Very consistent with the overall, 6%.
So why why did that D cell no I'm missing something.
Year to kind of like the comps.
Most guys are thinking things continue to accelerate with all these price increases coming through.
Any any particular reason why that decelerated quarter to quarter.
I'm not sure in season things changed very much in terms of pricing over the course of the season there were some some late quarter pricing.
This increases that flow in I think September will flow into the fourth quarter, but in seasons data there was not much variation in.
And.
With.
The kind of volatility that went on I'm not going to surmise much over the last 90 days just given what was going on.
But I will.
Something we sense that there will be more price increases in the near future.
Right. So so that would suggest that your U S. Resi volume was down a little bit in the quarter right now.
That was up slightly.
No.
Volume that was not that it was up slightly you know amongst our major most of our.
A major resin suppliers.
This increase that they had in the third quarter was September.
So got it didn't get impacted.
Or do you think you guys took market share in the quarter like as the industry.
I mean, if you guys tip.
<unk> market share that means the industry was down in the quarter right.
You really don't know for the quarter until all the data comes out I think we said this on the last call the shipment.
The shipment data versus movement that has been so out of out of sorts here for about the last 12 months I think gets thrown all up our models off.
Yeah.
What I'd like to say we.
And market share well you know August shipments as you know we're down.
What two 2%.
July was down five 6% so.
We werent down so we must have gained market share but I.
I don't think Thats, a hello, Hello statements.
We get.
And then so for these price increases that are coming through should we expect price to accelerate here in the fourth quarter I mean can you get to kind.
Kind of.
I think back to that kind of high single double digit level for the fourth quarter.
No idea.
No.
Kent.
Statements death.
Yes.
The actual demand is in the fourth quarter and we don't know what that's going to be got it and then one last one just on inventories they were flat quarter to quarter.
Hard to tell what would be kind of volume and what would be.
Some sort of inflation in there.
It's down a bit seasonally.
Can't predict.
Is there I'm trying to reconcile that with kind of the the supply constraints that are out there could you guys looked like a pretty good on inventory how do you feel your own inventory situation as well Barry.
Barry gave you a clue on that in terms of having.
Inventory, particularly in the equipment.
Yep.
We only have part of the system not all of the system. So we are carrying unusually high numbers of this this item, but it doesn't we don't have the matching part yet.
Of the of the unit very elaborate on that.
Yeah, just just do some math to the our version of inventory.
Our returns, which we can calculate usually monthly averages. It's hard for you all to do that but the monthly average inventory turn as of September 30th was identical to the prior 12 months. So.
All the all the investment level. If you will is the same.
The mix of that investment is what we're talking about it needs to improve.
We won.
And Oh, Steve there's not a great story there was there's some inflation, yes, there's some shortages yes.
There's.
A lot of product being moved around as we mentioned in the press release in terms of our of our.
<unk> to handle customer needs.
And all of that balances out in.
And so the inventory position as we go into next year.
Well, it's still dependent on normalcy, which means normal lead times are normal.
The normal ceiling in terms of order flow and we're not there yet.
Right right right well congrats on executing continually hearing.
Pretty challenging environment, thanks for the info.
Thank you. Thank you.
Please excuse any mispronunciation. The next question is from Jeff Polk Winski Zelinsky from Morgan Stanley. Please go ahead good morning.
Well at least I know, who I am.
Good morning, guys.
[laughter] you should you should make them spell out without looking at.
Well it was good to.
So far from you as soon as you started on the on the presentation comment.
Good morning, guys. Thanks for taking the question.
I guess, maybe first question on some of the availability stuff I know, we've kind of tried in this path a lot already but.
Even though it is not a critical market to watsco, we are transitioning into furnace season, you guys do have some.
So im exposure there in a few regions of course isn't that an availability you look any different than the AC market I mean, obviously the lines arent the same components aren't fungible like any any improvement just by virtue of turning on furnaces. This year.
Yeah furnaces are an important part of watsco.
Let's put it that way, especially with the acquisitions that we've made.
Over the last several years.
With Peirce Phelps in T E C and then in our supply and desktop et cetera.
Furnaces right now.
What we're seeing there is kind of an inversion of little bit to the air conditioning, we need more of the what we call the scanner.
Standard furniture, right now and there seems to be some shortage on standard furnaces, where we're getting some of the high end furnaces.
Just got off a call with one of our groups on furnaces and.
And a manufacturer and we're trying to supplement that and make sure we get them in.
There may be a little bit later than normal normally we're able to do it.
Pre season with the contractors to presell furnaces into the marketplace.
This year it looks like that may be a little bit of a delay coming up with the preseason program.
Got it and then just on the refrigerated transition or I guess, the phase out on our 'twenty two I think some of the other Oems have described it.
Sort.
Sort of de facto a $1000 office system, because it's cost avoidance on having to recharge the system that had worked on or had a week.
I guess, maybe a couple questions off that.
What is sort of the pricing on our 22 today and how does that work into homeowners.
There is advantage in.
I feel like if we would have this conversation I don't know seven eight years ago recycling of refrigerant was something that was a little bit more of a topical moment in time like isn't that helping at all so just maybe speak to how much of these upgrades or replacement is driven by.
The the refrigerant.
And maybe some of the numbers behind that if you wouldn't mind.
Yes.
Number of R. 22 units is decreasing obviously every year.
My Best estimate is it's probably probably 20, 25% of what it was when we when we did the transition so.
RMP theres fewer units out there that we have to service.
But the other side of R. 22 is that they would drop in replacements.
From both Dupont as well as from.
From arc amount or Tumours and Arkoma that.
We're able to able to work around any sort of.
Higher prices from shortages.
There are 22, we continue to see 22 sales is just a raw gas.
On the residential side at least continue to move down.
Okay. So the actual like homeowner economics, havent change that much because of these dropdowns.
No it really hasnt and if you think back.
Just how many years it's been since these 20 since we went with.
For 10 across the board.
A lot of those units that are have become replacement vehicles and as we move forward into <unk>.
Obviously into the <unk>.
Phase down.
Of the refrigerants that we currently are using the <unk> and such.
I think there'll be a slight acceleration on the remaining balance of those 22 units coming forward to be replaced.
Okay. That's helpful. Yes, that's our hope.
Got it thanks Paul.
Again, if you have a question. Please press Star then one the next question is from Nigel.
With Wolfe Research. Please go ahead.
Good morning, guys good morning.
Hi, sorry about that I talked about earlier, so that will happen there, but not a problem at all.
My questions have been answered at this point.
The remaining.
To clarify the point on pricing.
Wilco mentioned, you get 60 90 days notice from the Oems on.
On price increases does that allow you a chance to maybe get ahead of that.
Mismatch between price you realized from from your customers what your payout.
Well, yes, it's interesting.
We did 90 days.
At 69 days.
Okay. Thank you.
Answer the question.
Yes, yes of course, we can.
We can move ahead of that.
Okay. Okay.
I just wanted to say that and then on the commercial refrigeration.
So when you talk to your.
Sales, but it has not been so much time here, but it was up 27% said they would be.
What drove that extraordinary strength.
All yours Paul.
Okay.
Generally what drove that is.
A lot of it has to do with restaurants supply.
Ice machines.
Curious region coolers that type of thing what was really driving that progress.
Okay rebound that is open okay.
So okay that makes total sense and then just a quick one.
On.
The other HVAC products outgrew HVAC equipments.
Was that because of the availability issues with them a slight shift towards repair versus replace.
In the quarter, because you just couldn't get product gaps.
Yes.
If anybody studied that mix no I have not Barry.
I can take a quick look I mean first is about.
I've said this for a long time too there is over 100 product lines and 600 vendors in that bucket anything from duct tape to sungard.
Sunglasses to refrigerants copper tubing and so on.
So and replacement parts as a component of that.
Replacement parts does not account for the increase because it.
No budget increase.
And parts during the quarter. So everything else is across you know again 100 different product lines.
So measure of inflation going on as Paul suggested in some of the what I'll call the billing materials in there, which would be flagstar copper tubing.
Other products it's also.
So Ben and mission of our business units to grow that part of our business. It has much higher margin.
That's part of the consequence of the higher margin across watsco as well in the quarter.
So theres not one story, there Nigel and the story is not.
Repair versus replace.
Okay I didn't know.
I know you're still sunglasses, so that's something I've done today, so thanks for that.
Very stylish nationally.
Okay. Thanks.
Thanks, a lot.
It's safety glasses with safety first right.
Right.
This concludes our question and answer session I would like to turn the conference back.
Back over to Albert <unk> for any closing remarks.
Well, thanks again for your interest in our company.
We hope that you'll join us for more of these calls and follow with as we progress scaling the company. Thanks again.
The conference has now concluded thank you for attending today's presentation.
You may now disconnect.