Q1 2022 Watsco Inc Earnings Call
Yeah.
[music].
Good morning, and welcome to the Watsco first quarter 2022 earnings conference call.
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I would now like to turn the conference over to Albert <unk> CEO and Chairman. Please go ahead.
Morning, everyone.
Welcome to our first quarter earnings call.
And as she said this is al <unk> chairman and CEO .
With me is a J, Amit who's the president and.
And Paul Johnson, Barry Logan and Rick Gomez now before we start our cautionary statement as usual.
Our first call as forward looking statements as defined by SEC's laws and regulations that are made pursuant to the safe Harbor provisions of these various laws ultimate results may differ materially.
And the forward looking statements.
Well now that Thats over let me report.
The that we had at another.
Exceptional quarter.
New records were set on virtually every measurement up performance.
Earnings per share jumped 109% to a record $2 90 per share.
Sales grew with 34% to a record.
$1.52 billion and operating income increased 109%.
To a record $171 million.
Gross margins expanded.
That along with improved operating efficiencies.
Led to record operating profit as well as operating margins, which expanded 400 basis twice.
So a record 11.2%.
Now this is important the sales growth was strong and consistent across all markets and product groups.
Also noted is the companies that we acquired during the past year also performed at record levels. The reason, we like that is that we believe that shows once again. The watsco is a great home for family owned businesses, we sustain their culture invest in people and provide technology to secure.
Bill upon their very great legends.
Also please note that the quarters results are all the more impressive giving the strong comparison from a year ago year ago was very strong in this year is even stronger.
While it's early in the year, we are encouraged by this terrific start and by current demand trends.
Let me say it again, we are encouraged by terrific start and by current demand trends and.
We could think that 2000 into 2022 should be another record year for watsco.
Looking beyond sales and profits. It is important to highlight some of the important catalysts going on both on a short term and the long term and we emphasize as always as we always do with the long term.
Did the industry is still experiencing experiencing inflationary pressures and the Oems have recently announced additional price increases.
As you can see from our results we are capturing price in the marketplace, given the reliance and necessity of Bache PSE products.
In homes and businesses.
Looking forward to next year energy efficiency mandates enacted by the Mac did a few years ago are now in effect.
And they were raised the minimum standard.
Our base efficiency systems, beginning in 2023.
So the government is very involved and they're raising sufficiency mandates for efficiency ratings.
Mandates now.
Now we're working closely with our OEM partners start transition inventory ahead of next year.
Historically energy efficiency mandates.
Provide they provides us the opportunity for a richer sales mix up higher persistency systems, and importantly, our customers have greater value to offer and it.
Excuse me two to end users and replacing and upgrading older systems.
We have the same expectations going forward.
Federal mandates are also in place it would ultimately phase out the current high G. W. P refrigerant used in millions of systems throughout the country.
10% reduction in these refrigerators isn't in fact now that's mandated by the government.
A 30% reduction is scheduled for 2025 with a further reduction in.
In 2038 for the 30% reduction in 2030.
Oem's are actively developing new products to incorporate the lower G. W. P refrigerants and those products are expected to be launched in the next couple of years.
Yeah.
And as a result of that today's cost of refrigerant used to repair older systems has risen sharply and so too as the cost of repairing and maintaining older system.
[laughter].
Forgive my slight cold.
Ladies working where that contractor customers, we see the opportunity for homeowners and businesses to upgrade systems that will cover <unk>.
Over time more efficient.
I'll, just say that over time will be both more efficient and environmentally friendly that's a nice thing that's coming to our industry.
In terms of our commercial markets. We believe there is potential for greater infrastructure upgrades and climate change capital spending along with an increased focus on indoor air quality.
Although it is likely that this trend will take years to play out what's goes organic sales growth rate for commercial products accelerated during the first quarter to 29%.
That's 29% growth in commercial products in the first quarter.
Longer term there are other potential catalysts expansion of federal state or local program to help fund the purchase of five fishing Z systems.
We see that happening.
The trend towards <unk>.
Electrification and the adoption of heat pump systems to replace fossil fuel powered heating systems.
Yeah like gas furnaces.
And the second half.
And the second phase out to even lower G. W. P refrigerants.
It was on the books in 'twenty 'twenty nine.
This information emphasizes watsco significant role and the drive to lower C O two emissions.
According to the department of energy heating and air conditioning accounts for roughly half of U S household energy consumption.
As such replacing H B S systems at a higher efficiency is meaningful action that help moderate can take to reduce energy consumption and carbon footprint over time.
We offer a broad variety of systems that go well beyond the minimum standards that can exceed 20 seer.
First quarter sales of high efficiency systems, those about the minimum standards.
With 31% outpacing the 26% growth rate for the residential equipment.
Based on estimates validated by independent sources watsco.
Avert at 11.4 million metric tons of C. O. Two E emissions since January one 'twenty 'twenty through the sale of higher efficiency HVAC systems.
This kind of information and more information is available on our website.
Including sources and the substance use to support the estimate.
Simply put.
There's a lot going on and we love our industry.
Yeah.
Better yet we believe entrepreneurial culture.
Custom focused technologies.
Gail.
Access to capital and leadership positions provide unique advantages in our industry.
We are fortunate to serve a large and growing population of contractors and technicians Wendy industry with the industry's most innovative technology.
Our annual run rate for E Commerce sales now exceed $2 billion.
And we can see that our active technology users continue to grow at a faster rate, let me say that again e-commerce use users of Watsco E.
Technology at least the e-commerce platform are growing at a faster rate than those that do not do ecommerce with us.
On call are that's one of our.
Tec Tech developments.
Watsco digital sales platform used by contractors and credit for copper which extends.
Right to the end user.
Continues to expand.
Contractors presented quotes to approximately 45000.
[noise] got.
[noise] households, during the quarter, a 40% increase in and generated $160 million worth of sales.
For our customer a 59% increase.
Over last year.
The information presented today is only some of what is going on in terms of technology initiatives.
As we said before if you have any interest in learning more and let US know we will schedule a time with a Jay and his team.
We believe.
We are transforming the industry and we are always happy to share more about our progress.
With that let's now go on to Q&A.
Yeah.
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 are 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 the roster.
And our first question will come from Tommy Moll of Stephens. Please go ahead.
Good morning, John .
Good morning, Alan Thanks for taking my questions.
Yes.
So an 18% increase in residential average unit selling prices.
You called out that's a combination of pure price plus beneficial mix.
And I think on both points, there's a nexus to some of the technology investments you've made.
Can you help us understand that Nexus.
Well, that's a very good question.
Barry.
A J and good morning.
Hey, good morning, Tanya well first you know that the pricing actions are always built on.
You know the cost that's coming in the door as we as we receive a higher cost we pass on higher prices and that's the elementary school stuff. That's gone on for 25 years of course.
Yeah.
Cause and effect.
It's a technology discussion is on the pricing is the pricing system. That's been in place now for a couple of years and is more mature today than two years ago and more useful today than two years ago. When you start to see the pricing actions play out.
With all the movement, that's going on across really all product lines not just equipment, 18% is just equipment.
There's been a discussion across now 150 product lines.
600 vendors.
The administration of pricing is much different today.
Then again and it was two years ago. So.
Yeah, not quite answering your question, maybe but just get a sense that this is not business as usual.
This added layer of pricing technology that we have in place.
And on that.
Okay.
Sorry go ahead.
Kind of I would say is that you Rick I, just know that TJ, I'll say I'll bet, but various thing.
Is it differently as you have to think about the scale of what we're talking about with these price increases in the number of customers with deal with a number of products that touch it.
Graffiti.
We have received hundreds of different pricing actions from our 1000, plus manufacturers and we sell those products to 100000 contractors across 671 locations.
The administration of that.
Those changes and nearly every contractor by the way by products and lots of different prices.
The administration of that it can be overwhelming and what we have now with our technology tools allows us not only to administer that.
Quickly efficiently and accurately but it also provided we can get that done so quickly.
It gives us time to put intelligence and analytics to work to optimize pricing by customer by geography by product et cetera.
We cannot really make a difference in the market as well.
Thank you that's all helpful context.
I guess to consider the other side here.
Here Demur.
Demand destruction I'm curious for any insight on.
So in an environment, where you have realized substantial price.
And looking at your numbers I don't think there's any sign today of.
Significant or any demand destruction on the end user side, but it's got to be something that's that's on everyone's minds.
And so I'm, just curious for any insight or.
Or opinions you might offer there.
Barry Yeah, Okay.
Sure well again I. This is not this is not unprecedented.
Several years ago when products went from 10 seer to 13 Seer there were probably 15 15, 20% price increases then just because of the products we.
We didn't see them I understand the demand destruction then.
As you suggest I don't I don't think we're seeing it now I think the fundamentals are simple to understand.
Which is people don't live without our products. They wont live without our products. There is that there's a health question, there's a comfort.
If it's a dozen assets. It is it has to be in business. So I think the necessity of our products has always been a great fundamental for the industry. The.
The other is that it's really a.
A product without a 10 15 20 year life you don't buy these things twice a week you buy them once every 10 or 15 years.
And when you do your upgrading the efficiency of your your dinosaur that you do on in your home.
In contractor collaboration and contractor skill I think has improved.
At a point, where where the recommendation and the installation and really the overall attitude prior efficiency.
It's playing out obviously, we're helping in that with some of our technology as well.
But I think that's the lifecycle that has been in place now for a long time.
And I think if if your real question is at what point does consumer sensitivity matter.
On price.
You'll notice in the press release, we talked about selling 20.
29 different brands of of equipment.
So the diversity and the price points and the features and benefits and the waterfront that we cover it.
It is very comforting because that's part of that's ultimately part of an equation right is how how well the consumer spends money on these things.
And I'm glad we're the most diverse player in the industry to be in that position.
And there's an ROI that consumer that buys high efficiency equipment safely electricity costs.
10 to 15 years.
There is a return on that investment.
Thanks, a lot I appreciate it and we'll turn it back.
The next question comes from Jeff Sprague of vertical Research partners. Please go ahead.
Good morning, Jeff.
Hey, good morning, everyone.
In addition to the revenues the margins pop out here I Wonder if you.
If we could just kind of dig into that a little bit more and obviously you get leverage on a year over year growth, but kind of looking at the sequential right.
Revenue in Q1 is similar to Q4 as it usually is.
And really prior to last year, you know, we tended to see gross margins in Q4, and Q1 being quite similar but we've got we've got kind of a step function change happening here. So.
Maybe you could just unpack that for us.
I'm guessing it's a price on top of price would be by my initial guess, but maybe you could provide a little bit of perspective on how to think about the gross margins here in the quarter and what it portends for the year.
Oh.
Well, yes, it is a little bit of price upon price increase we had price increases are at the end of the.
The fourth quarter, you know that range.
From 8% to 12%.
And then we've had a secondary announcement of price increases that are coming on April and May.
So I think.
The prices have continued to move up and as the prices continue to move up obviously, our gross margin goes up with it.
And can we just touch on inventories a little bit here are obviously theres a lot of <unk>.
Rice and mix I would assume going on in the inventories as as you report them.
It is a is there any particular disconnect there.
And inventories relative to what you see playing out in Q2, and there was a comment about transitioning inventory with the Oems. So just wondering if you can elaborate on on what you meant there and how you see that playing out over the balance of the year. Okay. If you take the first question obviously the inventory dollars are up.
And we'd look at a reflection of you know how many units do we have in our we set for the season and the answer to that right now is where we're in very good shape on inventory.
To be able to carry us through the second quarter, and obviously the stronger third quarter.
What we're facing is the transition of pretty much all of our skus as they relate to our outdoor eating our outdoor heat pumps and cooling products.
That will go into effect January one 2023, as we indicated.
However, we're going to be doing a transition earlier than that we're going to try to start moving the new products in late third quarter early fourth quarter. So that we will have a smooth transition into 2023.
Obviously when that occurs we're going to see another step up in cost and price.
Because the price of the new products at the higher efficiency ratings is going to be higher.
But you're you're anticipating selling newer equipment also in the back half of the year not just stocking and in preparation for 'twenty. Three we look we definitely look forward to showing it in the back half of the year.
Great. Thank you.
The next question comes from Jeff Hammond of Keybanc Capital markets. Please go ahead pardon me, Jeff Good morning, Hey, Good morning. So I just wanted to get back on gross margins. I mean, you guys have had a huge step up from kind of three or four years in the <unk>.
Four and a half.
And then we step up again and I'm just wondering.
Any anomalies in there and this one Q end.
You know if we start to see you know this is this inflation kind of normalize which doesn't seem to be but you know where where do you think you ultimately fall out given the combination of kind of.
Price cost arbitrage versus your structural changes.
That's a very good question I think both Barry and eight and policy and answer them.
Yeah. Thanks, Good morning, Jeff Yeah, I mean first there are there were price increases in the first quarter effective in the first quarter as Paul mentioned.
There is a benefit.
As we turn that inventory and AR and what is a small relatively small quarter.
So just to balance the discussions if we look back sequentially in the fourth quarter of 27.3, I think was the margin.
And this quarter, you know 29 and change.
So there is a there is a benefit that showed up this quarter really in what is a slight quarter four that the benefit of that.
It doesn't account for the entire the entire increase but but but you know I'll say a good part of it.
So that's something that is I wouldn't call. It anomaly is not the right word that is something that is more material and in early first quarter.
And as Paul mentioned, there are there are more price increases on the horizon.
They won't have the same level of benefit in basis points, but they will have a benefit.
Not that that trend will continue we think for the rest of the year.
But don't do them again don't just fall in love with the algebra of it.
This is a structural change in how we manage pricing first of all you've heard that story.
Second of all we are absolutely work with our Oems to invest in our business and when we invest in our business because our mix between SME OEM.
Something that improves and you can see that in the SG&A by the way part of that part of the counterbalance to higher gross profit is sitting in our SG&A expenses through investments, we're making to grow to grow the business long term.
And.
Parts and supplies business, which we don't talk a lot about is were not asked about it very much.
That is where we see the disproportionate level of gross profit improvement along the lines of.
Of the technology gains that we're seeing with with pricing.
Okay.
Okay. That's really helpful. Oh go ahead, yeah, and then as we said you know we've got a price increase you know dropping into this quarter and.
Reasonably assured that we're going to have another price increase with the introduction of the new product in Q4.
And some of the products that we sell that Barry mentioned and when we get into.
The supply side and all the accessories you know some of those have got some long term.
Price advantages, which youre going to continue to repeat them.
Refrigerant is going to become short.
As the government has restricted the amount of a G. W. P type refrigerants that AR can be produced its create a days of supply issue, which is going to be long term at least for the next 10 years.
So there's a lot of things out there a lot of pieces or Barry always puts a lot of moving parts out there.
But I think from a price standpoint.
I think it's going to be pretty much sustainable for the rest of the year.
Then I think a direct consequence to gross profit margin is product mix.
As as we move to higher efficiency that does bring a higher gross.
Profit margin.
As we expand our parts of supplies was that does increase our gross profit margin.
In addition to what Paul and Barry has already said.
Okay very helpful guys, just kind of housekeeping one I'll ask on non equipment what price was.
To what you said on equipment and then just any color on growth rates in the international and commercial piece.
Well I mean, I guess on the not on the non equipment side, you know, yes, we've seen price increases less on the parts side.
Then we have on some of the supplies some of the supplies and you know as I indicated with the refrigerant refrigerant is is moving rapidly upper.
Upwards.
However on the parts side, what we're seeing is we're seeing a strong demand at the same time as we're seeing a strong demand for the equipment side and pricing actions there are.
Lower than they are on the equipment.
All right.
And Geoffrey the answer your question I I've said this now for a few quarters I think.
Overall same store growth rate of 25% is within 1% be it commercial or I'm, sorry, I'd be at a domestic or international.
And how about the geographic markets are very consistent.
And how about commercial growth.
Yeah, we mentioned that on a call it 29%, okay. Okay, sorry about that okay. Thanks, guys.
The next question comes from Nigel Coe of Wolfe Research. Please go ahead.
Morning Nigel.
Good morning, I'll hope Youre feeling good about it sounds like you're stepping out of the code.
I think that comes with age sorry, if I missed it.
[laughter] I know that.
On the mix side I'm not sure you've called out the broke out the 18 defense on residential between pure price and.
So I'm just wondering if you can just maybe just flesh that out a little bit.
And within the context of the question is.
It seems again hit middle of inflationary pressures across the board.
At these times you, sometimes see a mixed down towards more body brands battery products.
And then maybe EBIT. Moreover, Pat doesn't seem like that patent I told him just wondering number one what was mix in the quarter and then secondly are you seeing any signs of that kind of behavior coming through.
Not really Paul not really we're not really seeing any any real change in the way we're way the brands are reacting to it all of the brands all the Oems that we represent are experiencing up sales upsells, which pretty much are normal across.
The board.
As Barry indicated when we started the call you know most consumers only make this purchase every 10 to 15 years. So there isn't really a recognition on their part as far as what is what is the manufactured suggested list price of a carrier versus a goodman versus a train.
So it really hasnt impacted that at all.
Okay, and then what would you say.
Is the mix component of about 18%.
Yeah, Nigel it's not something we break out and that was in that sense.
Okay. Okay, that's fair and then on the inventory side.
I think the message from Jeffs question was that there was a bit.
The 14th.
Kind of stocking up perhaps ahead of the deadline.
Would you expect to continue to build inventory kind of ahead of seasonality into the mid part of year and then send it through.
I mean, how should we think about that.
Well first let me say that the Oems are still.
Supplied.
Challenged.
And we do have more orders.
Because the demand is still very high.
Barry you want to know Paul on that yeah, Yeah, we're not we're not going to build up inventory. This is not a traditional changeover that we had when we went from you know 10 to 12 here and then to 14 seer.
So we're gonna be tailing off very quickly on on the straight cool units, we're gonna be bringing those down focusing once again on on.
What is environmentally good and also can be sold through and is grandfathered and that has to eat bumps. So yeah. This is not going to be a situation where.
The industry will be building up you know low efficiency standard deficiency 14, seer products in anticipation of some sort of a.
A bridge, where they can sell under undercut the price of the new product when it's introduced in the fourth quarter and first quarter next year.
Okay, Great I'll leave it there thanks guys.
Okay.
The next question comes from Ryan Merkel of William Blair. Please go ahead.
Morning, Ryan.
Morning, guys, great quarter, I was hoping we could start high level and what is the outlook that you guys have for resi unit growth in 'twenty two I know the guys over at Hardie are thinking flattish, but you know.
After this quarter it feels like that might be a little conservative.
Go ahead Paul.
You know, it's we normally don't get into what we forecast you know for the marketplace, but the marketplace. Obviously right now is very strong and we're adapting to that.
New construction, which is a small piece of our business, but it's still an important piece of our business continues to be a very very strong don't see that tailing off.
But the replacement demand.
We feel pretty good about it right now, but a lot of a lot of the elements of trying to predict a replacement demand tied to things that we don't control.
The weather and all those things.
Yes, but we're still seeing very strong demand.
Yeah.
Yeah.
We haven't we haven't seen that change yet and the demand equation.
Okay.
We're gonna, saying how about some of this if you look at look through it we disclosed in our press release a bit of a discussion on duct Ductless systems for example, both residential commercial.
You know that the growth rate of that of that product group.
<unk> was up 45% in the quarter and if I've strength trying together three or four years the compound growth rate is.
Well in excess of any overall industry growth rate.
What's the story of Douglas for example, and part of it is our own investment and skill and capability I'm.
Yeah.
Those product lines are big part of it also is the acceptance of those products.
And in homes and businesses.
So we're committed where can work.
Computing today was the RF products in a way that we didn't probably even even three or four years ago.
Mentioned 10 years ago.
So so they're always more going on than just what's the market doing in that.
That would be an example of something that's becoming more material that's important and interesting and.
It gets beyond just what is the market doing.
Yep got it okay.
As a follow up I'm I'm getting asked about inflation and rising interest rates and how that might impact replacement rates.
What's been the history there during a period of rising rates should we be thinking about replacement rates falling at some point in the coming quarters or is that not in the.
You're not pretty quite yet.
Well again, Barry Yeah, I think Barry says it best Yeah Yeah.
Yeah, well first I think again, it's a you have a you know consumers.
Consumers that wallet without the products. So then the question is what do they spend when they are faced with a replacement and contractor. The contractor relationship is what matters most in that regard right.
So again, having access to the brands and our products and efficiencies that may solve any any equation.
Is what we're after.
If you were a factory operated dislocation with a single brand in your warehouse. If you have a different feeling that day, then I think what we have where we're servicing a broad a broad group of price points and contractor types and so on.
Oh It was just my pitch for independent distribution, but.
I think at the end of the day, the consumer is going to figure it out our job is to help them figure it out and.
Contractor relationships are integral to that financing becomes integral to that that's something that we're.
Investing in and ramping up and long term will have the most elegant solution, we believe in the industry for financing.
And again the.
And past past events past recessions, you know, let's say.
If we saw a trade between a.
20 Seer unit.
16, Seer unit, yes, there is price sensitivity, but it's really not material at the end of the day. These are not.
Discretionary purchases.
Very helpful guys I'll pass it on thanks for that color.
Yeah.
The next question comes from David Manthey of Baird. Please go ahead.
Good morning, David.
Hey, good morning, everyone.
Hum.
Question on the price differential as it relates to seer ratings I think in the past it's been fairly linear with efficiency is the price differential between 14 to 15 seer or something in that mid single digit range today.
Tom.
Actually it's.
The 15 seer is not it.
It was a product line, but it is not a material seller in the industry. So it actually jumped from a 14 to 16 seer.
So the 14th year in Sixteens here would be the largest segments of the market today, and let's say double digit difference between 14 to 16.
Yeah, Okay. That's helpful.
And then.
We've talked about this on past calls.
The success that you're having in selling other HVAC products that segment used to lag equipment and lately <unk> been seeing similar or even better growth that a lot of cases.
Are you ready at this point to talk about what's driving that and is it incentives is it training technology what are the key drivers behind the better results you've seen there lately.
Paul.
I guess.
I guess im not understanding exactly what products you're talking about.
Well I'm talking about so you've got you report equipment and then there's other HVAC products and I'm, saying other as a segment historically used to lag the equipment, because we sort of swung between the new construction related stuff.
Ductwork, and thermostats and things and then the repair parts.
So it used to always lag equipment lately, it's been.
Growing much better and I'm, just trying to understand what the driver is there something you're doing or is it just consumer demand, what's what's not sure that I would say, it's a combination of two things you know one yes, we are driving that business that has been a business, which has to your point lagged.
And now we're driving that business with a better availability.
Better arrays of products in the branches. So we have the right availability at the right spot and that's been a technology drive that we've had with our with our inventory management systems.
Secondly, we've actually put people in place.
Who are in that supply type business or in that non equipment business now it and have done it successfully for other people and they're doing it for US now so I think where we're gaining our fair share of that we're looking at attachment rates as far as how many units how many pieces of equipment, we sell and with that how much of the other.
Products should be going with them.
It's a it's a great effort and.
It's something that we're very focused on.
I would add that getting the pricing right to that's another extension of our pricing optimization or is that in many cases, we didn't we were so focused on selling equipment to our customers.
Non equipment wasn't out there thought well now with the tools.
We couldn't get the pricing right and the pricing profile is back with their customers and then market digitally excuse me digitally.
Through our ecommerce and email and mobile push notifications, making customers aware that we sell these products, they're well priced competitively.
And also we have a private label offering and non equipment.
Carton and supply that.
It's also an effective tool.
You are taking share in the market with those products.
Yeah.
Hey, This is Rick I would add just a fourth or fifth layer to that which is that.
Three years ago, if you want to use that as a benchmark we.
We did not have the number of users today on our mobile apps and our E. Commerce platform that we do today and we've said for a long time that that line items per order through that channel are higher.
The incremental line items are not equipment.
Tend not to be you know big ticket stuff they tend to be accessories. So for instance, this quarter, we grew supply 34%.
And the more the more contractors we aggregate.
On our mobile apps and through our ecommerce channel.
The more we kind a buttress that going forward.
Okay.
Good alright, thanks, everyone I appreciate the detail.
Yes.
The next question comes from Josh put Pas.
Glinski of Morgan Stanley . Please go ahead.
Hi.
Close enough, we all know we all know that.
Yes.
Yeah.
Thats all.
Good morning, guys.
Just on the gross margin commentary I understand there's kind of a lot of factors there, but I guess, Conversely, also an awful lot of daylight between 24% and I guess nearly 30%.
They have to get a little differently. If you guys were in this kind of like 26.
2007 type range, where you were at last year.
Yes, if I said you were there two years from now would you be happy with that we'd be disappointed because it didn't go up further.
<unk> was a little bit more anomalous like how would that sit with you.
Okay.
I don't understand the question.
Why do we think about gross margin gross.
Profit margins 27 long term is that good or bad.
Well, we hope to do better than that.
We have an express that before but.
What we think is with the investments that we're making we should be able to do considerably better than what we've done in the past with gross profit margin considerably better.
And for all the reasons, you're starting to hear.
You know.
The wave of higher efficiency government stimulating it there.
We had a peak at some bill I don't know, if it's going to actually pass, but theyre going to incentivize.
Consumers to buy.
Higher efficiency systems.
Our own ability to merchandise parts of supplies is growing by the time our e-commerce is booming.
I mean, there are a lot of things that we're doing to raise that gross margin.
Okay.
I don't think.
I am not stuck to the 24% of the items.
And that's going up absolutely.
I completely agree and Josh if you know us we are never satisfied right. The whole mission of the company is to always continuously improve everything we do in all of our results.
There is no level at which we're satisfied we're always shooting for more.
Okay, and then just thinking about <unk> I think seasonally has a lot of things that can move around and maybe not massive barometer for the year, but yeah. The levels of activity that contractors are seeing today is that an early start to the season is it catch up on stuff that couldnt get done last year because either.
Yeah labor equipment itself was less available like how should we think about what's going on today.
Relative to kind of when you get into the real bulk.
Bulk of the season like is this 'twenty, one kind of deferral activity that you you've made up here.
Wow.
Not that I don't think it was that way yes.
Don't think there's any real way of knowing Josh I would say there is no one no one tends to replace their system ahead of time.
They think it's kind of a break in in April . So let's go ahead and get it done in February I, just don't think that's ever.
However, a consequence you know.
I think in our experience the shoulder the shoulder season.
It's a very good indicator of how the consumer is behaving.
It's it's a time, where there is maybe more discretion going on instead of an emergency situation like in July .
If price and margin and yield in terms of gross profit has improved over the last six months and they have lots of good things over six months in the shoulder season.
I think that speaks well to what the consumer is doing.
Yeah, I agree with that.
Yeah, I don't think we have any way of knowing you know what what what motivates the consumer at this time you know historically, what we've looked at is about 80% of the units are replaced because in an emergency situation.
The units down and I need hot or cold Air.
About 20% of the consumers buy because they plan to purchase.
Ahead of time to what Barry is talking about and I don't I really can't foresee if theres been a real major change in that dynamic.
Great.
Yes.
The next question comes from Steve Tusa of Jpmorgan. Please go ahead.
Barney Steve Hey, good morning.
Sorry, what did you mean.
I mean, when you said the heat pumps are grandfathered in.
The heat pumps, you can continue selling the the current heat pump.
Into next year.
And then that's it.
That doesn't change going forward or is that just you can do you can sell them that you can take them in inventory in and sell them out that there still are.
The step up of acquired on on the heat pumps, there will be a step up required on the heat pumps, but any inventory that you have is grandfathered and can continue to be sold for the next year.
Got it even in the south.
Even in the south yeah, whereas.
Great Cool thing.
The government is very interested in moving away from gas furnaces right because of the emissions. So heat pumps solves the electrification through heat pumps. It solves a lot of those issues.
Right.
I feel I recall in the past you guys talking about targeting a.
10% operating margin at one point I don't know if you've ever kind of put it in print, but you had talked about that obviously, you're kind of blowing through that today I mean is this.
Is there a time, where you'll say you guys can do.
So low double digit 15% I mean is that is that kind of you know what the trajectory looks like for the next couple of years.
Well, that's our goal to increase the EBIT margin for sure.
Okay frankly.
We worked tirelessly at that our profitability and yes, I think those numbers are possible.
Okay, and then just one last one what what is total what was total price capture for the total company for the quarter.
See we only report on the equipment, so that the 18%.
Okay I had to try thanks, guys I appreciate it.
And if I.
8%.
Okay.
Once again, if you would like to ask a question. Please press Star then one and our next question will come from Chris Dankert of loop capital. Please go ahead.
Good morning, Hey, good morning, guys.
Again to circle back to gross margin because it was just kind of such an impressive number here I guess it would be fair to characterize you guys. Finally, hitting whether it's critical mass in kind of the adoption of the business intelligence tools and the operational efficiency tools is that part of what's really driving this uptick obviously price on price goes.
A long way, but.
It sounds like your commentary really is pointing to Hades efficiency tools to finally hit a point where it is.
At least a substantial driver of that gross margin improvement in the US is durable that's a fair way to characterize it.
[laughter].
Alright, who's going to volunteer for that one Barry Paul H H.
A J I mean, Barry said it early in the call is that.
Some portion of this is structural.
This price on price like you said that there is structural as well in business intelligence in moving our the customers' purchasing to online and all the other things that are happening in terms of our analytics and our process improvements and so forth those are structural in there and again, we're never satisfied we are always seeking to continuously improve.
These dimensions and they should result in higher gross margins and higher EBIT margins overtime.
That's been the plan didn't and yeah. I think we are we are absolutely seeing some of that.
And you'd have to say hey, we still have a lot of runway on.
Oh, my gosh odd.
To implement phase all the way through it.
We are excited.
Maybe we're in the second inning now out of the first thing.
Okay.
Yeah.
Okay. This is Michael again like I said it seems like this has been you know.
Since 2017 for lot of these programs it seems like all of a sudden you're certainly hitting hitting our stride on some of them. So I mean, maybe you said, there's a lot of runway where you see the most runway going forward is there a particular program or is it just integration is it Justin.
Driving adoption, how do we think about these tools going forward and what they can do.
You mean to quantify that.
Yeah, I mean, if you just kind.
Do you want your that'd be great I was more thinking.
Okay.
[laughter] Oh.
We always invite you and others.
With us really understand or start to understand the scope and the scale of what we're talking about with all of these programs at less than three hours together and.
And maybe to scratch the surface and you cannot understand the breadth of it that that might be a way to answer your question, but that's a very good anyway.
Yeah, I would say I would say that the Ts of that is this that.
E Commerce is meant to fit any customer anywhere and you know period not not larger small not.
North or south, but any customer we believe should be on the platform.
And so to the extent, we have let's say $100000 customer that's somebody else's million dollars customer how do we get access to that book of business through the technology, how do we.
Get that adoption going how do we make a material dent and what is the smaller customer and make them larger customers. So that's my TS is is if you if you spend two or three hours with a J and team you'll understand how that's being developed and how it's being done.
And I could add one more thing and that is with all the labor shortages that everybody's experiencing including in the HVAC industry.
We also forget that our technology improves the efficiency of the mechanic in the field.
Poops his productivity so that he can perform more jobs, so it becomes more and more relevant.
If we're able to improve the performance of our customer.
That's a benefit that a you can't just get from any any location except for watsco location.
So nothing excellent segue I guess, so to my follow up here I mean, adding 600 heads in the past year I guess.
How do we think about hiring going forward are you finding decent availability of labor or just any comments on kind of how we think about about head count from here would be great.
Well, we're very decentralized very entrepreneurial those decisions are made locally.
<unk>.
Of course, if we opened a new branch.
We are constantly doing will add to the head count.
So that's a that's something that's always in motion, we cant quantify to you what we're going to have 50, new employees or because we don't decide that at the corporate level.
We we let the people that know what's going on in the field decide that but we certainly are growing.
Branches and employees.
But it's not something that Youre regional managers have been saying Hey, this is really an impediment to growth at this point clearly it's youre finding the people you need.
No I wouldn't go that far where we we do have issues with sufficient.
But as I said, we're very decentralized local leaders do what they have to do with compensation.
We have a pretty good.
Corporate program for health insurance and retirement, we think.
Those are the things that we can do at our level, but.
At the local level, that's done because they understand what they need to do and they do it.
We do have people leave but it's not.
Yeah. It become a as you can tell by the performance you know something that's.
Hurting us.
Yes, we like that yeah.
Yeah.
Really not that big of an issue, but glad to hear that I mean, it sounds like you're the guys in the field, making the choices they need to so well lets say thanks, a lot for the color guys and really congrats on the quarter.
Thanks, Okay. Thanks come visit us out here.
Just imagine.
Just to finish that thought can you imagine what a factory branch does in order to beat the question that you've just raised.
How are they going to decide what to pay and how are they going to decide who to hire.
Many of the hiring that's coming from somebody in corporate.
What's a better model.
Without question.
I forgot you guys down.
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, guys I really appreciate your interest in our company.
I think we.
We I've shown you that we can perform well in it.
We believe very strongly we're going to continue to perform well let's.
I'll see you at the next conference call.
Bye now.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
[music].