Q3 2023 Watsco Inc Earnings Call

Speaker 1: Good day and welcome to the WatchCo third quarter 2023 earnings conference call. All participants will be in a...

Good day and welcome to the Watsco third quarter 2023 earnings Conference call.

All participants will be in a listen only mode.

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Speaker 1: Please note this event is being recorded. I would now like to turn the conference over to Al Naamad, CEO . Please go ahead. Good morning, everyone.

Please note. This event is being recorded I.

I would now like to turn the conference over to Alan Ahmed CEO . Please go ahead.

Good morning, everyone.

Welcome to our third quarter earnings call.

Speaker 2: And this is Al Nomet, Chairman and CEO . With me is A.J. Nomet, President, and Paul Johnston, Barry Logan, and Rick Gomes.

And this is al <unk>, chairman and CEO .

With me is a J.

Right.

And Paul Johnston.

Logan and Rick Gomez.

Speaker 2: Before we start, our normal cautionary statement.

Before we start our normal cautionary statement.

Speaker 2: This conference call is forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. State results may differ materially from the forward-looking statements.

Conference call. These forward looking statements as defined.

The laws and regulations that are made pursuant to the safe Harbor provisions of these various laws.

Results may differ materially from the forward looking statements.

Uh huh.

For the quarter.

Watsco delivered a record quarter.

Speaker 2: which is all the more rewarding given that record performance achieved that third quarter last year. Third quarter last year was a barn burner.

Which is all the more.

More rewarding given that record performance achieved in the third quarter of last year.

Third quarter last year was a barnburner.

And so I'm, so happy we're able to beat that.

Sales grew 4% driven by 6% increase in HVAC equipment.

Speaker 2: Sales grew 4%, driven by 6% increase in HVAC equipment.

Speaker 2: Residential unit volumes steadily improve throughout the quarter and price realization continues to be strong.

Residential unit volumes steadily improved throughout the quarter and price realization continues to be strong.

Commercial end markets also remain very healthy.

Speaker 2: As a reminder, we have navigated through an immense product transition.

As a reminder, we have navigated through an immense product transition in 2023, following the step up minimum efficiency standards mandated across the United States by the U S Federal government.

Speaker 2: following the step up minimum efficiency.

Speaker 2: mandated across the United States by the US federal government.

Speaker 2: Approximately 60% of the HVAC systems we are now selling represent new products. Let me repeat that. 60% of the systems we are selling are new products.

Approximately 60% of the H D. A C systems, we are now selling represent new products, let me repeat that 60% of expenses or selling our new products.

Speaker 2: Thousands of customers have been trained. Our digital product library has been updated, adding over 400,000 new SKUs since the start of the year.

Thousands of customers have been trained.

Our digital product library has been updated adding over 400000, new skus.

Started the year.

Yeah.

Speaker 2: As mentioned in our second quarter call, one of our primary OEM partners was disproportionately impacted by the product transition, affecting product availability during the summer selling season.

As mentioned in our second quarter call one of our primary OEM partners was disproportionately impacted by the product transition affecting product availability.

During the summer selling season.

Speaker 2: That impacted this during the third quarter, and I'm happy to share that our locations are now fully stocked.

That impact diminish during the third quarter and I'm happy to share that our locations are now fully stocked.

Speaker 2: Sales growth has returned to the effective stores and our partner is aggressively investing in collaborating with us to drive growth.

Sales growth has returned to the pack this doors and our partner is aggressively investing in collaborating with us to drive growth.

Speaker 2: But the reality is that all our OEM partners were affected to some measure, and all have improved the supply chain to help us meet the needs of our customers.

But the reality is that all of our OEM partners will affect that to some measure and all have improved the supply chain to help us meet the needs of our customers.

Speaker 2: Here's some other highlights. Our commercial business continues to grow at a healthy double digit rate this quarter. And our backlog of projects extend into next year.

There are some other highlights.

Our commercial business continued to grow at a healthy double digit rates this quarter and our backlog.

Projects extend into next year.

Speaker 2: Sales of ductless systems, an increasingly important component of our business, also grew double, they just turned a quarter.

Sales of ductless systems, and increasingly important component of our business.

Also grew double digits during the quarter.

We saw the continued trend of gas furnaces, converting toward heat pumps, which sell at higher average selling prices.

Speaker 2: We saw the continued trend of gas furnaces converting toward heat pumps, which sell at higher average selling price.

Speaker 2: SGNAs, percentage of sales decreased 80 basis.

SG&A as a percentage of sales decreased 80 basis points.

This quarter a good start to what we feel is an important opportunity to improve productivity.

Speaker 2: quarter, a good start to what we feel is an important opportunity to improve productivity and overall efficiency.

And overall efficiency.

Speaker 2: We are optimistic about driving more operating efficiencies across our network as supplies change and improve and operating conditions return to normal.

We are optimistic that by driving more operating efficiencies across our network of spies changed improved and operating conditions return to normality.

We have the tools the technology and then most importantly, the entrepreneurial culture to achieve more.

Speaker 2: We have the tools, the technology, and the most importantly, the entrepreneurial culture to achieve more.

Speaker 2: particularly as it relates to our internal productivity. We are focused on

Particularly as it relates to our internal productivity.

We are focused on internal productivity.

Speaker 2: And of course, our balance sheet remains strong with a small amount of debt offset by cash. In other words, no debt.

And of course, our balance sheet remains strong with a small amount of debt offset by cash in other words no debt.

Speaker 2: As always, the financial position provides us the flexibility to invest in virtually any opportunity as we continue to grow our scale in a very fragmented $50 billion plus North American market.

As always the financial position improves.

Financial position provides us the flexibility to invest in virtually any opportunity as you continue to grow our scale in a very fragmented $50 billion plus dark American market.

Speaker 2: And Manet remains an important contributor to growth.

M&A remains an important contributor to growth.

Speaker 2: this quarter, a great family business joined our family with acquisition of gateway supply in South Carolina.

This quarter a great.

Family business joined our family with acquisition of <unk> with the acquisition of Gateway supply in South Carolina.

Hi.

Speaker 2: I've spoken to the principals and you couldn't ask for higher quality people.

Spoken to the principles and you Couldnt ask for higher quality people gain.

Speaker 2: Gateway is a legendary company and its Sunbelt markets and provides us with the ability to partner with great leadership to grow beyond their current 180 million dollar sales run.

Gateway as a legendary company in its sunbelt markets and provides us with the ability to partner with great leadership.

Beyond their current $180 million sales run rate.

We continue to look for more entrepreneurs and businesses to partnering.

Speaker 2: We continue to look for more entrepreneurs and businesses to partner with.

Speaker 2: Watsco is a great home for entrepreneurs in our space. We sustain cultures, invest in people, and provide technology to secure and build on their great legacy.

Watsco is a great home for entrepreneurs in our space, we sustained cultures invest in people and provide technology to secure and build on their great legacies.

Looking beyond the short term our press release provides critical details and support watch those long term growth strategy.

Speaker 2: Looking beyond the short term, our press release provides critical details to support WAFSA's long-term growth strategy.

Speaker 2: We have an immense technology advantage and we are invested to grow that.

We have been managed technology advantage and we are investing to grow that advantage.

Speaker 2: Our mobile platforms and e-commerce channels have increased customer engagement.

Our mobile platforms and e-commerce channels have increased customer engagement.

Reduced attrition.

Speaker 2: created market share gains, and supported our margin expansion in recent years.

Create and market share gains and supported our margin expansion in recent years.

Watsco Watsco is broad array of products and brands is a competitive advantage.

Speaker 2: WattsCo's broad array of products and brands is a competitive advantage that allows us to serve contractors in any environment.

Allows us to serve contractors in any environment.

We have a leading market share in sun belt markets that provide stability and higher growth rates overtime.

Speaker 2: We have a leading market share in Sunbelt Markets that provides stability and higher growth rates over time.

Yeah.

Speaker 2: We have also made important technology investments with our business that will support margins and productivity in the years to come.

We have also made important technology investments, where that business that will support margins and productivity and new years to come.

In addition, there are several important regulatory and industry catalysts that are in effect.

Speaker 2: In addition, there are several important regulatory and industry catalysts that are in effect, which are listed in today's press release.

Listed in today's press release.

All of these catalysts will be good for the industry in the coming years, and we believe our scale technology and financial strength position us, especially benefit from these opportunities.

Speaker 2: All of these catalysts will be good for the industry in the coming years, and we believe our scale, technology, and financial strength position us to especially benefit from these opportunities.

With that let's go onto Q&A.

Yeah.

Yeah.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Speaker 1: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone.

Speaker 1: If you are using a speakerphone, please pick up your handset before pressing the key.

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Speaker 1: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time we will pause momentarily.

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At this time, we will pause momentarily to assemble our roster.

Speaker 1: The first question today comes from Tommy Moll with Steven. Please go ahead.

The first question today comes from Tommy Moll with Stephens. Please go ahead.

Speaker 3: Morning, Tommy. Morning, Al. Appreciate your taking my questions. Of course.

Morning, Tommy good.

Good morning Al I appreciate you taking my question.

Yes.

I wanted to start on the topic of gross margin.

Speaker 3: I don't imagine you'll get any more than a question or two on that today. Just to start the conversation, what can you tell us about the driver's headwinds or tailwinds from your second quarter to your third quarter results?

I don't imagine you'll get any more than a question or two on that today, but just.

Just to start the conversation.

What can you tell us about the the drivers headwind or tailwind from your second quarter to your third quarter results.

Speaker 3: And then associated with those, if I look over the past few years

And then associated with those if I look over the past few years.

Hum.

Speaker 3: the margin rate tends to improve as you move into fourth quarter from third quarter. Is there any reason that should not be the case this year? Is there something else going on that you want to make sure we're aware of?

The margin rate tends to improve as you move into fourth quarter from third quarter.

Is there any reason that should not be the case. This year is there something else going on that you want to make sure we're aware of.

Well I'm gonna turned out over two persons.

Speaker 2: AJ, the president, and Barry Logan, our chief financial officer.

A J, the president and Barry Logan.

Our Chief Financial Officer.

Oh, good morning, Tommy Yeah, we had a we had a bad going would it be the first question would be on margins are.

Speaker 2: Good morning, Tommy. Yeah, we had a bet going. Would it be the first question would be on margins, or would it be every other question after that? Or the first 10? Right, exactly. So I'll let Rick and Barry get into the details. But I wanted to spend a second, a minute here, and abstract with the layer and talk about the big picture.

Okay.

For the first 10.

[laughter] I'll, let Rick and Barry get into details, but I want to spend a second minute here an abstract at the layer and talk about the big picture.

Speaker 2: and start with reminding everyone what Barry usually reminds us of is that there are many components to our gross margin.

And start with reminding everyone library, usually reminds us of it that there are many components to our gross margin.

Speaker 2: There's the transaction margins or what we make on an invoice by invoice basis, or on a markup basis, if you will. There's cost changes that come from the 1,000 or 2,000 manufacturers that we buy product from. There's volatility and commodity items that we sell. There's internal pricing actions with our optimization tools that we're getting more flow in. There are product delivery costs. There's product mix changes between commercial and residential equipment, supplies, etc.

There's the transaction margins or you know what we'd make an invoice by invoice basis market basis. If you will theres cost changes that come from the 1000 or 2000 manufacturers that we buy a hard problem.

Theres volatility in commodity items that we sell there is internal pricing actions with our optimization tools that were getting more fluid and there are product delivery costs. There is product mix changes between commercial and residential equipment supplies et cetera.

Speaker 4: So there's action in all of these categories all the time.

So and there's action and all of these categories all the time.

Speaker 4: But what I want to get across is a reminder that we're a long-term company.

But what.

What I wanted to get across is a reminder, that we're a long term company.

And.

Quarter to quarter, there's going to be noise and actions in all those categories, but we're focused on the signal.

Speaker 4: quarter to quarter there's going to be noise and actions in all those categories, but we're focused on the statement.

And as we've said.

Speaker 4: And as we've said, the long-term aspirational goal at margins is 30%. And we see that within reach, you know, in time. And let me tell you why. And really it starts with what we talk about a lot, which is our technology, but we should really call our continuous improvement culture.

The long term aspirational goal up margins is 30% and we see that within our reach.

And let me tell you why and really it starts with what are we talking about a lot which is our technology, but we should really call our continuous improvement culture.

Speaker 4: What the technology enables is our teams to be able to do analytics, to start opportunities.

Let the technology enables our teams to be able to do analytics for spot opportunities.

Speaker 4: enhance our capabilities, measure and track our successes in all parts of our business. Like prospecting and winning new customers.

And hence our capabilities measure and track our successes in all parts of our business things like prospecting and winning new customers.

Speaker 4: and changing and improving how customers engage with us with things like e-commerce and our apps, which eventually reduce our cost to serve those customers.

And changing and improving how customers engage with us with things like e-commerce, and our apps, which have actually reduced our cost to serve those customers.

Speaker 4: We can increase with the tech or the continuous improvement. We're increasing our productivity levels in the warehouses. We spend a ton of money moving across the in and out and through our network and our fleet, and transportation, which is now another frontier, how we can use technology to improve what we're doing there. Optimizing our inventory, we've talked about a lot.

We can increase the attack or the continuous improvement, where we're increasing our productivity levels in the warehouses.

We spend a ton of money.

Money moving in and out and through our network and our fleet transportation, which is now another frontier of how we can use technology to improve.

What we're doing there optimizing our inventory we've talked about a lot and there are several.

Speaker 4: will be meaningful gains there. Marketing and sales of the new systems, it goes on and on and on. That continues...

Will it be meaningful gains there.

And sales of the new system that goes on and on and on.

But that continuous improvement culture.

Speaker 4: or what we call technology. It's that tool set to...

Our what we call technology, so it's a tool set to win.

Speaker 4: win in the marketplace and increase what we do. And margins will be part of that. Higher gross margins will be part of the market.

When in the marketplace and increase our what we do and margins will be part of that March drove higher gross margins.

Well the part of our is part of our DNA.

Speaker 4: And more importantly, we'll continue to grow profits and generate a lot of cash.

More importantly, well.

Well continue to grow profits and generate a lot of cash.

Speaker 4: But quarter to quarter there will be noise and I know that that's very interesting to you all Rick and Barry and Paul can much more eloquently answer questions about the noise, but I wanted to make sure that that big picture was communicated and a reminder that we're a long-term company and

But quarter to quarter, there will be noise and I know that that's very interesting to you all.

Rick.

Barry and Paul can much more eloquently answered the questions about the noise, but I wanted to make sure that that big picture.

As communicated in a reminder, that we're a long term company.

Long term, we expect to have not only strong gross margins, but.

Speaker 4: Long term, we expect to have not only strong gross margins, but continuous growth.

<unk> growth.

Okay.

Yes, so Barry I don't know if you want to jump in and put US answer a specific question, but I want to just have that.

Speaker 2: Yeah, so I don't know if you want to jump in and talk, you know, answer a specific question, but I wanted to just have that underlying the conversation here. I think that was well done and Rick too.

Underlying the conversation here.

That was well done and and rig two.

You both can jump in wherever you want.

Yeah, well first I think there's two to three probably becoming analyst for a second there's two things to analyze right cause year over year margins and we're talking about a 90 day period.

Speaker 5: First, I think there's two things to analyze. There's year over year margins and we're talking about a 90 day period and that's okay. We have to address it.

That's okay, we have we have to address it but.

Speaker 5: But I wouldn't get in this box of thinking that every 90-day period is like a new conversation. It's not. It's a continuous process as AJ suggested.

But I wouldn't get into this this box of thinking that every 90 day period is like a new conversation, it's not it's a continuous process as Jay suggested.

Speaker 5: But if I go ahead and put myself in the box and talk about it, you know, obviously our equipment business is a group through, you know, nicely this quarter. Our non-equipment business did not. And, you know, that's in the press release, six percent growth in HVAC equipment, four percent decline in other HVAC. And there was a margin difference.

But if I go ahead and put myself in the box and talk about it obviously, our equipment business as a group grew nicely this quarter.

Our non equipment business did not.

And you know that's in the press release, 6% growth in HVAC equipment, 4% decline in other atria C and there's there was a margin difference.

Speaker 5: in that mix is about 30 days a year over year in terms of just pure impact.

And that mix and that mix is about 30 days to year over year in terms of just pure impact.

Of margin.

Speaker 5: And so the question beyond that is what happened to non-equipment? That's where our commodities reside. 6% of watts go is refrigerant, copper tubing, and sheet metal products.

So the question beyond that is what happened to the non equipment, that's where our commodities reside six per cent of watsco is as it is.

Erigeron copper tubing and sheet metal products.

Speaker 5: Inflation in those products in the corridor cost revenue. Pricing of those products has improved throughout the corridor and is more well established today than it was 90 days ago. So that's good news. But those are some algebraic considerations there. So obviously our commercial business.

And those products in the quarter cost revenue.

Pricing of pricing of those products has improved throughout the quarter and is more.

More more well established today than it was 90 days ago. So that's a good that's good news because those are some algebraic considerations. There also obviously our commercial business.

Speaker 5: Somebody will ask later in the call, through double digits, that would mean our residential business was single digits. There's a few basis points of margin there.

Somebody will ask later in the call grew double digits and that would mean, our residential business was single digits Theres a few basis points of margin there.

Speaker 5: if you again stay in the box of year over year change in gross profit margin.

If you look at it if you're again stay in the box of year over year change in gross profit margin.

Sequentially, which was your question comment before I get to the to your question.

Speaker 5: sequentially, which is your question, Tom, and if I finally get to your question, sequentially, we talked about last quarter having OEMs.

Italy, we talked about last quarter.

Having OEM pricing actions that took effect.

Speaker 5: in March benefited the margin in the second quarter. And that's a nice, again, algebraic benefit to that quarter's performance. Sequentially, no such thing occurred. And that's the noise that AJ is referring to is, you just can't get trapped in 90-day periods and try to gain inferences over a long period of time.

In March benefited the margin in the second quarter.

And you know that's a nice again algebraic benefit because that quarters performance sequentially no such thing occurred and that's the noise that a J is referring to here is you just can't get trapped in 90 day periods and try to gain inferences over a long period of time.

Speaker 5: So if I wrap it up, and Rick, maybe you have more, but the concept of let's look at the last 12 months being 27 and change. That's very consistent with what we've been saying.

So if I kind of wrap it up and Rick maybe you have more but.

The concept of let's look at the last 12 months, you know being 27 and change.

That's very consistent with what we've been saying.

And to add to that in the future.

Speaker 5: where the aspiration is 30%. The other credibility in that is we have business units within our portfolio business units that approach that number today. And we certainly have locations that are...

Where are the aspiration is 30%.

Our credibility and that is we have business units within our portfolio of business units that approach that number today.

And we certainly have locations that are in excess of that today.

So when we talk about continuous improvement or looking out to a horizon. Yeah. That's that's the perspective.

Speaker 5: So when we talk about continuous improvement or looking out to a horizon, that's the perspective.

Speaker 4: Rick, I don't know if there's anything we're going to talk about this all day. Rick and I, but yeah, it's usually more Rick. I can't expand on it. I would only just add a data point. Tommy that, you know, when you look at the year date. Margin picture, right? Let's take a more medium term perspective on it. It's almost rounding errors compared to last year.

I don't know if there's anything we're going to talk about this all day, Rick in either [laughter], usually boring [laughter] I I I can't expand on it I would only I would just add a data point and tell me that you know when you look at the year to date margin picture Ray, let's take a more medium term perspective on it.

It's almost a rounding error compared to last year.

Speaker 4: And I think that's an achievement on our part, given the unit environment we've been in, given the relative lack of price that's been in the market this year relative to last year. To say that there's only a 20 basis point difference, I call that a good outcome.

And I think that's a that that that's that's an achievement on our part given the unit environment we've been in.

Given the relative lack of price that's been in the market. This year relative to last year to say that theres only.

A 20 basis point difference I call that a good outcome.

Thank you all.

I'll I'll pivot to a oh.

Speaker 3: forward-looking conversation here and hope that we could advance.

Forward looking conversation here and I hope that we could advance that.

Speaker 3: the conversation around potential revenue impact next year and into 25 from the coming refrigerant regulations. The OEMs have certainly been more vocal here. We've heard that the impact could be as much as 15 to 20 percent cumulative price over the next couple of years. And so my question for you is, does that sound like a reasonable range? And if you unpack the dynamics here.

The conversation around potential revenue impact next year and another 25 from the coming refrigerant regulations. The Oems have certainly been more vocal here, we've heard that the impact because it could be as much as 15% to 20% cumulative price over the next couple of years and so my question for you is.

Does that sound like a reasonable range and if you unpack the dynamics here.

Speaker 3: What do you expect to see in terms of impact from the pricing on the new equipment? And what are you seeing now or what do you think you might see on the existing equipment configured for R410 where there will be a big curtailment of supplies you head into next year?

What do you expect to see in terms of impact from the pricing on the new equipment.

And what are you seeing now or what do you think you might see on the existing equipment configured for our 410, where there'll be a big curtailment of supply as you head into next year.

So let me call on Paul Johnston for that.

Speaker 6: Let me call on Paul Johnson for that. Wow. I'll give you all the hard ones, Paul. Yeah, the easy question here.

Wow [laughter].

I guess I'll start windfall, yes, I use easy question here.

Speaker 6: I think two of the OEMs have announced that they think it's going to be in the 10 to 15.

Yeah, I think what to two of the Oems have announced that they think it's going to be in the 10% to 15% range.

Speaker 6: We'll just have to see what movement that they have on that. There are going to be higher costs in the new product, and obviously those are going to be reflected in higher prices.

We'll just have to see what the what what movement that they have and that there are going to be higher costs in the new products and obviously that was going to be reflected in higher prices.

I think as we move into next year, we're going to find out more and more about you know what the regulations actually yours.

Speaker 6: I think as we move into next year, we're going to find out more and more about what the regulations actually state and what the regulations allow going forward into 2025 as far as the curtailment of 410A equipment. I think that's really the open question.

Right.

Unknown Executive: Good day, and welcome to the Watsco third quarter 2023 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

The regulations allow you know going forward into 2020 five as far as the curtailment of 410, a equipment and I think that's really the open question that we have right now.

Speaker 6: Obviously at some point we're going to be 100% 454 or 32A refrigerant, which are going to have higher prices because they are slightly flammable. There have to be safety devices on the units. It is going to increase the price of the products. There's no doubt about it.

Obviously at some point, we're gonna be 100%, a 454 or <unk> 32, a refrigerant, which are going to have higher prices because they are slightly flammable. There has to be safety devices on the units. It is going to increase the price of the products, there's no doubt about it.

Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than one on a touchstone's own. To withdraw your question, please press star than two. Please note, this event is being recorded.

Alan Ahmad: I would now like to turn the conference over to Alan Ahmad, CEO. Please go ahead. Good morning, everyone. Welcome to our third quarter earnings call. And this is Alan Ahmad, Chairman and CEO. With me is A.J. Ahmad, President, and Paul Johnston, Barry Logan and Rick Gomez.

Speaker 6: I'm not going to give you a forecast of what I think it's going to be, but it will be higher than what we're seeing right now with the new higher efficiency products that we introduced this year.

I'm not going to give you a forecast of what I think it's going to be.

But it will be it will be higher than what we're seeing right now with the new higher efficiency products that we are that we introduced this year.

And just don't they.

Speaker 3: And just on the existing equipment configured for our 410, are you seeing anything or hearing anything or expecting anything as you move into next year where the refrigerant itself is likely more expensive and what that could mean for overall equipment pricing there?

On the existing.

Equipment configured for our 410 to are you seeing anything or hearing anything or expecting anything as you move into next year.

Alan Ahmad: Before we start our normal cautionary statement, this conference call is for looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate resolves made different materially from the for looking statements on to the quarter. What's going to deliver the record quarter, which is all the more rewarding given that record performance achieved that third quarter last year. Their quarter last year was a barn burner.

Where the refrigerant itself is likely more expensive and what that could mean for overall equipment pricing there.

Speaker 6: I think there's going to be there's going to be some increases there have been increases here recently in the last couple weeks on on 4-10-8.

I think theres going to be there's going to be some increases there have been increases here recently in the last couple of weeks on unfortunately.

Speaker 6: It's a matter of what the refrigerant manufacturers are going, how they're going to handle their new allocations. Their allocations for GWP products were reduced by 30% for negative

It's it's a matter of what's the refrigerant manufacturers are going how they're going to handle their new allocations.

Allocations for GW P products were reduced by 30% for next year.

Speaker 6: And so they're going to have to come up with their formulas and internally, that would determine, you know, how much 410A they can afford to make versus some of the other lower GWP products, you know, given their outlook.

And so they're going to have to come up with their formulas and internally.

Alan Ahmad: And so I'm so happy we're able to beat that. Sales grew 4% driven by 6% increase in HVAC equipment. Residential units volume steadily improved throughout the quarter and price realization continues to be strong. Commercial end markets also remained very healthy.

Determine you know how much how much for 10, a they can afford to make for it.

Some of the other lower G. W. P products, you know given their allocations.

Speaker 6: And then secondly, you know, we get into the long term issue, we've got another 30% reduction coming in 2020.

And then secondly, you know we get into the long term issue, we've got another 30% reduction coming in 2029 right.

Speaker 6: Right. And when that occurs, I think you're going to really see a crunch, if you will.

Right and when when that occurs I think youre going to youre going to really see a crunch if you will.

Alan Ahmad: As a reminder, we have navigated to an immense product transition in 2023 following the step up minimum efficiency standards mandated across the United States by the US federal government. Approximately 60% of the HVAC systems we are now selling represent new products. Let me repeat that. 60% of the systems we're selling are new products. Thousands of customers have been trained. Our digital product library has been updated adding over 400,000 new SKUs sister started the year.

Speaker 6: But right now we're just we're trying to ferret out exactly what the regulations, how they impact the OEMs, how they impact the service level for the contractors that we work with. And you know what's going to be the long tail or short tail of existing 4-10 equipment in the market.

But right now we're just we're trying to ferret out exactly what the regulations, how they impact the Oems how the impact of service level for the contractors that we work with.

And you know what's going to be the the long tail of short tail of existing 410 equipment in the market.

Thank you all I appreciate the insight and we'll turn it back.

The next question comes from Brett Linzey Duval. Please go ahead.

Speaker 1: The next question comes from Brett Lindsay from the Zoho. Please go ahead.

Speaker 6: Good morning. Yes, so just the first question regarding HVAC equipment growth and I snap back. Of 6% in the 3rd quarter, do you think there's a little bit of catch up from some of the issues you had in the 2nd quarter? And then any comments just on underlying replacement activity. You know, it does continue to show some resilience here, but just curious if there's any cracks in terms of metrics or ticket size, etc.

Good morning, Yeah. So just the first question regarding HVAC equipment growth, a nice snapback up 6% in the third quarter do you think there was a little bit of catch up from some of the the OE issues you had in the second quarter.

Alan Ahmad: As mentioned in our second quarter call, one of our primary OEM partners was disproportionately impacted by the product transition affecting product availability during the summer selling season. That impacted this during the third quarter and I'm happy to share that our locations are now fully sparked. Sales growth has returned to the effect of stores and our partner is aggressively investing in collaborating with us to drive growth. But the reality is that all our OEM partners will factor to some measure and all have improved the supply chain to help us meet the needs of our customers.

And then any comments just on underlying underlying replacement activity and it does continue to show some resilience here, but just curious if theres any cracks in terms of metrics or.

You know ticket size et cetera.

Okay.

I can this is Paul again, I don't think are really we saw any real change in dynamics as it relates to the replacement market the replacement market remained healthy and strong.

Speaker 6: This is Paul again. I don't think really we saw any real change in dynamics as it relates to the replacement market. The replacement market remained healthy and strong.

And.

Speaker 6: A lot of conversation, a lot of debate going on. Are we moving to a repair versus a replace type of mark?

A lot of conversation and a lot of debate going on or are we moving to repair versus replace type of market.

Alan Ahmad: Here's some other highlights. Our commercial business continues to grow in a healthy double digit rates this quarter and our backlog of projects extend into next year. Sails of ductless systems, an increasingly important component of our business, also grew double they just are in the quarter. We saw the continued trend of gas furnaces converting toward heat pumps, which sell at higher average selling prices. SGNA is a percentage of sales, decreased 80 basis price.

Speaker 6: Our indications are slightly, you know, we're seeing a slight uptick in parts which shows up in our numbers as far as compressor sales, motor sales, those types of things that would be a repair item.

Our indications are slightly you know where were seeing a slight uptick in in parts, which shows up in our numbers.

As far as compressor sales motor sales those types of things that would be oh repair items.

But.

Speaker 6: Really too early in the game and we're not really seeing any real trends yet.

Really are too early in the game and it's a you know and we're not really seen any real trends yet.

Speaker 6: But I think the consumer is replacing the equipment with a higher efficiency product and we're all happy for the consumer.

But I think the consumer is replacing the equipment with the higher efficiency product in and we're all happy for the consumer.

Alan Ahmad: This quarter, a good start to what we feel is an important opportunity to improve productivity and overall efficiency. We are optimistic about driving more operating efficiencies across our network as supplies change improve and operating conditions return to normalization. We have the tools, the technology and the most importantly, the entrepreneurial culture to achieve more. I particularly as it relates to our internal productivity. We are focused on internal productivity. And of course, our balance heat remains strong with a small amount of debt offset by cash.

Okay.

Speaker 7: Yep, great. And then maybe just one on price. So you've been talking about the price optimization software and some of the deployment across the organization. I'm just curious how you think about price capture above sort of normal course of business, you know, as you think about some of the surgical opportunities on price and various skews across the line card there.

Yeah, Great and then maybe just one on price so you've been talking about the price optimization software and some of the deployment across the organization I'm. Just curious how you think about price capture above sort of normal course of business.

And as you think about some of the surgical opportunities on price and in various skus across the the wildcard there.

I mean I'll handle some of that.

Go ahead Barry.

Speaker 5: Yeah, I mean, first I just want to say this, that when we say 60% of our equipment products are new products, that's obviously a huge inventory conversion. It's also a pricing and margin execution process. Everything is new, everything has a new price, everything had to be prosecuted in the market with our customers.

I mean first I just want to say this that when when when we say 60% of our equipment products, our new products.

Alan Ahmad: In other words, no debt. As always, the financial position improves, the financial position provides us the flexibility to invest in virtually any opportunity as we continue to grow our scale in a very fragmented $50 billion plus dark American market. MNA remains an important contributor to growth.

That's obviously a huge inventory conversion, it's also a pricing and margin execution process everything is new everything has a new price everything's.

Everything had to be prosecuted in the market with our customers and.

Speaker 5: So, you know, this year, for example, 8% is the price increase achieved on our residential product.

This year for example, 8%, 8% as the price increase achieved on our residential products.

Alan Ahmad: This quarter, a great family business join our family with the acquisition of Gateway Supply in South Carolina. I've spoken to the principals and you couldn't ask for higher quality people. Gateway is a legendary company and it's Sunbelt Market and provides us with the ability to partner with great leadership to grow beyond their current $180 million sales run rate.

Speaker 5: this quarter and year-to-date is about the same. So it's consistent through the year.

This quarter and year to date is about the same so it's consistent you know through the year.

Speaker 5: By the way, units this quarter were down 4%. Obviously last quarter was down double digits.

By the way units this quarter.

Down, 4%, obviously last quarter was down double digits.

Speaker 5: And if I count for one less selling day this quarter.

And if I account for one less selling day this quarter.

Speaker 5: and start to look at things a little bit proformid.

And we can start to look at things a little bit pro forma and.

You know the quarter's units where were near flat if I look at it that way.

Speaker 5: you know, the quarters units were near flat, if I look at it that way.

Alan Ahmad: We continue to look for more entrepreneurs and businesses to partner with. Watts goes a great home for entrepreneurs in our space. We sustain cultures, invest in people and provide technology to secure and build under great legacies.

Speaker 5: So price and units are combining to help business.

So price and units you know are combining to to help business.

Speaker 5: And that's just the equipment business. AJ, you were going to talk about the broader picture, though.

And yeah. That's that's just the that's the equipment business, Hey, Jay you were going to talk about the broader picture though.

Speaker 4: Yeah, I just, you know, we talk about the pricing optimization a lot, and it's not one thing. It is hundreds of opportunities across every product we sell to every customer in every location. So just that one maybe small example would be if you say everybody sells the same

Yeah, just you know we talk about the pricing optimization, a lot and it's not one thing it is hundreds of opportunities across.

Alan Ahmad: Looking beyond a short term, our press release provides critical details to support Watts' long-term growth strategy. We have an immense technology advantage and we are investing to grow that advantage. Our mobile platforms and e-commerce channels have increased customer engagement, reduced attrition, created market share gains and supported our margin expansion in recent years. Watts goes broad array of products and brands is a competitive advantage that allows us to serve contractors in any environment.

Every product we sell to every customer in every location. So just that one maybe small example would be if you say everybody sells the same.

Speaker 4: meaning all of our business units just in the Florida market or Miami market. So a Honeywell 123 ABC thermostat and maybe there's 3,000 customers that bought that thermostat in the last six months. Well it probably is at three different three thousand different prices.

Meaning all of our business units just in the Florida markets Miami market sell a honeywell one two or three a D C thermostat and maybe their 3000 customers that bought that thermostat in the last six months well it probably is at three different 3000 different prices.

Speaker 4: And there's wide variation in that sale price. Well, now with this tool, for example, what we can do is understand all those sales prices, those sale prices of that same thermostat and the same market. And we can do some rationalization and some floor setting and some, you know, making sure that the right customer, meaning larger customers, are getting a more appropriate price.

And there there is wide variation and that sell price well now with this tool for example, what they can do is understand all of those sales right, let's sell prices that that same thermostat in the same market and we can do some rationalization and some floor setting and I'm, making sure.

Alan Ahmad: We have a leading market share in Sunbelt markets that provides stability and higher growth rates over time. We have also made important technology investments with our business that will support margins and productivity in the years to come.

Is that the right customer, meaning larger customers are getting more appropriate price and smaller customers, who have an earned a lower price are getting.

Alan Ahmad: In addition, there are several important regulatory and industry catalysts that are in effect which are listed in today's press release. All of these catalysts will be good for the industry in the coming years and we believe our scale technology and financial strength position us to especially benefit from these opportunities, with that let's go on to Q&A.

Speaker 4: and smaller customers who haven't earned a lower price are getting a price that's right for them. And that's, you know, if you do that one on that micro level.

That's right for them and that you know if you do that one on that micro level, but you multiply it times hundreds and hundreds of opportunities.

Speaker 4: but you multiply it times hundreds and hundreds of opportunities, that's part of the effort that's going on now.

That part of the effort that's going on now and.

Speaker 4: it helps. It's going to help drive margins and it's going to help in fact sell more product because it's not always about raising price. It's about getting the price right so that customers find it attractive and want to purchase the product from us as well.

It helps it's going to help drive margins and it's going to help in fact sell more product because it's not always about raising price it's about getting the price right. So that customers find it attractive and want to purchase the product from us as well.

Unknown Executive: We will now begin the question and answer session. To ask a question you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster.

Got it I appreciate the insight.

Yeah.

Speaker 1: The next question comes from Dave Manthi with Baird. Please go ahead. Scott, how are you?

The next question comes from Dave Manthey with Baird. Please go ahead.

Morning, Dave.

Speaker 8: Thank you. Good morning, Al. In the press release, you noted potential for additional productivity gains as operational complexities abate. And I'm just wondering if you can outline the key remaining complexities that would represent the biggest opportunity over the next six to 12 months....

Thank you and good morning al.

And in the press release.

Noted potential for additional productivity gains as operational complexities abate and I'm just wondering if you can outline the key remaining complexities.

Thomas Moll: The first question today comes from Tommy Moll with Stephen. Please go ahead. Morning Tommy. Morning Al. Appreciate you're taking my questions. Of course. Want to start on the topic of gross margins. I don't imagine you'll get any more than a question or two on that today, but just to start the conversation. What can you tell us about the drivers headwinds or tailwinds from your second quarter to your third quarter results? And then associated with those. If I look over the past few years, the margin rate tends to improve as you move into fourth quarter from third quarter.

That would represent the biggest opportunity over the next six to 12 months.

Well, it's an interesting question, who wants to deal with that.

It's Rick.

Speaker 4: Yeah, Rick. Sure. Hi, Dave. Good morning. I mean, I don't think I'm overstating it by saying it's been the Wild West out in the field the last couple of years. And, you know, all of that supply chain imbalance weighs on.

Yeah.

Sure Hi, David Good morning.

Yeah, I mean, I I don't think I'm overstating it by saying, it's been the wild West I'm out in the field. The last couple of years and you know all of that supply chain imbalance weighs on.

Speaker 4: that same store productivity equation. And so what you've seen the last few quarters is variable SG&A reacting to a different end market. But more importantly, what we've been working on the last year or so is a lot of energy into understanding our own internal productivity.

That same store productivity equation.

And so what you've seen in the last few quarters is you know variable SG&A reacting to a different end market.

A.J. Ahmad: Is there any reason that should not be the case this year is there something else going on that you want to make sure we're aware of? Well, I'm going to turn that over to two persons, a J the president and by Logan are cheap and national officer. Good morning Tommy. Yeah, we had a we had a bet going would it be the first question would be on margins or the first ten?

But more importantly, what we've been working on the last year or so is a lot of energy into understanding our own internal productivity.

Speaker 4: And we've armed our leaders with real-time data that should help drive this in the field. They know this is a priority and they're responding. But this productivity journey that we're on is going to take some time. It encompasses a huge number of things.

And we've armed our leaders with real time data that should help drive this in the field.

They know this is a priority and they're responding.

But that you know that this there's productivity journey that we're on is going to take some time. It encompasses a huge number of things.

Speaker 5: It starts with how we order and receive product from 2,000 suppliers. And we talk about supply chains getting better, but they're not better everywhere just yet. Commercial is one example and you asked where are the pain points still, that is still a pain point in the supply chain is commercial and high-efficiency product.

It starts with how we order and receive product from you know 2000 suppliers.

A.J. Ahmad: So I'll let Rick and Barry get into the details, but I want to spend a second minute here and abstract with the layer and talk about the big picture. And start with reminding everyone what Barry usually reminds us of is that there are many components to our gross margin. There's the transaction margins are what we make on invoice by invoice basis on a market basis, if you will. There's cost changes that come from the thousand or two thousand manufacturers that we buy products from.

And and you know we talk about supply chains are getting better, but they're not better everywhere just yet.

As one example, and you know you asked you know where the pinpoint still that is still a pinpoint in supply chain is.

As commercial and high efficiency product.

Speaker 7: But it starts with how we receive product from over 2000 suppliers. It impacts the real estate footprint, how we fulfill orders in the warehouse.

But it starts with how we receive product from over 2000 suppliers. It impacts the real estate footprint, how we fulfill orders and warehouse.

A.J. Ahmad: There's volatility and commodity items that we sell. There's internal pricing actions with our optimization tools that we're getting more fluid and there are products delivery costs. There's product mix changes between commercial and residential equipment supplies, etc. So in there's action in all of these categories all the time, but what I want to get across is a reminder that we're a long term company. And quarter to quarter, there's going to be noise and actions in all those categories, but we're focused on the signal.

Speaker 7: and finally how we deliver product to customers. That's really what this productivity effort encompasses. It's a lot of things really from the very beginning to the very end of our processes. And so we're starting to see progress, but there's a lot more to do. And I think, big picture, two thoughts, I'll leave you with two thoughts. One is that,

Finally, how we deliver product to customers that's really the the.

What what would this productivity effort encompasses it's it's a lot of things really from the very beginning to the very end of our processes.

And so we're starting to see progress.

But there's a lot more did you and I think you know big picture two thoughts I'll leave you with two thoughts one is that.

Speaker 7: I think our growing scale naturally enables more efficiency, right? As a $7 billion company, we have more opportunity to be more efficient than we did as a company half our size four years ago.

I think our growing scale naturally enables more efficiency right.

Ah is a $7 billion company, we have more opportunity to be more efficient than we did as a as a company half our size four years ago.

A.J. Ahmad: And as we said, the long term aspirational call of margins is 30%. And we see that within reach, you know, in time. And let me tell you why. And it really hit starts with what we talk about a lot, which is our technology. But we should really call our continuous improvement culture. What the technology enables is our teams to be able to do analytics, the thought opportunities, enhance our capabilities, measure and track our successes in all parts of our business, things like prospecting and winning new customers, and changing and improving how customers engage with us with things like e-commerce and our apps, which eventually reduce our cost to serve those customers.

Speaker 7: And secondly, we possess the technology and the tools to drive this productivity throughout our network.

And secondly, we possess the technology and the tools to drive this productivity throughout our network.

Speaker 7: And you'll note in the press release that we talked about what some of those internal investments have been.

And you'll note in the press release that we talked about what some of those internal investments have been.

Speaker 7: in the pricing technology that Ajay just talked about, the warehouse management and order fulfillment technology, some interesting work going on around logistics in our network. And so over time that will bear some fruit in productivity and that will…

And the pricing technology that age I just talked about.

The warehouse management and order fulfillment technology, some interesting work going on around logistics in our network.

And so over time that will bear some fruit in productivity and that will.

Speaker 7: We're starting to see the benefits of that today, and not just variable SG&A reacting, but fixed SG&A reacting as well.

We're starting to see the benefits of that today and not just variable SG&A reacting, but fixed SG&A reacting as well.

Yeah, Thanks, a lot.

Speaker 4: Yeah, I'll double click on the last one, the logistics and transportation delivery. That is the third biggest expense for the company, about $200 million they spend moving products in and through and around our network and delivering products to customers. And I call it our next frontier of opportunity for continuous improvement.

A.J. Ahmad: We can increase with the tech or the continuous improvement, we're increasing our productivity levels in the warehouses, we spend a ton of money moving costs in and out and through our network and our fleet and transportation, which is now another frontier how we can use technology to improve what we're doing there, optimizing our inventory, we've talked about a lot and there will be meaningful gains there, marketing and sales of the new systems that goes on and on and on, but that continuous improvement culture or what we call technology, so it's a tool set to win in the marketplace and increase our what we do, and margins will be part of that, you know, higher gross margins will be part of our is part of our DNA, and more importantly, we'll continue to grow profits and generate a lot of cash, but court record, there will be noise, and I know that that's very interesting to you all, Rick and Barry and Paul can much more eloquently answer questions about the noise, but I want to make sure that that big picture was communicated in a reminder that we're a long term company, and long term we expect to have not only strong gross margins but continuous growth. Yeah, so I don't know if you want to jump in and talk, you know, answer a specific question, but I want to just have that underlying conversation here.

Real quick on the.

Last one the logistics and transportation delivery that that is the third biggest expense for the company about $200 million, they spend moving product in and through and around our network and delivering product to customers and I call. It our next frontier of opportunity for continuous improvement.

Speaker 4: There's about 800 trucks in the fleet today, but there are now with the data, the data being exposed and smart people taking smart actions, we're realizing that some of those trucks are sitting idle for 90% of the day. Does it make sense to have that truck or maybe use a different means of transportation to get product from point A to point B? Or can our business units share trucks?

About 800 trucks in the fleet today, but there are now with the data.

It would be exposed and smart people, taking smart actions, we're realizing that some of those trusts are sitting idle.

Sure.

90% of the day does it makes sense that they'll have that truck or maybe use a different means of transportation to get product from qualitative might be okay. In our business units sure trucks.

Speaker 4: or is there a more efficient route to deliver the product in? So all those questions now about the millions of times that we're moving products around our network in and out and through to customers are open season on that effort. And it's a big bucket. So we're going to move a needle on a big bucket.

Or is there a more efficient route to deliver the product and so all of those questions now about the millions of times that we're moving products around our network in and out and through the merits are helping season on that effort and it's a big bucket. So we're going to move the needle on a big bucket.

Speaker 2: Okay, thank you for that detail. And second, could you give us your take on Governor DeSantis rejecting IRA funds? We do not express political views. No, we're not going to talk about that. Next question.

Okay. Thank you for that detail.

And second could you give us your take on governance to Santos rejecting I or a fun [laughter] well, we do not expect so we need to go now.

[laughter] next question.

The next question comes from Nigel Coe with Wolfe Research. Please go ahead.

Speaker 1: The next question comes from Nigel Coe with Wolf Research. Please go ahead.

Speaker 9: Morning, Nigel. Thanks. Oh, hi guys. Thanks for the question. So, inventory. Can we talk about where we stand right now, Alan, on inventory? I think you've said in previous calls maybe $2 million of reduction for the full year. Are we still on that track?

A.J. Ahmad: I think that was well done and Rick too, you both can jump in wherever you want. You know, first I think there's two two if I become the analyst for a second there's two things to analyze right there's you over your margins and we're talking about a 90 day period and that's okay, we have we have to address it, but I wouldn't get in this this box of thinking that every 90 day period is like a new conversation it's not it's a continuous process as they just adjusted, but if I go ahead and put myself in the box and talk about it, you know, obviously our equipment.

Morning Nigel.

Hi, guys. Thanks for the question.

So inventory can we you talk about where we stand right now you know Alan on inventory, yet I think he said.

In previous calls maybe $2 million of production for the full year are we still on that track.

Speaker 2: Well, that's a good question and I'll turn it over to the executive that's taking care of that for me. Go ahead.

Well, that's a good question and I'll turn it over the executive that's taking care of that before we go ahead Paul.

Speaker 6: Alrighty, yes, we can expect that. We've been delirium our inventory now, since this season ended, and we're seeing great progress. We've set goals for each one of our operating units.

Already yes, we can expect that we've been delivering our inventory now.

Since the season ended and we're seeing great progress we've set goals for each one of our operating units.

A.J. Ahmad: The equipment business is a group through, you know, nicely this quarter are not equipped with business did not. And you know, that's in the pressure late 6% growth and HVAC equipment 4% decline in other HVAC and there's a margin difference in that mix and mix is about 30 days to year over year in terms of just pure again packed of margin. And so with the question beyond that is what happened to not equipment that that's where our commodities reside.

Speaker 6: We track them daily with with our ability to identify and what we have on order and what our sales through is

We track them daily with our with our ability to identify and what we have on order and what our sales through is.

Speaker 6: sales output is, and we're seeing definite reductions.

Sales output is and we're seeing definite reductions.

Speaker 6: month over month, day over day.

You know a month over month day over day.

Yeah.

Speaker 9: Okay, so that implies fourth quarter should be a big source of funds from inventory. That's the way to read that.

Okay. So that implies fourth quarter should be a big source of funds.

Funds from inventory, that's that's the way to read that.

Speaker 2: It better be. I would. Okay, I would not I would not want to pigeonhole into that week. No, you know, we're not give you that kind of.

It better be I would [laughter], okay I.

A.J. Ahmad: 6% of what is refrigerant copper tubing and sheet metal products deflation in those products in the quarter cost revenue pricing of pricing of those products has improved throughout the quarter and is more. More more well established today than it was 90 days ago, so that's a good that's good news, but those are some algebraic considerations there also obviously our commercial business. Somebody will ask later in the call, redouble digits that would mean our residential business was single digits there's a few basis points and margin there, if you again stay in the box of year over year change and gross profit margin.

I would not I would not want to take a pigeonholed into that we know.

We're not giving you that kind of.

Speaker 4: Okay, no, I think this direction is with the question. Yeah, we're very focused on it. Don't forget that during the

Okay.

So I think just directionally. It was he was the question Yeah. We were very focused on it don't forget that during the.

Speaker 2: this all these delivery issues that we had to do things that we normally don't do.

Yes.

All of these delivery issues that we had to do things that we normally don't do it.

Speaker 2: the producers couldn't ship that partial the order and that sort of thing and it takes a while to...

The producers couldn't ship. It you know partial of the order and that sort of thing.

It takes a while to.

Speaker 2: that inventory that we have to be what it should be in terms of complete systems and that sort of thing. But we're working very focused and yes I do plan to take out that kind of...

Get that inventory that we have to.

To.

B, what it should be in terms of complete systems and that sort of thing.

A.J. Ahmad: Sequentially, which is your question, Tom, if I finally get to your question. Sequentially, we talked about last quarter, having OEM pricing actions that took effect in March, benefited the margin in the second quarter. And, you know, that's a nice again algebraic benefit to that quarter's performance. Sequentially, no such thing occurred and that's the noise that AJ is referring to is, you just can't get trapped in 90 day periods and try to gain inferences over a long period of time.

We're working very focused and yes, I do plan to take out that kind of.

Speaker 2: number and improve our cache.

Number.

And and improve our cash.

Cash flow along with it.

Speaker 9: Okay, that's great. And my follow-up question is around the 410A phase-out. I mean, I think the EPA, the way it was written right now, I think it's an installation deadline as of 1 Jan 2025 as opposed to a production deadline. So how do you guys think about that in terms of managing 410A inventory levels? And how do you think the 454B availability will come through next year?

Okay, that's great and my follow up question is around you know the the.

For the full 10 a.

Ah phase outs, I mean, I think the EPA did the way the rules written right now I think it's installation deadline.

You know as of one Jan 2025 as opposed to a production deadlines. So how are you. How are you guys thinking about that in terms of managing for CNA inventory levels and how do you think the full five will be available if people will come through next year.

A.J. Ahmad: So if I kind of wrap it up and Rick maybe you have more, but the concept of let's look at the last 12 months, you know, being 27 and change. That's very consistent with what we've been saying. And to add to that in the future, where the aspiration is 30 percent, the other credibility in that is we have business units within our portfolio of business units that approach that number today. And we certainly have locations that are in excess of that today.

Speaker 6: Are you asking about the new EPA?

Right, Yeah, Yeah, I'm, sorry, Paul I would say that you're right are you asking about the new E. P. A.

Speaker 6: Yeah, I think it's well to be seen. Yeah. Yeah, it came out last Friday night. Yeah. Everybody's still, you know, working their way through it. You know, basically what it provide provided was that the outdoor unit becomes a component and hence can be replaced.

Yeah, I think that's about it.

Yeah Yeah.

It came out last Friday night, Yeah, everybody Who's still you know working their way through it you know basically what it provide provided was that the outdoor unit becomes a component.

A.J. Ahmad: So when we talk about continuous improvement, or we're looking out to a horizon, you know, that's the perspective. Rick, I don't know if there's anything we're going to talk about this all day, Rick and I, but yeah. I can't expand on it. I would only just add a data point to me that, you know, when you look at the year date margin picture, let's take a more medium term perspective on it.

Hence can be replaced.

Speaker 6: as a repair item or a system that you can't install systems, you know, indoor and outdoor units, but you can repair the unit by putting in an outdoor unit.

As a repair item.

For a system that you can't install systems, you know indoor and outdoor units you send you can repair the unit by putting in an outdoor unit.

And that's got a that's got a lot of ramifications, which I don't know if it's really it's been thought all the way through by the people who wrote it up you know for instance, how can you make sure that the coil on the inside.

Speaker 6: And that's got a lot of ramifications, which I don't know if, really have been thought all the way through by the people who wrote it up. You know, for instance, how can you make sure that the coil on the inside matches the outdoor unit, which is only going to be the higher efficiency product. So if you're putting in a 15.3 outdoor unit,

A.J. Ahmad: It's almost surrounding areas compared to last year. And I think that's an achievement in our part given the unit environment we've been in given the relative lack of price that's been in the market this year relative to last year to say that there's only a, you know, a 20 basis point difference. I call that a good outcome.

Our match as the outdoor unit, which is only going to be the higher efficiency product.

So if you're putting in a 15.3 outdoor unit.

Speaker 6: you know, with a 13 or 14 seer indoor unit, you're not going to get the efficiency that you're paying for for the outdoor.

You know with a 13 or 14 Seer indoor you don't you're not going to get the efficiencies that you're paying for it for the outdoors.

Speaker 6: And then secondly, you know, I think we're looking at, you know, a difference from when we went through the transition between our 22 and 410A. This one is different.

And then secondly, you know I think we're looking at.

Unknown Executive: Thank you all.

Unknown Executive: I'll pivot to a forward looking conversation here and hope that we could advance the conversation around potential revenue impact next year and into 25 from the coming refrigerant regulations. The OEMs have certainly been more vocal here. We've heard that the impact could be as much as 15 to 20% cumulative price over the next couple of years. And so my question for you is, does that sound like a reasonable range? And if you unpack the dynamics here, what do you expect to see in terms of impact from the pricing on the new equipment? And what are you seeing now or what do you think you might see on the existing equipment configured for our 410 where there will be a big curtailment of supplies you had in the next year?

You know a difference from when we went through the transition between our 'twenty. Two Unfortunately this one is different.

Speaker 6: It's different in the regard that there's no replacement for 410A. There were other replacements that you could drop in that would replace the R22 that aren't going to be available with the new product.

It's different in the regard that there's no replacement for 410 eight there were other replacements that you could drop in they would replace the R 22 that arent going to be available with the new with the new with the new product.

Also you know.

Speaker 6: A lot of questions that I think we need to ask are OEMs, and OEMs will have to answer the question, you know.

A lot of questions that I think we need to ask Oems and Oems will have to answer the question you know.

Speaker 6: what's going to happen to the price of the 410 units because obviously the production will be lower from the OEM. Will that raise the price of the product?

What's going to happen to the price of the 410 units because obviously the production will be lower from the OEM will that raise the price of the product.

Speaker 6: what's going to happen to the availability of 410A to make the repair costs. So the repair costs would be acceptable.

What's going to happen to the availability of fortunate I hate to make the repair cost for the repair costs would be.

Acceptable to the consumer.

Paul Johnston: Let me call on Paul Johnson for that. Wow. I give you a hard ones, Paul. Yeah, that easy question here. You know, I think what, two of the OEMs have announced that they think it's going to be in the 10 to 15% range. We'll just have to, you know, see what they, what, what movement that they have on that there are going to be higher costs in the new product. And obviously those going to be reflected in higher prices.

Speaker 6: what happens to the 30 to 40% of the install base, which is still operating on R22, where you can't change out the outdoor unit with a 4K.

What happens to the you know 30% to 40% of the installed base, which is still operating on R. 22, where you can't change out the outdoor unit with a 410 eight.

Speaker 6: So I've got a lot of questions. I guess I don't have a lot of answers for you.

So I've got a lot of questions I guess I don't have a lot of answer and boy that's.

Yeah.

Speaker 6: But you know, those are things that we're thinking of and we're working with our OEMs and working with the the refrigerant manufacturers to try to figure out how all this is going to play out in not only in 24, but also in 25 when we do the actual roll up.

But oh those are things that we're thinking of and we're working with our Oems and working with the.

The refrigerant manufacturers who've tried to figure out how all of this is going to play out and not only in 'twenty four but also in 25, when we do the actual rollout.

Paul Johnston: Uh, I think as we move into next year, we're going to find out more and more about what the regulations actually are state and what the regulations allow going forward into 2025 as far as the curtailment of 410A equipment. I think that's really the open question that we have right now. Obviously, at some point, we're going to be 100% 454 or 32A refrigerant, which are going to have higher prices because they are slightly flammable.

Speaker 9: Thanks. You actually have more questions than I did. So, but it sounds like a little bit too early to have a view, but I appreciate the context. Thanks a lot.

Thanks.

You actually have some more questions and I did so but it sounds like.

I hope, it's going to have a view, but I appreciate the context. Thanks Luca.

Speaker 10: The next question comes from Ryan Merkel with William Blair. Please go ahead. Morning, bro. Morning. Hey, morning. Morning, everyone. Nice quarter. So I wanted to ask about demand trends through the quarter and maybe even to October just given the fears out there about consumer spending starting to decline. Just update us on what you saw through the quarter and into October .

The next question comes from Ryan Merkel with William Blair. Please go ahead morning, Brad morning, Hey morning morning, everyone nice quarter.

I wanted to ask about demand trends through the quarter and maybe even into October just given the fears out there about consumer spending starting to decline just update us on what you saw through the quarter and into October .

Paul Johnston: There have to be safety devices on the units. It is going to increase the price of the products. There's no doubt about it. I'm not going to give you a forecast of what I think it's going to be, but it will be it will be higher than what we're seeing right now with the new higher efficiency products that we that we introduced this year. And just on the existing equipment configured for our 410, are you seeing anything or hearing anything or expecting anything as you move into next year.

Sure.

Speaker 5: Hi Ryan, yeah, I mean very consistent. I would say throughout the quarter and quarter ended

Hi, Ryan Yeah, I mean, very consistent I would say throughout the quarter and.

Quarter ended.

Speaker 5: If I looked at September , for example, just to say it that way, you know, looks like the rest of the quarter. So pretty consistent throughout.

Yeah, if I looked at September for example, just to say.

Say it that way you know it looks like the rest of the quarter, so pretty consistent throughout.

Throughout.

Speaker 5: October is only a few business days and it's our biggest month of the fourth quarter last year. So not quite the same answer, but

October is only a few days a few business days and it's our biggest month of the fourth quarter of last year, so not quite the same answer but.

Paul Johnston: Where where the refrigerant itself is likely more expensive and what that could mean for overall equipment pricing there. I think there's going to be there's going to be some increases there have been increases here recently in the last couple of weeks on on 410A. It's a matter of what the refrigerant manufacturers are going how they're going to handle their new allocations their allocations for GWP products were reduced by 30% for next year.

Speaker 5: All of our field checks, talking to our people, see a good fourth quarter.

All of our field all of our field checks talking to our people see a good fourth quarter.

Paul Johnston: And so they're going to have to come up with their formulas internally that would determine, you know, how much how much 410A they can afford to make versus some of the other lower GWP products, you know, given their allocations. And then secondly, you know, we get into the long term issue, we've got another 30% reduction coming in 2029. Right. And when that occurs, I think you're you're going to really see a crunch, if you will.

Okay.

Speaker 10: helpful. And then I had a high-level question too that's probably hard to answer but...

Helpful. And then I had a high level question too, that's probably hard to answer but.

Speaker 10: We all see the price increases coming 15 to 20 percent and then obviously there's been a lot of price increases on equipment the last few years. How do you guys think about the impact to the consumer? Are they going to be able to afford these systems? Is financing going to need to be a bigger part of the HVAC industry? How much worry do you have that there will be more repair versus replace?

We all see the price increases coming 15% to 20% and then obviously there's been a lot of price increases on equipment. The last few years. How do you guys think about sort of the impact of the consumer are they going to be able to have 40 systems, it's financing going to need to be a bigger part of the HVAC industry. You know how much worried do you have that.

There will be more sort of repair versus replace.

Well, that's an interesting thing.

Speaker 2: Oh, that's an interesting... we think about things like that.

Do you think about things like that.

Speaker 2: As you may or may not know, we now have a financing platform ourselves. And it's probably, let's be considered the most user friendly platform that exists for a customer to find the loan that he wants to finance it. So, anybody wanna...

As you may or May not know, we now have a financing platform ourselves.

It's probably at least be considered the most user friendly platform that didn't exist before.

Paul Johnston: But right now we're just we're trying to thread out exactly what the regulations, how the impact the OEMs, how the impact the service level for the contractors that we work with. And, you know, what's going to be the long tail or short tail of existing 410 equipment in the market.

And a customer to.

Find the.

The loan that he wants to finance it.

So.

And the way they want to take a shot at the more sophisticated answer.

Speaker 6: Yeah, it's it. You know, there is a concern. Yes, there are elasticity issues here where we're going to reach a point where a consumer can't afford it.

Got it yeah. There is a concern you know sort of elasticity issue here, where we're going to reach a point, where a consumer can afford it.

Speaker 6: I still feel like this is a necessity of life, that people have to have heat, have to have cool. Also, we're seeing a lot more interest, obviously. We really haven't felt the impact of 25C.

I don't I still feel like this is a necessity of life there.

Unknown Executive: Thank you all. I appreciate the insight.

Unknown Executive: We'll turn it back.

Brett Lindsey: The next question comes from Brett Lindsey from the blue hole. Please go ahead.

People have to have to have he'd have to have cool also we're seeing a lot more interest obviously, we really haven't felt the impact twenty-five C. S.

Paul Johnston: Good morning. Yes. So just the first question regarding HVAC equipment grow the night snapback of 6% in the third quarter. Do you think there was a little bit of catch up from some of the OE issues you had in the second quarter. And then any comments just on underlying replacement activity, you know, does continue to show some resilience here. But just curious if there's any, you know, cracks in terms of, you know, metrics or, you know, you know, take it size, etc.

Speaker 6: far as the tax credits coming into effect for the higher income people. The rebate programs that hopefully will start being...

As far as the tax credits coming into effect for the higher income people.

The rebate programs that are hopefully will start being.

And the second and third quarter 2024 ships are kicking in now.

So importantly with $8000.

Speaker 6: rebate to the medium and low income consumer to be able to replace their unit and their system.

Rebate to the medium and low income consumer to be able to replace there.

Our unit in their system.

Speaker 6: But the consumer so far has been fairly resilient as far as taking care of what I would consider to be an absolute need for life, if you will. Also we're starting to see a lot more activity around what utilities are doing, what states are doing in the area of the weatherization programs and that type of thing.

But the consumer so far has been fairly resilient as far as you know taking care of what I would consider to be.

Paul Johnston: I can, this is Paul again. I don't think really we saw any real change in dynamics as it relates to the replacement mark, the replacement mark that would mean healthy and strong. And... A lot of conversation, a lot of debate going on, are we moving to a repair versus a replaced type of market? Our indications are slightly, we're seeing a slight uptick in parts which shows up in our numbers as far as compressor sales, motor sales, those types of things that would be a repair item.

In absolute need need for life, if you will.

Also we're starting to see a lot more active activity around what utilities are doing what states are doing.

In the area of the Weatherization programs or that type of thing so.

Speaker 6: Maybe that's a little bit of Pollyanna, but I think you know going forward the consumer is going to have to

Maybe that's a little bit of pollyanna, but but I think you know going forward to consumers going to have to.

And have to figure out you know, which programs work out best for them. So that they can be put in place.

Speaker 6: have to figure out which programs work out best for them so they can do it.

Paul Johnston: But really, too early in the game, and we're not really seeing any real trends. But I think the consumer is replacing the equipment with the higher efficiency product and we're all happy for the consumer. Yeah, great.

Speaker 6: and with the financing, the financing is going to help also.

And with the financing the financing is going to help also.

Speaker 5: Yeah, I think affordability has always been a question and yet the industry has grown three and a half percent, compounded for 30 years and things are obviously always more expensive over time given all the regulatory things. So I would just point to that as a long term reality of it.

Yeah, I think affordability is always been a question yet you know the industry has grown three 5% compounded for 30 years and things are obviously always more expensive overtime given all of the regulatory things. So I would just.

Point to that as a long term reality of it.

A.J. Ahmad: And then maybe just one on price. So you've been talking about the price optimization software and some of the deployment across the organization. I'm just curious, how you think about price capture above sort of normal course of business. You know, as you think about some of the surgical opportunities on price and various skews across the, you know, the line card there. I mean, I'll handle some of that. Yeah, go ahead. Yeah, I mean, first, I just want to say this that when, when, when we say 60% of our equipment products are new products, that's obviously a huge inventory conversion.

Speaker 5: But Ryan, if I give you an interesting answer, I just recently took out a system in my home, $6,200 was the bill.

But Ryan if I give you an interesting answer right.

Just recently you know took out a system in my home $6200 was the Bill Com.

Speaker 5: contractor did it in a day. They expected to be paid that day. And I was curious, I went back and looked at our cost to him, meaning our revenues. What did Watts go sell that guy in my $6,200 installation? And the answer was around $2,900.

Contract or did it in a day.

I expect it to be paid that day.

And I was curious I went back and looked at our cost of our cost our cost to him, meaning our revenues, but what did watsco sell that guy and my 6200 dollar you know installation.

And the answer was around was around $2900.

Speaker 5: So there's a layer, my point is there's a layer in this called the contractor that's also a very important layer of

So there's a layer my point is there's a layer and this is called the contractor. That's also a very important layer of.

Speaker 5: of both profit and cost and consumer price and so on.

A.J. Ahmad: It's also a pricing and margin execution process. Everything is new. Everything has a new price. Everything's, everything had to be prosecuted and market with our customers. And so, you know, this year, for example, eight percent, eight percent as the price increase achieved on, on our residential products. This quarter and year to date is about the same. So it's consistent, you know, through the year. By the way, units this quarter, we're down 4%, obviously last quarter was down, double digits.

Of both profit and cost and consumer price and so on.

Speaker 5: If our cost of goods went up 10% because of regulatory matters, that's...

If our if our if our cost of goods went up 10% because of regulatory matters. That's.

Speaker 5: $270, that's something the contractor would have to decide how to pass that on or what to do about it.

$270, that's something they could contract the contract or would have to decide.

How to pass that on or or what to do about it.

Speaker 5: But there's this entrepreneurial thing and it's really doing a lot of the work called a contractor, not just Carrier or not just Wattsco, but.

But there's a there's this entrepreneurial thing and it's really doing a lot of the work called the contract or not just carrier not just watsco, but.

Speaker 5: contractor and that's where all these tools we're talking about.

Contractor and that's where all of these tools were talking about how.

Speaker 5: How do we help a contractor sell products? How do we help them grow their business? How do we help them digitize their business? How do we help them improve their business?

How do we help a contract or sell products, how do we help them grow.

A.J. Ahmad: And if I count for one last selling day, this quarter, and you know, look, it starts to look at things a little bit performance. But, you know, the quarter's units were near flat if I look at it that way. So price and units, you know, are combining to to help business. And, you know, that's just the, that's the equipment business.

So their business, how do we help them digitize their business.

We help them improve their business processes.

Speaker 5: How do we cater to that clientele that's growing at a much faster rate and build on it?

Do we cater to that clientele, that's growing at a much faster rate and build on it.

Speaker 5: So this whole idea of how we're approaching the contractor.

So this whole idea of how we're approaching the contractor.

Speaker 5: gets beyond just the economics of a price increase. There really is a much bigger picture that we're at.

It gets beyond just you know the economics of a price increase there really is a much bigger picture that we're after.

A.J. Ahmad: AJ, you were going to talk about the brother picture though. Yeah, I just, you know, we talked about the price compensation a lot. It is not one thing. It is hundreds of opportunities across every product we sell to every customer and every location. So just that one, maybe small example would be, if you say, everybody sells the same meaning all of our business units just in the Florida market or Miami market.

Speaker 10: Yeah, makes sense. All right, thank you for the caller. That's it on.

Yeah that makes sense alright, thank you for the color that's it on.

The next question comes from Jeff Hammond with Keybanc. Please go ahead.

Speaker 1: The next question comes from Jeff Hammond with KeyBank. Please go ahead.

Speaker 5: Hey guys, morning. I just want to come back to this regulatory issue. I know there's a lot of uncertainty, but is your expectation that this split system needing to be installed kind of sticks? And if that's the case, just how do you think about transition time? Are the OEMs going to be ready to start getting a new product? This kind of brings in inventory obsolescence. Just maybe talk a little bit more about that.

Hey, guys good morning.

I wanted to come back to this regulatory issue I know you know there's a lot of uncertainty, but like is your expectation that you know the split system kind of needing to be installed kind of sticks.

A.J. Ahmad: So a Honeywell 1, 2, 3, ABC thermostat. And maybe there's 3000 customers that bought that thermostat in the last six months. Well, it probably is at three different 3000 different prices. And there's wide variation in that sale price. Well, now with this tool, for example, what we can do is understand all those sales price those prices of that same thermostat and the same market. And we can do some rationalization and some floor setting and some, you know, making sure that the right customer, meaning larger customers are getting more appropriate price.

And you know if that's the case just how do you think about you.

You know transition time and out of the Oem's gonna be ready to kind of start getting a new product.

So there's kind of brings in kind of inventory obsolescence, just maybe talk a little bit more about that.

Okay.

Speaker 6: I think, you know, all of our OEMs are geared up to have the new product and hopefully we can start introducing product in the second, third quarter of next year, the new product.

I think you know all of our Oems are geared up to have the new product and then hopefully we can start introducing product in the second and third quarter of next year, the new product.

Speaker 6: So I really don't have a lot of concern that they're not going to be ready. They will be ready. And then on the on the

So I really don't have a lot of concern that they're not going to be ready they will be ready.

And then on the on the 410 transition.

A.J. Ahmad: And smaller customers who haven't earned a lower price are getting a price that's right for them. And that's, you know, if you do that one on that micro level, but you multiply it times hundreds and hundreds of opportunities. That's part of the effort that's going on now and it helps. It's going to help drive margins and it's going to help in fact sell more product because it's not always about raising price. It's about getting a price right so that customers find it attractive and want to purchase the product from us as well.

Speaker 6: Your guess is as good as mine if they allow this to continue the way it's unfolding right now or has been written up in the latest blurb we got from the EPA. That means 410A units will be available indefinitely until we run out of the ability to supply them with 410A.

Your guess is as good as mine if they allow this to continue the way it's unfolding right now or has been written up and in the latest a blurb. We got from the E. P. A that means for 10, a units will be available indefinitely until we run out of the ability to supply them.

Unknown Executive: Got it to appreciate the insight.

410 eight.

Speaker 6: But I think that's not a good move for the consumer. The consumer would be much better off.

But I think that's not a good move for the consumer and consumer would be much better off.

Speaker 6: with the longer warranty period as well as having a new machine that it actually is operating to specs.

With the longer warranty period, as well as having a new machine that it actually is operating to specs.

And.

Speaker 6: improve their overall efficiency in their home. So it's a guess as far as whether or not

Improve their overall efficiency in their home. So it's it's a guess as far as whether or not.

Dave Manthey: The next question comes from Dave Manthey with Beard. Please go ahead. Hi, Courtney Dave. Thank you. Good morning, L.

Speaker 6: Whether or not the EPA is going to continue on this path where they're going to change their path or modify it in some way. We don't.

Whether or not the EPA is going to continue on this path, where they can have changed your bathroom modified some way we don't know.

Rick Gomez: In the press release, you've noted potential for additional productivity gains as operational complexities of bait and I'm just wondering if you can outline the key remaining complexities that would represent the biggest opportunity over the next six to 12 months. That's an interesting question. Who wants to be with that? Here's Rick. Yeah, Rick. Sure. Hi, Dave. Good morning. I don't think I'm overstating it by saying it's been the Wild West out in the field the last couple of years and all of that supply chain imbalance weighs on that same store productivity equation.

It seems like the R 22 dry ship.

Speaker 6: It seems like the R-22 dry ship over again. It is. It was indicated that it was different that time because you had all these drop-ins available.

Over again, but I will say it.

It is as I indicated that every different that time, because you had all these drop ins available and.

Speaker 6: the consumer could rely that they were going to have a unit that would be serviced, you know, for the 10 or 12 or 14 year lifespan of the product.

The the consumer could rely that they were going to have a a unit there would be service generally for the 10 or 12 or 14 year lifespan of the product.

We don't have that certainty this time.

Speaker 5: That's another one of those questions added to the list of questions is, you know, what does warranty look like on R410A products moving forward?

Yeah. That's another one of those questions added to the list of questions as well what is warranty look like on our fourth tenet products moving forward.

Speaker 5: when five, ten years from now, they may not even be serviceable.

510 years, probably.

10 years from now they may not even be serviceable.

Rick Gomez: And so what you've seen the last few quarters is variable SNA reacting to a different end market. But more importantly, what we've been working on the last year or so is a lot of energy into understanding our own internal productivity. And we've armed our leaders with real time data that should help drive this in the field. They know this is a priority and they're responding. But that this productivity journey that we're on is going to take some time.

Speaker 11: Yeah, and then just on this 30% gross margin target, I mean, I think you put it out there maybe a quarter or two ago, just

Yeah, and then just just on this 30% gross margin target I mean, I think if you put it out there maybe a quarter or two ago just.

Speaker 5: Rebel set us on, as you think about the path from 27 to 30, what do you think the biggest buckets of opportunity to kind of get there over time? Thanks.

Level set us on you know or you know as you think about the path from 27 to 30.

What do you think that the biggest buckets of opportunity to kind of get there over time. Thanks.

[laughter], alright, I forgot to answer that.

Rick Gomez: It encompasses a huge number of things. It starts with how we order and receive product from 2000 suppliers. And we talk about supply chains getting better, but they're not better everywhere just yet. Commercial is one example and you ask where are the pain points bill that is still a pain point in supply chain is commercial and high efficiency product. But it starts with how we receive product from over 2000 suppliers. It impacts the real estate footprint, how we fulfill orders in the warehouse.

Speaker 2: We have a lot of buckets of opportunity and we'll just have to take one at a time and see how we get there. We have folks, we have ambition and knowledge and financial capability to achieve.

We have a lot of block and pockets of opportunity and.

We'll just have to take one other time and see how we get there, but we have booked you have ambition and knowledge into the financial capability to achieve.

Speaker 2: in the end at some point in time our goal that's our confidence.

In the end it at some point in time, our goal that's our confidence level.

Speaker 4: Yeah, I'd say there's not a silver bullet or two silver bullets. It's hundreds of small opportunities that add up to a lot. But now we have the tools and the teams and the drive.

Yeah, I'd say, there's not a silver bullet.

But it's.

Hundreds of small opportunities that add up to a lot.

Rick Gomez: And finally, how we deliver product customers. That's really the what this productivity effort encompasses. It's a lot of things really from the very beginning to the very end of our processes. And so we're starting to see progress, but there's a lot more to do.

But now we have the tools and the teams and the drive and the focus.

And we'll get there.

Alright, great guys. Thanks.

The next question comes from Damian Karas with UBS. Please go ahead.

Speaker 1: The next question comes from Damian Karas with UBS. Please go ahead. Morning, Damian.

Well I mean minion.

Rick Gomez: And I think, you know, big picture, two thoughts, I'll leave you with two thoughts. One is that I think our growing scale naturally enables more efficiency, right? As a $7 billion company, we have more opportunity to be more efficient than we did as a company half our size four years ago. And secondly, you know, we possess the technology and the tools to drive this productivity throughout our network. And you'll note in the press release that we talked about what some of those internal investments have been in the pricing technology that AJ just talked about.

Hey, good morning Al.

Speaker 12: So maybe I'll throw you guys a real curve ball here and ask a more strategic question.

So maybe I'll throw you guys, a real curve ball here and ask a more strategic question.

Speaker 12: With the gateway deal, you're sort of stepping up into the plumbing space.

With the gateway deal.

You're sort of stepping up into the plumbing space.

Speaker 2: So maybe you could talk a little bit about the deal rationale and how you're thinking about that market opportunity and just kind of comparing, you know, say the water here and the HVAC market. You know, are there any notable differences in the distribution model and financial profile? Well, we don't want to provide publicly our thinking about things like that. Let's say that...

So maybe you could talk a little bit about the deal rationale and how youre thinking about that market opportunity and just kind of comparing.

Water, you're a N D. H back market you know are there any notable.

Differences in the distribution model in and financial profile.

Well, we don't want to provide.

Rick Gomez: The warehouse management and order fulfillment technology. Some interesting work going on around logistics and our network. And so over time, that will bear some fruit in productivity and that will. We're starting to see the benefits of that today, and not just variable-ish and air-reacting, but fixed-esting and air-reacting as well.

Publicly.

Our thinking about things like that but.

Let's say that we do believe.

The heat pump water heaters will be.

Yeah.

Speaker 2: They have a substantial opportunity for us, and we're thinking about it.

A substantial opportunity for us.

And we're thinking about how to take advantage of that.

Rick Gomez: Yeah, I'll double click on the last one, the logistics and transportation delivery. That is the third biggest expense for the company, about $200 million they spend moving products in and through and around our network and delivering products to customers. And I call it our next frontier of opportunity for continuous improvement. There's about 800 trucks in the fleet today, but there are now with the data, the data being exposed and smart people taking smart actions, we're realizing that some of those trucks are sitting idle for 90% of the day.

Okay. I appreciate that would you be able to give us a sense for kind of where gateways gross margins are coming into the business.

Speaker 12: Okay, I appreciate that. Would you be able to give us a sense for kind of where gateways, gross margins are coming into the business?

Rick Gomez: Does it make sense to have that truck or maybe use the different means of transportation to get products from 20 to 20 feet, or can our business unit share trucks, or is there a more efficient route to deliver the products in? So all those questions now, about the millions of times that we're moving products around our network in and out and through to customers are open season on that effort. And it's a big bucket, so we're going to move a needle on a big bucket. Okay, thank you for that detail.

Speaker 2: I don't have that. Do you have it Barry or Rick? I don't mind sharing it.

I don't have that you havent barrier, Rick I don't mind sharing it.

Speaker 4: Yeah, no, it wasn't deluded and it wasn't accretive. So that means it's very comparable. I think we have to take this opportunity to say how impressed we are with Chris Williams and his brothers and the team at Gateway. They have built a tremendous company over many years. And we're so proud and excited to have them as part of the family. It's an honor that they're with us now and we're going to do great things together.

Yeah, no. It's a it wasn't dilutive and it wasn't accretive so that means it's very comparable [laughter] I think we have to take this opportunity to say how impressed we are with Chris lands and his brothers and the team at Gateway they have like.

Tremendous company over many years and we're so proud and excited to happen that's part of the family it's that it's.

It's an honor that they're with US now an unbroken do great things together.

Yeah.

Speaker 5: I would say it this way too that everyone on this call, you're in a community and you know the legendary players and wonderful track records and so on. You know that within your industry and within our industry.

Yeah, I would say that I would I would say it this way too that you know everyone on this call you're in a community and you know the legendary players and wonderful track Records and so on you know that within your industry.

With our within our industry.

Speaker 5: Gateway is one of those very special stories and companies.

Gateway is it's one of those very special stories and company. So.

Speaker 5: The fun part is what happens next though, which is what can they do with the keys to the kingdom in their hand?

You know the fun part is what happens next though which is what can I do with kind of the keys to the kingdom in their hands.

Unknown Executive: And second, could you give us your take on Governor DeSantis rejecting IRA funds?

Speaker 5: How can they grow? Where can they expand? What new things can they accomplish? What ambitions did they have that were parked because of capital? Things like that.

How can they grow where can they expand what new things can they accomplish what.

Unknown Executive: Well, we do not express related to that. No, we're not going to talk about that. Next question.

And what ambitions that they have that were parked because of capital things like that.

Speaker 5: So there are more special companies like this one. It was a very special company.

So it's a you know there are more there are more special things like.

Nigel Coe: The next question comes from Nigel Coe with Wolf Research. Please go ahead. Morning, Nigel. Thanks. Oh, hi guys. Thanks for the question. So inventory. Can we talk about where we stand right now? You know, Alan on inventory yet. I think you've said in previous calls, maybe two million dollars of reduction for this pool year. Are we still on that track?

Uh huh.

It was a very special company.

Great appreciate all the color guys best of luck.

Thank you.

The next question comes from Steve Volkmann with Jefferies. Please go ahead.

Speaker 1: The next question comes from Steve Volkman with Jeffrey. Please go ahead.

Speaker 13: Morning, good morning guys. Thanks for fitting me in. I don't think anybody's mentioned gross margins yet. So I wanted to ask. Oh, my goodness, since we're at the end of the call. Yeah, very. Barry, I appreciate you jumping into the short term box with us against your will, but you didn't provide anything to call out in the fourth quarter that we should be aware of.

Very good.

Good morning, guys. Thanks for fitting me in I don't think anybody's mentioned gross margins yet so I wanted to.

Paul Johnston: Well, that's a good question, and I'll turn it over to the executive that's taking care of that for go ahead, Paul. Alrighty, yes, we can expect that. We've been a delirium or inventory now, since this season ended, and we're seeing great progress. We've set goals for each one of our operating units. We track them daily with with our ability to identify, you know, what we have on order and what our sales through is.

[laughter] Oh my goodness.

We're at the end of the call area from cheap Barry I. Appreciate you jumping into the short term box with us against your will but you did provide.

<unk> anything to call out in the fourth quarter that we should be aware of.

Speaker 5: Yeah, I had my brain goes back to last year. Is there anything peculiar or interesting about last year and comparative and I don't know the answer. My instinct is, you know, a measure of consistency as we play out the year.

Yeah, I I just have my brain goes back to last year is there anything peculiar or interesting about last year in comparative and I don't know the answer my instinct is you know a measure of consistency as we play out the year.

Paul Johnston: Sales output is and we're seeing definite reductions. You know, month over month, day over day. Okay, so that implies fourth quarter should be a big source of funds, inventory. That's the way to read that. It better be. I would. Okay. I would not. I would not want to take a pigeon hold into that week. No. You know, we're not giving you that kind of. Okay, not. I think it's the question. Yeah, we're very focused on it.

Speaker 5: with what you're seeing. I don't think there's any big pricing.

With what you're seeing is I think I don't think there are any big pricing.

Speaker 5: going on in the market at this point. Paul, do you have any insight beyond that? No, not really.

Actions going on in the market at this point.

Paul do you have any insight beyond that.

No not really yeah yeah.

I've got a you know a little bit on the commodity side I think we're going to start seeing some upticks and some of the commodities, but whether they will kick in in the fourth quarter I can't I can't definitively say.

Speaker 6: I've got a little bit on the commodity side. I think we're going to start seeing some up kicks in some of the commodities, but whether they'll kick in in the fourth quarter, I can't definitively say. Okay, great.

Okay, Great and then I want.

Speaker 13: Sorry, my real question is I wanted to ask about this refrigerant transition, but from a different angle, because it feels like I think Al, you mentioned at the outset here that 60% is now new products. My guess is, you know, 12 to 18 months from now. It could be even more new products just as we go through all these transitions.

Sorry, My real questions I wanted to ask about this refrigerant transition, but from a different angle.

Paul Johnston: Don't forget that during the. All these delivery issues that we had to do things that we normally don't do. The producers could ship that, you know, partial the order and that sort of thing. And that takes a while to, to get that inventory that we have to be what it should be in terms of complete systems and that sort of thing. But we're working very focused. And yes, I do plan to take out that kind of number and improve our cash flow along with it. Okay. That's great.

It feels like I think al you mentioned at the outset here that 60% is now new products My guess is <unk>.

12 to 18 months from now it could be even more new products just as we go through all these transitions and I'm curious sort of how you guys feel like youre going to be able to manage that from two perspectives, one SG&A because I imagine there's going to be a lot of training on the new products and you know how to replace old.

Speaker 13: And I'm curious sort of how you guys feel like you're going to be able to manage that from two perspectives. One, SG&A, because I imagine there's going to be a lot of training on the new products and how to replace old products and all that kind of stuff. And I'm curious how that impacts SG&A. And then also on the inventory side, my guess is that you may have to layer in a little extra inventory in 24 as this transition kind of goes through. So just any early thoughts on how those two things might trend?

Products, and all that kind of stuff and I'm curious how that impacts SG&A and then also on the inventory side. My guess is that you may have to layer in Electra inventory in 'twenty four as this transition and kind of goes through so just any early thoughts on how those two things might trend.

Paul Johnston: And the fourth question is around, you know, the full 10 a. I mean, I think the EPA, the way the rules are written right now, I think it's an installation deadline. You know, as of one jam to 2025, so as opposed to a production deadline. So, how, how you guys think about that in terms of managing 4th and a inventory levels. And how do you think the 4th, 5th, 4B availability will come through next year?

Whatever those.

The opportunities are in the future, we'll deal with them as we have in the prior.

Speaker 2: opportunities are in the future, we'll deal with them as we have in the prior.

Speaker 2: changes that come to the industry, we're very good at it, we've never been better at it. And so far as specific goals, anybody from the Watson team wanna deal with them? It's

Changes that come to the industry, we're very good at it we've never been better at it.

And so.

So far as specific goes with anybody from the Watsco team won a deal with them.

I think we've got some.

Speaker 6: ideas on how we can handle it without having to really overlay inventory, you know, different ways of handling our logistics, our order plans, and you know how we utilize some of our DC attributes to accommodate the replacement of the 410A units.

Ideas on how we can handle it without having to really overly inventory.

Paul Johnston: Are you asking about the new EPA? Yeah, I think it came out last Friday night. Yeah, everybody's still, you know, working their way through it, basically what it provided was that the outdoor unit becomes a component and hence can be replaced as a repair item for a system that you can't install. All systems, you know, indoor and outdoor units, but you can repair the use by putting in an outdoor unit. And that's got that's got a lot of ramifications, which I don't know if it really have been thought all the way through by the people who wrote it up, you know, for instance, how can you make sure that the coil on the inside matches the outdoor unit, which is only going to be the higher efficiency product.

Different ways of handling the logistics are order plans and.

How do we use utilize some of our D C attributes to to accommodate the replacement of the 410 eight units.

Sterling, it's early innings early innings on that.

Speaker 4: I'll say this, I'm glad that we have the skill and the strength that we have.

I'll say that I'm glad that you have the scale and the strength that we have.

Speaker 4: because we can do exactly what was just said, is deal with anything that comes with us in an efficient way, an effective way, and we can use our resources.

Because we can do exactly what you just said is deal with anything that comes up with it in an efficient way and effective way.

And we can use our resources.

Speaker 4: as needed, it's going to be presumably more difficult for smaller competitors of ours. They'll have a tougher time with the challenges, I would imagine.

As needed, it's gonna be presumably more difficult for smaller competitors of ours.

They'll they'll have a tougher time with the challenges I would imagine.

Paul Johnston: So, if you're putting in a 15.3 outdoor unit, you know, with a 13 or 14-sear indoor unit, you're not going to get the efficiency that you're paying for for the outdoor unit. And then secondly, you know, I think we're looking at, you know, a difference from when we went through the transition between R22 and 410A, this one is different. It's different in the regard that there's no replacement for 410A. There were other replacements that you could drop in that would replace the R22 that aren't going to be available with the new product.

Great I appreciate the color. Thanks.

The next question comes from Steve Tusa with Jpmorgan. Please go ahead.

Speaker 1: The next question comes from Steve Tusa with JP Morgan. Please go ahead.

Hey, guys good morning.

Speaker 5: Can you just clarify again what you said about October ? You said it was like a different comment or something? I didn't quite understand what the October comment was. Yeah, a bit lower growth rate, but again, if I look at a year ago, it was very strong this time of year, so I'm not going to get too much of an inference out of it.

Morning.

Can you just clarify again, what you said about October you said it was like a different comment or something I didn't quite understand what were the October comment was.

A bit lower growth rate, but again, if I look at a year ago. It was very strong in this time of year, So I'm not going to I'm not going to get too much of an influence out of it.

Speaker 5: We look out the rest of the quarter, we're seeing expected to derive growth.

If you look out the rest of the quarter. We're seeing you know we're expected to drive growth.

Speaker 14: Okay, got it. And then I don't quite understand the comments. I mean, the refrigerant prices we've seen, which is kind of curious or down double digit year over year, which is kind of unusual going into, you know, a period where everybody has visibility on this wind down. And I know everybody is very highly convicted that that price is going up. But from what we've heard in the channel, from the actual refrigerant suppliers themselves, they continue to say it's actually going down.

Got it and then I I don't quite understand the comments I mean, there were the refrigerant prices, we've seen which is kind of curious are down double digit year over year, which is kind of unusual going and do you know appeared where everybody has visibility on this wind down and I know everybody is very highly convicted that that price is going up but.

Paul Johnston: Also, you know, a lot of questions that I think we need to ask are, you know, OEMs and OEMs will have to answer the question, you know, what's going to happen to the price of the 410 units because obviously the production will be lower from the OEM. Well, that raised the price of the product. What's going to happen to the availability of 410A to make the repair costs so the repair cost would be acceptable to the consumer.

From what we've heard in the channel from the actual refrigerant suppliers themselves. They continue to say, it's actually going down sequentially and it's like now you know in the high single digits per pound type of area would you said you saw an uptick this week or something like that or a last couple of weeks.

Speaker 14: sequentially and it's like now you know in the high single digits per pound type of area would you said you saw an uptick this week or something like that or a last couple weeks what are you guys seeing yeah what are you guys seeing that maybe those guys aren't

Paul Johnston: What happens to the, you know, 30-40% of the install base, which you're still operating on, R22, or you can't change out the outdoor unit with a 410A unit. So, I've got a lot of questions. I guess I don't have a lot of answers for you. But, you know, those are things that we're thinking of and we're working with our OEMs and working with the refrigerant manufacturers to try to figure out how all this is going to play out in not only in 24 but also in 25. I'm going to do the actual lower. Thanks. You actually have more questions than I did, but it sounds like a little bit too late to have a view, but I appreciate the context.

What are you guys seeing yeah. What are you guys seeing didn't need all these guys arent.

Speaker 6: We saw a definite uptick, you know, and those are the guys that are selling it to us. So hopefully they saw the same uptick. But yeah, we've seen an increase in...

We saw it definitely.

Unknown Executive: Thanks, Lucas.

Definitely the upticks you know and those are the guys that are selling it to us so hopefully they saw the same uptick.

But yeah, we've we've seen an increase in AR and the price of 410, we had.

Speaker 6: in the price of $4.10. We had, there was some dislocation where some people were taking inventory out.

There's some dislocation where some people were taking inventory out.

Speaker 6: earlier and we're reducing price to be able to create some sort of sell through and when that ended we started seeing the price come back the other

Earlier, and we are reducing price to be able to create some sort of sell through and when that ended we started seeing the price come back the other way.

Speaker 14: Got it. So so and then and just the last one, Barry, the the 2900 equipment number that you mentioned in your instance, that's after like obviously like a 30% plus increase.

Got it so so and then and then just the last one I know Barry.

The the the 2900 equipment number that you mentioned in your instance, that's after like obviously like a 30% plus increase.

Ryan Merkel: The next question comes from Ryan Merkel with William Blair. Please go ahead. Morning, bro. Morning. Hey, morning. Morning, everyone. Nice porter.

Ryan Merkel: So I wanted to ask about demand trends through the quarter and maybe even two octaves. October, just given the fears out there about consumer spending, starting to decline, just update us on what you saw through the quarter and into October. Hi, Ryan. Yeah, I mean, very consistent. I would say throughout the quarter and quarter ended. If I looked at September, for example, just to say it that way, you know, looks like the rest of the quarter.

Speaker 14: um you know over the last few years it that just seems low is that is that um

You know over the last few years.

That just seems low is that is that yeah. I don't know is that for like a pool house or something like that like maybe clarify what [laughter] cause I mean do you view you as you've done pretty you've done pretty well for yourself over the years I mean, that's like a pretty low number.

Speaker 5: I don't know, is that for a pool house or something like that? Maybe Claire would buy one. You've done pretty well for yourself over the years. That seems like a pretty low number. What's building on your estate, Barry? That's right. That's right. It's a one and a half ton home office system that sits... It's a smaller ton of system. It's not a five ton system.

Ryan Merkel: So pretty consistent throughout. October is only a few business days, and it's our biggest month of the fourth quarter last year. So not quite the same answer, but all of our field, all of our field checks, talking to our people. See a good fourth quarter. OK, that's helpful.

What are the welding on your estate.

[laughter] that's right that's right.

So one of the house on a home office a system. That's it's you know it's a smaller tonnage system, it's not a five one system but.

The more important.

Speaker 4: the more important. Is that a ductless system? No, it's a ducted system.

Doug Douglas is that a ductless system now deducted system okay.

Speaker 14: Okay, all right. And that's a it is an arm's length margin for the record when I purchase something from one of our subsidiaries. Yeah, something something didn't didn't quite add up there and then just one last one. Have you actually have you actually seen the

Okay Alright.

And it isn't it is an arm's length of margin for the record when I purchased something from one of our subsidiaries.

A.J. Ahmad: And then I had a high level question to that's probably hard to answer, but we all see the price increases coming 15 to 20% and then obviously there's been a lot of price increases on equipment the last few years. How do you guys think about sort of the impact of the consumer? Are they going to be able to afford these systems is financing going to need to be a bigger part of the HVAC industry?

[laughter] yeah.

It's something something didn't didn't quite add up there and then and then just one last one.

Have you actually have you actually seen the debt.

Speaker 14: I mean, these OEMs haven't even really come out with their new products. I mean, they've kind of perhaps given you a bit of a sneak preview on some of them, but like, have you actually seen the pricing yet for the 454 product?

These Oems haven't even really come out with their new products.

They've kind of perhaps giving you a bit of a sneak preview on some of them, but like how have you actually seen the pricing yet.

A.J. Ahmad: You know, how much more do you have that there will be more sort of repair versus replace? Oh, that's an interesting thing. We think about things like that. As you may or may not know, we now have a financing platform ourselves. And it's probably at least be considered the most user-friendly platform that exists for an customer to find the loan that he wants to finance it. So anybody want to take a shot at the more sophisticated answer?

For the for the 454 products.

No we have not so.

Speaker 14: So how are- They did not establish the price yet for us. So if you guys are kind of saying that, you know, like it sounds like there's some uncertainty here. I mean, I know the rule the EPA just went through last week, that is finalized and in the Federal Register in a few weeks, but like how can they be so confident in kind of going out there and predicting what kind of price they're going to actually capture over the next two years? Like, what's the disconnect there? You have to ask them.

So how did not establish a price yet for us. So if you guys are kind of saying that you know like it sounds like there's some uncertainty here I mean I know the rule. The EPA just went through last week that is finalized and in the Federal Register in a few weeks, but like.

How can how can they be so confident in kind of going out there and predicting what they are but what kind of price they're going to actually capture over the next two years like what's the disconnect there.

A.J. Ahmad: Yeah, it's, you know, there is a concern, you know, it's around elasticity issue here where we're going to reach a point where a consumer can afford it. I don't, I still feel like this is a necessity of life that people have to have to have heat, have to have cool. Also, we're seeing a lot more interest, obviously, we really haven't felt the impact of 25 C as far as the tax credits coming into effect for the higher income people.

You have to ask them.

Yeah.

Yeah, Okay, well thanks, guys.

Speaker 1: The next question comes from Jeffrey Sprog with Vertical Research. Please go ahead.

The next question comes from Jeffrey Sprague with vertical research. Please go ahead.

Thank you good morning.

One.

Speaker 13: Hey, how's everybody doing? Hey, a lot of good ground covered here. So let me just do two quick little cleanup ones. Barry, you gave us, you know, 8% price and down four on units, so consolidated revenues up four. Can you do the same on HVAC?

Hey, How's everybody doing hey, a lot of good ground covered here. So let me just do two quick little cleanup ones.

Sorry, you gave us 8% price and down four on units. So you've consolidated revenues up for can you do the same on HVAC equipment and.

A.J. Ahmad: The rebate programs that hopefully will start being affected with third quarter of 2024 should start taking into help support at least with $8,000. Rebate to the medium and low income consumer to be able to replace their unit and their system. But the consumer so far has been fairly resilient as far as, you know, taking care of what I would consider to be an absolute need for life, if you will. Also, we're starting to see a lot more activity around what utilities are doing, what states are doing in the area of the weatherization programs and that type of thing.

Speaker 13: a little bit of detail on within price kind of what the price mix dynamic

Give us a little bit of detail on within price kind of what the price mix dynamic is there.

Speaker 5: No, that is residential equipment, those data points.

Oh that is that that is that is residential equipment that the that those data points.

Speaker 13: Then our double digit growth in commercial brings the overall equipment growth rate up to 6%. And on the other hand...

Okay, and then in our double digit growth in commercial brings the overall equipment growth rate up to 6%.

Got it and then on the.

And can you say anything about mixed Berry, how much is kind of price price versus mix.

Speaker 5: Again, it's an infinite array of data and that's the answer. The 8% price is...

Boy again, its an infinite array of data in that in that.

The answer would be 8% prices, whether its an infinite number of answers inside that 8%.

A.J. Ahmad: Maybe that's a little bit of polyhanna, but I think going forward the consumer is going to have to figure out which programs work out best for them so that they can be in place. And with the financing is going to help also. Yeah, I think affordability has always been a question. And yet the industry's grown 3.5% compounded for 30 years. And things are obviously always more expensive. And so over time, given all the regulatory things, so I would just point to that as a long term reality of it.

Speaker 5: It's an infinite number of answers inside that 8%.

Speaker 5: It's more so what it's most of is the new products having a higher cost and a higher price in the market than that composite a year ago.

It's it's it's more so.

But it's most of it is the new products, having a higher cost and a higher price in the market then.

The composite a year ago.

Yes.

And just back to the 60% of products being new.

Speaker 13: And just back to the 60% of products being new.

Speaker 13: I would assume that is just mostly, you know, sear change units, but could you maybe address what percent of your volume is the new higher sear product at this point? How much, you know, how much more do we have to go until we're 100% there? Maybe if, you know, if there's a difference between that 60 and 100% of the volume. So, I would assume that's just mostly, you know, sear change units, but could you maybe address what percent of your volume is the new higher

I would assume that is just mostly you know sheer change units, but could you maybe address what percent of your volume is the new higher seer product at this point how much.

A.J. Ahmad: But Ryan, if I give you an interesting answer, I just recently, you know, took out a system in my home $6200 was the bill contract to get it in a day. I expected to be paid that day. And I was curious, I went back and looked at our cost of our cost to him, meaning our revenues, but what did Watsco sell that guy in my $6200, you know, installation. And the answer was around was around $2,900.

You know how much more do we have to go until we're 100% there.

Maybe if you know if there's a difference between that 60% on.

New product, new sheer product versus other new product.

Yeah.

Speaker 6: That's the sole question. Go ahead. Yeah, we can't. We can't replenish the old product. So it's no longer in production.

So second question go ahead [laughter], Yeah, we we can't we can't replenish the old product. So it's no longer in production.

Speaker 6: So it's going to be pretty much at 100% at some point once the remaining product is sold through.

So it's going to be pretty much at a at a 100% at some point once.

A.J. Ahmad: So there's a layer, my point is there's a layer in this called the contractor that's also a very important layer of both profit and cost and consumer price and so on. If our cost of goods went up 10% because of regulatory matters, that's $270, that's something the contractor would have to decide how to pass that on or what to do about it. But there's this entrepreneurial thing and it's really doing a lot of the work called a contractor, not just Currier and not just Watsco, but contractor.

The remaining product is sold through.

Speaker 4: Domestically, right?

Domestically.

Internationally.

Yeah.

And this is just a reminder.

Speaker 5: This is a reminder what changed, and this was a change from prior times. It's not just higher efficiency systems being mandated. The way efficiency was measured changed.

A reminder, what changed in this what was the change from prior times.

Is that it's not just a higher efficiency systems, you know being mandated the way efficiency was measured changed.

Speaker 5: and what would be called SEER II. And SEER II changed the way a 17 SEER system is rated a year ago versus now, or a 16 SEER system is rated today versus a year ago.

And and kind of what would be called tier two and SER two changed the way our Seventeens. Your system is rated a year ago versus now or 16 Seer system has read it today versus a year ago.

Speaker 5: So when we talk about, you know, and then the matching error handlers that go with it and the matching components that go with it. That's the complexity, that's the nuance, and that's why as a composite it's, you know, a higher price.

So when we talked about you know and then the matching air handlers that go with it and the matching components that go with it.

A.J. Ahmad: And that's where all these tools were talking about, how do we help the contractor sell products, how do we help them grow their business, how do we help them digitize their business, how do we help them improve their business processes, how do we cater to that clientele that's growing in a much faster rate and build on it. So this whole idea of how we're approaching the contractor gets beyond just, you know, the economics of a price increase. It really is a much bigger picture that we're after. Yeah, that makes sense. All right. Thank you for the color. That's it on.

That's the complexity, that's a nuance and that's why as a composite its you know a higher price.

Speaker 5: But I guess your question is how mature is that within?

But I guess your question is how mature is that with him.

Speaker 6: I'm trying to think of how much more mix effect do you have to come through for us to get to that 100 percent. You're not going to get it right. The question is when does it annualize, so to speak, and it would be obviously sometime probably early next year, Paul. Does that make sense? Yeah, I would say early next year will be pretty much all new equipment.

You know I'm trying to think how much yeah, how much more mix effect do you have to come through for us to get to that 100%.

Right.

Yeah of course, there's windows at annualized so to speak and it would be obviously sometime probably early next year. Paul is that makes sense. Yeah. I would say early next year will be will be pretty much are all new equipment.

Unknown Executive: The next question comes from chef Herman with bank. Please go ahead. Hey guys, morning. I just want to come back to this regulatory issue. I know, you know, there's a lot of uncertainty, but like is your expectation that, you know, this split system kind of needing to be installed kind of sticks. And, you know, if that's the case, just how do you think about, you know, transition time in our OEMs going to be ready to kind of start getting a new product.

Yeah.

Great. Thank you I'll leave it there guys much appreciate it.

Yeah.

Speaker 1: As a reminder, if you wish to ask a question, please press star and 1 to enter the question Thank you.

As a reminder, if you wish to ask a question. Please press star one to enter the question queue.

The next question comes from Joe <unk> with Deutsche Bank. Please go ahead.

Speaker 12: The next question comes from Joe Allomire with Deutsche Bank. Please go ahead. Good morning. Hey, everybody.

Good morning, everybody.

Unknown Executive: You know, this kind of brings in kind of inventory obsolescence, just maybe talk a little bit more about that. I think, you know, all of our OEMs are geared up to have the new product and hopefully we can start introducing product in the second, third quarter of next year, the new product. So I really don't have a lot of concern that they're not going to be ready. They will be ready. And then on the, on the 410 transition, your guesses is good at mind if they allow this to continue the way it's unfolding right now or has been written up in the latest, the blurb we got from the EPA.

How are you.

Well you.

Speaker 15: I'm good. Just I'll just kind of clean up with one more about the model here. A lot of great questions so far. A lot of mine have been answered.

I'm good just a I'll just put kind of clean up with one more about the model here a lot of great questions. So far a lot of mine have been taken if I think through a lot of other considerations for the fourth quarter, Barry you're kind of asking you to get back in the year over year box again here, but you know volume comps getting easier.

Speaker 15: If I think through a lot of the considerations for the fourth quarter, Barry kind of asking you to get back in the year over year box again here, but, you know, volume, and the like, it's not really that clear, but I think that we are getting back to whether

Speaker 15: getting easier into November and December , you're starting to actually get probably even more CRMx benefit because of the geography of how it rolled out.

Is your into November and December you're starting to actually get probably even more so your mix benefit because of the geography of how it rolled out you know theres, probably some catch up from the weather in the third quarter benefiting even into the fourth quarter and then also the OEM logistics that so is it possible.

Speaker 15: You know, there's probably some catch up from the weather in the third quarter benefiting even into the fourth quarter and then also the OEM logistics. So is it possible that we could be looking at like high single digit type revenue growth?

Unknown Executive: That means 410A units will be available indefinitely until we run out of the ability to supply the most 410A. But I think that's not a good move for the consumer. The consumer would be much better off with the longer warranty period, as well as having a new machine that it actually is operating to specs and improve their overall efficiency in their home. So it's a guess as far as whether or not the EPA is going to continue on this path where they're going to change their path or modify it in some way.

We could be looking at like high single digit type revenue growth in the fourth quarter and then just thinking about you said at the beginning of the year you were targeting earnings growth. It looks like you're likely to get there just kind of wondering how much you might be able to grow EPS. This year with just one quarter left in the 2% to 3% or potentially something more.

Speaker 15: in the fourth quarter. And then just thinking about, you said at the beginning of the year, you were targeting earnings growth, looks like you're likely to get there just kind of wondering how much you might be able to grow EPS this year with just one quarter left. Is it, you know, two to 3% or potentially something?

Speaker 2: And we don't have.

Yeah, we don't have.

Speaker 2: That in our history we do not forecast because we're in a business.

Yeah.

That in our history, we do not forecast.

We're in the.

Business that fluctuates.

Speaker 2: considerably with weather and that's been our tradition and I don't know.

Considerably with weather.

Unknown Executive: We don't know. It seems like the R22 dryship over again, but it is as I indicated that it was different that time because you had all these drop ins available and the consumer could rely that they were going to have a unit that would be serviced for the 10 or 12 or 14 year lifespan of the product. But we don't have that certainty this time. Yeah, that's another one of those questions added to the list of questions is, you know, what does warranty look like on our 14 a products moving forward when five, 10 years and out, five, 10 years from now, they may not even be serviceable.

And that's been our tradition.

No.

Speaker 5: that we're going to change it. Eric, you can help them with that changing that. No, I was going to say, we'll give you our thoughts and our educated, close reaction to what's going on, but we're not going to give guidance, so we're not going to give, certainly not fourth quarter guidance, when again, we're getting to a 90 day period and trying to crystallize something. So.

That we're going to change it.

If you can help them without changing that no I was going to say well give you our thoughts and our are educated.

Oh.

Close close reaction to what's going on but we're not going to give guidance. So we're not going to guess certainly not fourth quarter guidance when again.

Getting into a 90 day period in and trying to crystallize something so.

Speaker 5: Are we giving you the trends? I think again it's a...

And we're giving you the trends I think again, it's a.

Speaker 5: If you think about where we started this year, where unit volumes were down 10% or more.

If you think about where we started this year, where unit volumes were down 10% or more.

And the worry what the question was will that get worse or better it's got much better as the years gone on a short period of time.

Speaker 5: And the worry was, and the question was, will that get worse or better? It's gotten much better as the year's gone on in a short period of time.

Speaker 5: inventory flowing to the channel and earnest at this point. Our one vendor issue that hurt the first half of the year is now converting into a growth opportunity for the rest of the year.

Inventory flowing into the channel and in earnest at this point.

Unknown Executive: Yeah, and then just just on this 30% gross margin target. I mean, I think you put it out there, maybe a quarter or two ago, just rubble set us on, you know, or you know, as you think about the path from 27 to 30. You know, what you think that the biggest buckets of opportunity to kind of get there over time. Thanks. I'm going to answer that. We have a lot of pockets of opportunity and we'll just have to take one and a time and see how we get there where we have folks.

Or one or one vendor issue that hurt the first half of the year is now converting into a growth opportunity for the rest of the year.

Speaker 5: So just kind of leave it at that. And our focus has to also be looking into next year.

So just kind of leave it at that and.

Our focus has to also be looking into next year.

Speaker 5: and because we're the major partner for much of the OEMs that you can talk to.

And cause cause you know where the major partner for much of the Oems that you can talk to.

Speaker 5: and growth and market share and expansion and more brands and more SKUs and new SKUs next year, you know, we start to look ahead and that's pretty exciting. Fourth quarter, we'll see. I wouldn't, I wouldn't.

And growth in market share and expansion and more brands and more skus and new skews next year.

Unknown Executive: We have ambition and knowledge and the financial capability to achieve. And at some point in time, our goal, that's our confidence. Yeah, I say there's not a stiller bill or two silver bullets. It's hundreds of small opportunities that add up to a lot. But now we have the tools and the teams and the drive and the focus and we'll get there. Parker goes. Thanks.

You know we start to look ahead and in that that's pretty exciting.

Fourth quarter, we'll see I wouldn't I wouldn't.

Alright Barry.

Hum.

Speaker 15: Anybody else? Okay. I appreciate that. Maybe just one more then kind of related to the prior question about the SEER proportion. I noticed in the release in the second quarter you talked about 60% of year-to-date sales representing the new equipment. And then now in the release of the new equipment,

Okay.

I appreciate that maybe just one more then I'm kind of related to the prior question about the sphere proportion.

I noticed in the release in the second quarter, you talked about 60% of year to date sales.

Representing the new equipment and then now in the release, it's the same number but you're talking about the number of Skus at your locations. Just wondering if that was a intentional change and if that was intended to communicate anything there.

Damian Karas: The next question comes from Damian Curris with UBS. Please go ahead. Hey, good morning out.

Speaker 15: but you're talking about the number of SKUs at your locations. Just wondering if that was an intentional change and if that was intended to communicate.

Speaker 5: That's a fair question, but I don't maybe somebody else can ask that because I'm not sure yeah Yeah, it's clarification that the inventory we actually carry in our stores That's 60% is new and that's that's the clarification Versus a digital catalog where it's a much much, you know broader set of products what we actually carry in stores

Unknown Executive: So maybe I'll throw you guys a real curveball here and ask a more strategic question with the gateway deal. So you're sort of stepping up into the plumbing space. So maybe you could talk a little bit about the deal rationale and how you're thinking about that market opportunity and just kind of comparing, you know, say the water and the HVAC market, you know, are there any notable differences in the distribution model and financial profile.

It's a fair question, but I don't maybe somebody else can they understood cause I'm not sure go.

Go ahead, yeah, it's clarification that the inventory, we actually carry in our stores, that's 60% is new and that's that's the clarification.

A digital catalog, where it's a much much broader set of products, what we actually carry in stores.

Speaker 5: The point is we emptied out 60% of what we sell a year ago into new products this year. It's an immense change.

Point is we emptied out 60% of what we sell a year ago and the new products. This year, it's an immense change.

Unknown Executive: Well, we don't want to provide publicly are thinking about things like that. Let's say that we do believe that the heat pump water heaters will be. You have an actual opportunity for us, and we're thinking about how to take advantage of that. Okay, I appreciate that.

Speaker 5: and obviously also an immense opportunity with what's going on.

And obviously also an immense opportunity with what's going on.

Alright, Thanks, a lot guys.

This concludes our question and answer session I would like to turn the conference back over to Alan on it for any closing remarks.

Speaker 2: This concludes our question and answer session. I would like to turn the conference back over to Al Named for any closing remarks. Once again, thanks very much for your interest in Watsco.

Yeah.

Once again actually must be interest in watsco.

We hope to continue to build this wonderful company.

Barry Logan: Would you be able to give us a sense for kind of where deep ways gross margins are coming into the business? I don't have that. Do you have it, Barry or Rick? I don't mind sharing it. Yeah, no, it wasn't dilutive and it wasn't a creative idea. So that means it's very comfortable.

Speaker 2: and appreciate very much your interest. Bye bye now.

And I appreciate very much your interest bye now.

Speaker 1: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

[music].

Speaker 16: The.

Alan Ahmad: I think we have to take this opportunity to say how impressed we are with Chris Williams and his brothers and the team the gateway. They have such a tremendous company over many years and we're so proud and excited to have them as part of the family. It's an honor that they're with us now and we're going to do great things together.

Alan Ahmad: Yeah, I would say I would say it this way too that you know everyone on this call, you're in a community and you know the legendary players and wonderful track records and so on. You know that within your industry and within our industry. The gateway is one of those very special stories and company so you know the fun part is what happens next though which is what can they do with kind of the keys to the kingdom in their hands.

Alan Ahmad: How can they grow where can they expand what new things can they accomplish what and what ambitions did they have that were parked because of capital things like that. So it's a you know there are more there are more special companies like this is very special company.

Unknown Executive: Great. We're getting all the color guys. That's a lot. Thank you.

Steve Bolton: The next question comes from Steve Bolton with Jeffrey. Please go ahead. Morning Steve. Good morning guys. Thanks for fitting me in. I don't think anybody's mentioned gross margins yet so I wanted to say. Oh my goodness. Thanks for at the end of the call.

Barry Logan: Very appreciate you jumping into the short term box with us against your will but you didn't provide about four cute anything to call out in the fourth quarter that we should be aware of. Yeah I have my brain goes back to last year is anything particular or interesting about last year and comparative and I don't know the answer. My instinct is you know a measure of consistency as we play out the year with what you're seeing is I think I don't think there any big pricing actions going on in the in the market at this point.

Barry Logan: Paul do you have any insight beyond that? No I'm not really you know. Yeah. I've got you know a little bit on the commodity side. I think we're going to start seeing some upkicks and some of the commodities but whether they'll kick it in the fourth quarter. I can't I can't definitively say.

Barry Logan: Okay great. And then I want. Sorry I my real questions I wanted to ask about this refrigerant transition but from a different angle because it feels like I think Al you mentioned at the outset here that 60% is now new products. My guess is you know 12 to 18 months from now it could be even more new products just as we go through all these transitions. And I'm curious sort of how you guys feel like you're going to be able to manage that from two perspectives one SGNA because I imagine there's going to be a lot of training on the new products and you know how to replace old products and all that kind of stuff.

Barry Logan: And I'm curious how that impacts SGNA and then also on the inventory side my guess is that you may have to layer in an electric inventory in 24 as this transition kind of goes through. So just any early thoughts on how those two things might trend. Whatever those opportunities are in the future, we'll deal with them as we have in the prior changes that come to the industry. We were very good at it. We've never been better at it. And it's in some far-specific goals.

Paul Johnston: Anybody from the Watsco team want to deal with them? Yeah, I think we've got some ideas on how we can handle it without having to really overlay inventory. Different ways of handling logistics, our order plans, and how we utilize some of our DC attributes to accommodate the replacement of the 420 units. What can you say about that? I'm glad that we have the skill and the strength that we have because we can do exactly what was just said is deal with anything that comes with us in an efficient way, an effective way, and we can use our resources as needed. It's going to be presumably more difficult for smaller competitors of ours. They'll have a tougher time with the challenges I would imagine.

Unknown Executive: Great. I appreciate to go on. Thanks.

Steve Tusa: The next question comes from Steve Tusa with JP Morgan. Please go ahead. Hey guys, good morning. Can you just clarify again what you said about October? You said it was like a different comment or something. I didn't quite understand what the October comment was. Yeah, a bit lower growth rate. But again, if I look at a year ago, it was very strong in this time of year. So I'm not going to get too much of an inference out of it.

Steve Tusa: We look out the rest of the quarter. We're seeing expected to derive growth. Okay. Got it. And then I don't quite understand the comments. I mean, the refrigerant prices we've seen, which is kind of curious or down double digit year over year, which is kind of unusual going into, you know, a period where everybody has visibility on this one down. I know everybody is very highly convicted that that price is going up.

Steve Tusa: But from what we've heard in the channel from the actual refrigerant suppliers themselves, they continue to say it's actually going down sequentially. And it's like now, you know, in the high single digits per pound type of area. Would you said you saw an uptick this week or something like that or the last couple weeks last what are you guys seeing? Yeah, what are you guys seeing that maybe those guys aren't. We saw a definite definite uptick, you know, and those are the guys that are selling it to us.

Steve Tusa: So hopefully they saw the same upkick. But yeah, we've seen an increase in in a price of 410. We had, there was some dislocation, whereas some people were taking inventory out earlier. And we're reducing price to be able to create some sort of sell through. And when that ended, we started seeing the price come back the other way. Got it. So, and then just the last one, Barry, the 2,900 equipment number that you mentioned in your instance.

Steve Tusa: That's after like, obviously like a 30% plus increase, you know, over the last few years. That just seems low. Is that, is that, yeah, I don't know, is that for like a pool house or something like that? Like maybe clarify what? You've done pretty well for yourself over the years. I mean, that seemed like a pretty low number. It is a one and a half ton home office system that sits, you know, so it's a smaller ton of system.

Steve Tusa: It's not a five ton system, but. The more important, is that a duck list? Is that a duck list of them? No, it's a ducked system. Okay. Okay, all right, and it is an arm's link to margin for the record when I purchased something from one of us actually did something, something didn't quite add up there. And then just one last one. Have you actually seen the, I mean, I mean, these OEMs haven't even really come out with their new products.

Steve Tusa: I mean, they've kind of perhaps given you a bit of a sneak preview on some of them. But like, have you actually seen the pricing yet for the, for the 4.54 products? No, we have not. So, they did not establish the price yet for us. So if you guys are kind of saying that, you know, like, it sounds like there's some uncertainty here. I mean, I know the rule the EPA just went through last week.

Steve Tusa: That is finalized. And in the federal registry, I'm not sure in a few weeks, but like, how can, how can they be so confident in kind of going out there and predicting what they're, what kind of price they're going to actually capture over the next two years? Like, what's the disconnect there? Yeah, Sam. Yeah. Okay. We'll do. Thanks, guys.

Barry Logan: The next question comes from Jeffrey Sprawb with vertical research. Please go ahead. Thank you. Good morning, everyone. Hey, how's everybody doing? Hey, a lot of good ground covered here. So let me just do two quick little cleanup ones. Barry, you gave us, you know, 8% price and down for on units. So consolidated revenues up for, can you do the same on HVAC equipment and give us a little bit of detail on within price, kind of what the price mix dynamic is there.

Barry Logan: Now, that is that is residential equipment that those data points. Okay. And then our double digit growth and commercial brains, the overall equipment growth rate up to 6%. Got it. And then on the, oh, and can you say anything about mixed spirit? How much is kind of price price versus mix? Boy, again, it's an infinite array of data in that, in that answer, the 8% price is whether it's an infinite number of the answers inside that 8%.

Barry Logan: It's, it's, it's more so whether what it's most of is the new products having a higher cost and a higher price in the market than that composite a year ago. Yeah. And just back to the 60% of products being new. I would assume that is just mostly, you know, sear change units, but could you, could you maybe address what percent of your volume is the new higher sear product at this point, how much, you know, how much more do we have to go until we're 100% there. Maybe, you know, if there's a difference between that 60% on, you know, new product, new sear product versus other new product.

Paul Johnston: Well, this is all a question. Go ahead. Yeah, we can't, we can't replenish the old product. So it's no longer in production. So it's going to be pretty much at a hundred percent at some point, once the remaining product is sold through. Domestically, right? Yeah, the national. Yeah. And this is a reminder, what, a reminder what changed, and this was a change from prior times is the, it's not just a higher efficiency systems, you know, being mandated.

Paul Johnston: The way efficiency was measured changed. And, and what we'd be called tier two, and tier two changed the way a 17-seer system is rated a year ago versus now, or a 16-seer system is rated today versus a year ago. So when we talk about, you know, and then the matching your handlers that go with it and the matching components that go with it, that's the complexity, that's the nuance. And, and that's why, as a composite, it's, you know, a higher price.

Paul Johnston: But I guess your question is how mature is that within? Yeah, I'm trying to think of how much, yeah, how much more mix effect do you have to come through for us to get to that hundred percent, you know? Yeah, yeah, yeah, question is, when does it annualize, so to speak, and it would be obviously sometime probably early next year, Paul, does that make sense? Yeah, I would say early next year will be, will be pretty much all new equipment. Great. Thank you. I'll leave it there, guys. Much appreciated.

Unknown Executive: As a reminder, if you wish to ask a question, please press star, then one, to enter the question queue.

Joe Olimire: The next question comes from Joe Olimire with Boy to Bank. Please go ahead. Good morning. Hey, everybody. How are you? Good, Val. You? I'm good.

Barry Logan: Just a, I'll just kind of clean up with one more about the model here. A lot of great questions so far. A lot of mine have been taken. If I think through a lot of the considerations for the fourth quarter, Barry, kind of asking you to get back in the year of a year box again here. But, you know, volume comps, getting easier into November and December. You're starting to actually get probably even more sear mixed benefit because of the geography of how it rolled out.

Barry Logan: You know, there's probably some catch up from the weather in the third quarter, benefiting even into the fourth quarter, and then also the OEM logistics. So is it possible that we could be looking at like high single digit type revenue growth in the fourth quarter. And then just thinking about, you know, you said at the beginning of the year you were targeting earnings growth looks like you're likely to get there just kind of wondering how much you might be able to grow EPS this year with just one quarter left is that, you know, two to three percent or potentially something more.

Barry Logan: We don't have that in our history. We do not forecast because we're in a business that fluctuates considerably with weather and that's been our tradition. And I don't know that we're going to change it. Very if you can help them with that changing that. No, I was going to say we'll give you our thoughts and our educated, you know, close, close reaction to what's going on, but we're not going to give guidance and we're not going to give certainly not fourth quarter guidance when again, we're getting to a 90 day period and trying to crystallize something, and we're giving you the trends.

Barry Logan: I think, again, if you think about where we started this year, where unit volumes were down 10% or more, and the question was, will that get worse or better? It's gotten much better as the year's gone on in a short period of time. Yeah, the inventory flowing to the channel and earn us at this point. Our one vendor issue that hurt the first half of the year is now converting into a growth opportunity for the rest of the year.

Barry Logan: So just kind of leave it at that and our focus has to also be looking in the next year because we're the major partner for much of the OEMs that you can talk to. And growth and market share and expansion and more brands and more skews and new skews next year, you know, we start to look ahead and that's pretty exciting.

Paul Johnston: Fourth quarter, we'll see. I wouldn't, I wouldn't, you know, I'm very old. Okay, I appreciate that maybe just one more than kind of related to the prior question about the year proportions. I noticed in the release in the second quarter, you talk about 60% of year to date sales representing the new equipment and then now in the release, it's the same number but you're talking about the number of skews at your locations.

Paul Johnston: Just wondering if that was a intentional change and if that was intended to communicate anything there. That's a fair question, but I don't maybe somebody else can ask that because I'm not sure. Yeah, go ahead. Yeah, it's clarification that the inventory we actually carry in our stores. That's 60% is new. And that's that's the clarification. Versus a digital catalog where it's a much, much, you know, broader set of products, but we actually carry in stores. The point is we emptied out 60% of what we sell a year ago in the new products this year. It's an immense change. And obviously also an immense opportunity with what's going on.

Unknown Executive: All right, thanks a lot, guys. This concludes our question and answer session.

Unknown Executive: I would like to turn the conference back over to our nomad for any closing remarks. Once again, that actually must be interesting. Let's go. We hope to continue to build this wonderful company and appreciate very much your interest. Bye bye now. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.