Q4 2023 Watsco Inc Earnings Call

Good morning, and welcome to the Watsco fourth quarter 2023 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad after today's presentation there.

Operator: Good morning, and welcome to the Watsco fourth quarter 2023 earnings call. All participants will be in listen only mode.

Operator: Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad.

There will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Albert <unk>, Chairman and CEO. Please go ahead.

Operator: To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Albert Nahmad, Chairman and CEO. Please go ahead.

Albert: Thank you and good morning, everyone.

Albert H. Nahmad: Thank you and good morning, everyone. Welcome to our fourth quarter earnings call. This is Al Nahmad, Chairman and CEO. With me is AJ Nahmad, Watsco's President, Paul Johnston, Barry Logan, and Rick Gomez.

Albert: Welcome to our fourth quarter earnings call. This is al <unk>, Chairman and CEO with me is David <unk>, President and Paul Johnston, Barry Logan and Rick Goldman.

Albert H. Nahmad: Now before we start, our cautionary statement As always, this conference call has four forward-looking statements as defined by the SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. However, ultimate results may differ materially from forward-looking statements. Now, Watsco delivered strong results in 2023, despite some market conditions which were somewhat inevitable after two extraordinary years in 2021 and 2020. Reflecting on the year's results, I am proud of the accomplishments we delivered. We achieve market share gains in the markets we serve, and we further scale Watsco's industry-leading technology platform.

Albert: Before we start our cautionary statement as always this conference call forward looking statements as defined.

Albert: The balls and where you'd like it.

Albert: Pursuant to the Safe Harbor provisions of these various laws.

Albert: Ultimate results may differ.

Albert: They differ materially from forward looking statements.

Albert: Yes.

Albert: Now watch her delivered strong results in 2023, despite some market conditions, which were somewhat inevitable.

Albert: After two extraordinary years in 2021 'twenty to 'twenty two.

Albert: Well, reflecting a new year's results I am proud of the accomplishments we delivered.

Albert: We achieved market share gain in markets we serve.

Albert: This scale, while school industry, leading technology platforms.

Albert H. Nahmad: We had a successful start driving down long-term productivity gains. I should say we had a successful start driving long-term productivity gains. We expanded our network and product offerings by acquiring great businesses to grow our scale, and we fortified our balance sheet through inventory reduction and generated record fourth-quarter cash flow. And once again, shareholders will receive a meaningful dividend increase in... in 2024. This is Watsco's 50th consecutive year of paying dividends.

Albert: We've had a successful start driving down long term.

Albert: Productivity gains.

Albert: I should say, we got a successful start driving.

Albert: Long term productivity gains.

Albert: We expanded our network and product offerings by acquiring great businesses through our scale and we fortified our balance sheet.

Albert: Inventory reduction and generated record fourth quarter cash flow.

Albert: And once again shareholders or receive a meaningful dividend increase.

Albert: 'twenty 'twenty four.

Albert: Which is in April 2024. This is what's goes 58 consecutive years.

Albert H. Nahmad: 2023 was also a year of immense change, and virtually all equipment and products transitioned to new, higher efficiency systems. In collaboration with our OEM partners, Watsco introduced new products and SKUs for over 25 brands of HVAC systems. Our teams executed well, and thanks to our scale and speed to market, we are confident that we gained shares. We also trained thousands of customers on new products, and our digital product library was updated with approximately 500,000 new SKUs. And this spring, we will begin the next regulatory transition to new... 8-2, and products with lower GWP refrigerants. These regulatory transitions are positive for our industry and are good for Watsco's business. They offer meaningful value to homeowners and businesses to upgrade systems that are more efficient and better for the environment. Watsco's residential unit values, although still down, stabilized during the second half of 2023. Commercial end markets remain strong across all markets.

Albert: 2023 was also a year of immense change was virtually all equal tranches.

Albert: Transition to a new high efficiency systems.

Albert: In collaboration with our OEM partners Watsco introduced new products and that's good news for over 25 brands of H D. A C systems.

Albert: Our teams executed well and thanks to our scale and speed to market. We are confident that we gained share.

Albert: We also trained thousands of customers on new products and our digital Pollak Library was updated with approximately 500000 new skus.

Albert: And this spring.

Albert: We'll begin the next regulatory transition to new <unk>.

Albert: Two.

Albert: L products with Laura G WP refrigerants.

Albert: These regulatory changes as a positive probable study and are good for watch those business they offer meaningful value to homeowners and businesses to upgrade systems that are more efficient and balance will be involved.

Albert: Well I suppose there's an actual unit volumes, although still well stabilized during the second half of 2023.

Albert: Our commercial end markets remained strong across all markets.

Albert: Our commercial business continuing to grow at a healthy rate and our backlog of products extend.

Albert H. Nahmad: Our commercial business continues to grow at a healthy rate, and our backlog of products extends well into next year. Sales of Ductless Systems, an increasingly important component of our business, grew double digits for the year. And I'll set the clients for conventional residential business. SG&A as a percentage of sales on a same store basis decreased for the year, indicating progress in driving more productivity across the country.

Albert: Well into next year.

Albert: Sales of Blackwell assistant an increasingly important component of our business grew double digits year.

Albert: And also good clouds unconventional.

Albert: Hello.

Albert: Yes.

Albert: SG&A as a percentage of sales on a same store basis decrease for the year, indicating.

Albert: I'll go ahead, and driving more productivity across the company.

Albert: We believe we are in early innings of a long term opportunity to meaningfully improve productivity and overall efficiency.

Albert H. Nahmad: We believe we are in the early innings of a long-term opportunity to meaningfully improve productivity and overall efficiency. We have challenged our leaders and provided them with tools and data to implement change. And most importantly, we possess an entrepreneurial culture to execute change in a responsible way. Over the past year, we expanded our network through acquisitions with three terrific businesses joining. The Watsco family, collectively, their annual sales are around $200 million. These businesses will retain their culture,

Albert: We have challenged our leaders and provided them with tools and data to implement change and most importantly.

Albert: We possess an entrepreneurial culture to execute change in a responsible way.

Albert: Over the past year, we expanded our network.

Albert: Acquisitions with three terrific business joining.

Albert: What's the Sammy collect the laser sales.

Albert: Or around $200 million.

Albert: These businesses will retain their culture.

Albert H. Nahmad: Leadership, please, and Uniqueness in the Market, consistent with our long-term practice of honoring and sustaining great new services. Our industry remains highly fragmented, and we will continue to pursue other great companies to grow scale in our $60 billion North American market. Do you believe Watsco's technology advantage, market-leading scale, and the strength of our balance sheet are all great reasons to join Watsco?

Albert: Leadership teams.

Albert: And uniqueness in the market consistent with our long term.

Albert: Awesome honor, England sustaining great.

Albert: Yeah.

Albert: Okay.

Albert: Our industry remains highly fragmented and we will continue to pursue other great companies to grow scale in a $60 billion North American market.

We believe watsco is technology advantage.

Market, leading scale and <unk>.

Albert: Strength of our balance sheet, all great reasons to join the watsco.

Albert: Now before getting to Q&A as always I want to emphasize that our core focus remains on the long term, we believe our scale the quality of our balance sheet. Our unique culture will continue to drive long term growth.

Albert H. Nahmad: Now, before getting to Q&A, as always, I want to emphasize that our core focus today is the long term. We believe our scale, the quality of our balance sheet, and unique culture will continue to drive long-term growth and performance. We have an immense technology advantage, and we are investing in growing that advantage. Watsco's broad array of products and brands is also a competitive advantage that allows us to serve contractors in any environment.

Albert: Yes.

Albert: We have an immense technology about and we arrested.

Albert: Investing to grow that advantage watsco is broad array of products and brands is also a competitive advantage that allows us to serve contractor in any environment.

Operator: And finally, our industry is fortunate to benefit from important regulatory and industry catalysts that should positively influence Watsco's performance in the years ahead. With that, let's go on to Q&A. Thank you. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.

Albert: And finally, our industry our industry is fortunate to benefit from important regulatory and industry catalysts that should positively influence watsco is performance in three years.

With that.

Speaker Change: Let's go on to Q&A.

Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question.

Operator: 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 to assemble our roster. The first question comes from Tommy Moll with Stephen Zink. Please go ahead. Good morning, Tommy. Good morning, Al. Thank you for taking my questions. You bet. I wanted to start on gross margins. No big surprise there. Your fourth quarter...

Please press Star then two at.

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

Speaker Change: The first question comes from Tommy Moll with Stephens, Inc. Please go ahead.

Tommy Moll: Good morning, Tommy.

Good morning, Thank you for taking my question.

Tommy Moll: You bet.

I wanted to start on gross margin.

Tommy Moll: A big surprise, there your fourth quarter.

Tommy Moll: Yes.

Speaker Change: [laughter] yeah.

Tommy Moll: Your fourth-quarter gross margin percentage was a little bit below the long-term aspirations that have been discussed recently, so it's a two-part question, really. One is just if you could unpack any of the factors there for us in the fourth quarter. And then if we think about the art of the possible going forward to start this year, is there a pathway? near-term. You can define that how you want. Near-term to recovering and moving back toward those, longer-term aspirations in the high 20s or maybe 30. Very good question.

Speaker Change: Your your fourth quarter gross margin percentage was a little bit below the long term aspirations that had been discussed recently so it's a two part question really one is just if you could unpack any other factors there for us in fourth quarter.

Speaker Change: And then if we think about the art of the possible going forward to to start this year.

Speaker Change: Is there a pathway.

Speaker Change: Near term you can you're going to find out how you want in the near term to recovering and moving back toward those.

Speaker Change: Longer term aspirations and the high twenty's or may be 30.

Speaker Change: Very good question as you know Ive stated earlier that eventually our aspiration was 30%.

Albert H. Nahmad: As you know, I stated earlier that, eventually, our aspiration is 30%, and we have a ways to go. So I'm gonna ask Barry Logan and Paul Johnston to deal with current events. Yeah, thanks, Al. Good morning, Tommy.

Speaker Change: And we have a ways to go so I'm going to ask Barry.

Speaker Change: Logan and Paul Johnston, good year with current events.

Yeah. Thanks, Alan Good morning, Tommy well, we've said all.

Barry S. Logan: Well, we've said, you know, all year long, you know, with some of the moving pieces with gross profit and also, also said two years ago or so now, the short-term aspiration was 27%. And so if I just focus on the year for a second, Tommy, just some important things to be grounded in, looking at the year's performance, and then I'll address the quarter and the other shorter-term perspective. But for the whole year, you know, 27.4 is what was achieved. And obviously, it's better than it was two years ago, three years ago historically.

Barry: All year, along with some of the moving pieces with gross profit.

Also also said two years ago, or so now and the aspiration short term aspiration was 27%.

Barry: So if I just focus on the year for a second time in just some for some horton things to be grounded in looking at the years performance and then I'll address the quarter.

Barry: And the other shorter term perspective.

Barry: For the for the year you know the 27.4 as what was achieved.

And and it's you know obviously, it's better than it was two years ago three years ago historically.

Barry S. Logan: And a lot of the moving pieces that we've talked about to drive and sustain that higher margin obviously are in place as we look at the year's perspective. But if we look at a 60 business day perspective, which is the fourth quarter in the off-season, you know, some of the some of the variables have a greater impact in the short term. So that would be, you know. My first bias I would try to talk about is that we're talking about 60 business days in the off season, in the fourth quarter.

Barry: And a lot of the moving pieces that we've talked about to drive and sustain that higher margin. You know are obviously are in place. If you look at the year's perspective.

Barry: If we look at our 60 business day perspective, which is the fourth quarter in the off season, you know some of the some of the variables have a greater impact in the short term so that would be.

Barry: My first bias I would try to to talk about is we're talking about 60 business days in the off season.

Barry: The fourth quarter and some of the moving pieces are more acute because of a benefits of a year ago not so much what's happening short term.

Barry S. Logan: And some of the moving pieces are more acute because of the benefits of a year ago, not so much what's happening in the short term. So if I unpack that a bit and not be quite so abstract about it, We had about $16 million of benefit in the prior year from pricing gains, from weighted average cost gains, from inflationary gains, however you want to define them, which is roughly 100 basis points in the year-ago quarter. Some of that is equipment; a greater proportion is non-equipment. There was a lot of inflation going on in some of our non-equipment products a year ago, like refrigerant, copper tubing, steel products, and probably 40 other product lines where a year later, those benefits are not there. So that's 100 basis points. That's $16 million of consequence. And if I look forward 12 months, and Ben Whittle and Julia DeLuna, and Mike Stimone. Thank you very much for sharing this.

Barry: So if I unpack that a bit and not be quite as abstract about it.

Barry: We have about $16 million of benefit in the prior year from pricing gains from weighted average cost gains from inflationary gains. However, you want to define it.

Barry: Which is roughly 100 basis points in the year ago quarter.

Barry: Some of that is equipment, a greater proportion is not equipment.

Barry: Is there a lot of inflation going on in some of our non equipment products a year ago like refrigerant like like copper tubing like steel products.

Barry: And probably 40 other product lines.

Barry: We're a year later those benefits are not there. So that's that's 100 basis points, that's $16 million of consequence.

Barry: I look forward to 12 months.

Barry S. Logan: This is our 30th anniversary, so thank you again for continuing with this exciting conversation. Well, I look forward to seeing you again soon. Thanks for joining us. Thanks, everybody. Have a great evening.

Barry: Instead of back 12 months I look forward 12 months I don't expect there to be that kind of headwind.

Barry: And those products you know, let's say a year from now.

Operator: Bye bye. Thanks. Bye.

Barry S. Logan: Hello, everybody. I don't know you and those products very well, let's say a year from now. And it's just one of those things that as the numbers are larger in the fourth quarter, their acuteness is higher. $16 million would not be as material to a second or third quarter; it's more material to a fourth quarter. So that's probably the biggest impact in the quarter if you look at things on a year-over-year basis. But there are some other moving pieces, which we've talked about. One is that equipment products, in fact, have a lower gross margin than non-equipment products.

Barry: And it's just one of those things that as the numbers are larger than our fourth quarter their their cuteness is higher 16.

Barry: $16 million would not be as material to our second and third quarter, it's more material to our fourth quarter.

Barry: So that's that's that's probably the biggest impact in the quarter.

Barry: If you look at things on a year over year basis.

Barry: Some other moving pieces.

Barry: Which we've talked about one is that equipment products.

Barry: In fact have a lower gross margin than non equipment products.

Barry S. Logan: So in the quarter, you see a mixed difference between the growth rate of equipment, which was pretty flat, and not equipment, which was down. So that's the algebra that affects the margins and the quarter by 2030 basis points, I would say. And, you know, there are some other smaller things that aren't worth kind of going through.

Barry: So in the quarter you see a mix difference between the growth rate of equipment, which was pretty flat.

Barry: Non equipment, which was down so that's the algebra that affects the margins in the quarter by 2030 basis points I would say.

Barry: And yeah. There are some other other smaller things that that you know aren't worth kind of going through the bigger picture is this idea of.

Barry S. Logan: The bigger picture is this idea of inflationary gains that occurred a year ago. With less inflation, there's less inventory gains to come by. And if we look at the next 12 months, I would expect a much smoother water, much, you know, less volatility in terms of this dynamic. I think we need to get beyond the first quarter to clearly see that, but if I look forward 12 months, I would say a greater feeling of stability versus the volatility that you've been seeing this year. Paul, anything you would add to that? Boy, Barry, you've really covered a lot of ground there, yeah.

Barry: Of inflationary gains that occurred a year ago with less inflation, there's less inventory gains there to come by.

Barry: And if you look in the next 12 months I would expect a much smoother and smoother water.

Barry: More you know quote you know less volatility in terms of this dynamic.

Barry: I think we need to get beyond the first quarter to clearly see that if I look for the next 12 months.

Barry: But I would say a greater feeling of stability is to present, you know versus the volatility that you've been seeing cheer Paul anything you would add to that.

Paul W. Johnston: Oh boy very you've really covered a lot of ground there yeah.

Paul W. Johnston: You know, obviously, there's going to be some price changes that we're going to see in some of the commodities, especially refrigerant. We should start seeing some uptick in refrigerant pricing as we've got the 30% reduction in allocations coming in to affect January 1. Too early in the season to have really seen those yet in the first quarter, but obviously, those are expected.

Paul W. Johnston: Yeah, I mean, obviously theres going to be some.

Speaker Change: Some price changes that we're going to see in some of the commodities, especially refrigerant, we should start seeing some up.

Paul W. Johnston: Up tick in refrigerant pricing as we as we've got the 30% reduction in allocations coming into effect January.

Paul Johnston: January one.

Paul Johnston: Too early in the season two of really she knows yet from the first quarter, but are obviously Dallas are expected.

Paul Johnston: Secondly.

Tommy Moll: Secondly, you know, we're also seeing some recovery in steel, and we're seeing some recovery in some of the other products that we sell, so... Price increases are still occurring in the non-equipment side of the business, and we expect those to stabilize and perhaps grow as demand picks up during the year. Thank you both for those helpful answers. As a follow-up, I wanted to pivot to a volume conversation. And knowing that you won't give guidance, I'll try to frame it in a way that provides for a constructive discussion. If we look at the trends for unitary HVAC systems in the year you just concluded, down, I think it was 8% in your materials this morning that you provided. I think that's an abnormal-type trend, and so I'm just curious if you look to 2024, is there anything abnormal that you see, anything worth calling out now, or does it feel more like a normal kind of environment off that lower base from last year? That is a great question.

Paul Johnston: We're also seeing some recovery in steel we've seen some recovery in our in some of the other products that we sell so.

Paul Johnston: Price our price increases are still occurring in the non equipment side of the business and we expect those two to stabilize them and perhaps grow as the year as the demand picks up during the year.

Speaker Change: Thank you both for those helpful answers as a follow up I wanted to pivot to a volume conversation.

Speaker Change: And knowing that you won't give guidance I'll try to frame it in in a way that provides for a constructive discussion if if we look at the the trends for our unitary HVAC systems and in the year. You just concluded down I think it was 8% in your materials. This morning that you provided.

Speaker Change: I think we would agree that's an abnormal type trend and so I'm just curious that if you look to 'twenty 'twenty four is there anything abnormal that you see anything worth calling out now or does it feel more like a normal kind of environment off that lower base from last year.

Speaker Change: And it's a great question.

Paul W. Johnston: By the way, some of the OEMs..., and now 30% unit volume drop in the fourth quarter. Well, And we're pleased that we're doing a hell of a lot better than that. Paul, you want to take a shot?

Speaker Change: By the way some of the OEM.

Speaker Change: Jeremy Laurance win.

Speaker Change: 30% unit volume.

Speaker Change: Drop in the fourth quarter.

Speaker Change: And we're pleased that we're doing a hell of a lot better.

Speaker Change: Al you want to take a shot.

Paul W. Johnston: Yeah, the obvious elephant in the room is going to be how fast the transition goes to the A2L product, which is being discussed among the OEMs as perhaps a 10 to 15% increase or lift in price. And each one of the OEMs obviously has a different implementation schedule, so it's not going to be a full year implementation that we're going to see on that. We're going to see some start coming in during the second quarter and beyond.

Speaker Change: Yeah.

al: The obvious elephant in the room is going to be the how fast the transition goes to the a two well product.

al: Which is.

al: Being discussed and are among the Oems, it's a perhaps a 10% to 15% increase are lifted.

al: And price.

al: And each one of the Oems, obviously has a different implementation schedule. So it's not going to be a full year implementation and we're going to see on that we're going to see some start coming in in the second quarter and beyond.

Paul W. Johnston: So I think that's going to be one of the things that's going to drive an increase. Secondly, obviously a reduction in mortgage rates always helps. People buying existing homes, although they don't intend to replace the air conditioning system, that's when they're at the prime period where they would do a replacement, is within the first 90 to 180 days after acquiring an existing home.

al: So I think that's gonna be a you know one of the things that's going to drive drive an increase in AR.

al: Secondly, obviously a reduction in mortgage rates always helps.

al: People buy an existing homes.

al: Although they don't intend to replace the air conditioning system. That's went really when they're at the prime period, where they would do a replacement.

al: Is within the first 90 to 180 days after after acquiring a an existing home.

Paul W. Johnston: So, I think there's some good news out there, you know, we don't, I can't forecast out exactly how that's going to overlay into the entire year. I think there are some positive things that we're going to be seeing as the year goes on. Yeah, just to say, I don't know... Let me just say generally that, as I've always seen, industry weakness is an opportunity for us. They are highly leveraged

al: I think there's some good news out there they don't we don't.

al: I can't forecast out exactly how that's going to overlay into the entire year, but I think theres. Some months some positive things that we're gonna be seen as the year goes on.

al: Yeah.

al: Generally, but let me just say generally that.

al: If I.

al: It won't be seen industry weakness as an opportunity for us.

al: They are highly leverage.

Albert H. Nahmad: The Bulletproof Executive 2013, distributors that don't have the Perhaps the balance sheet that to deal with tougher times. We see that as an opportunity to have them join us.

al: Perimeters and business in there.

al: Tributaries.

al: Don't have the.

al: Perhaps the balance sheet.

To deal with the tougher times.

al: We see that as an opportunity to join.

al: <unk> had been join us.

Albert H. Nahmad: We've got our culture, we provide capital. We insist that they keep their culture and their organization that we provide, tools that no one else has. So I'm sort of a... Well, I would not be.

al: Our culture, we provide capital.

al: He insisted they keep their culture and their organization and we provide.

al: Tools.

al: No one else has it.

al: So I'm sort of it well.

al: Well I don't well.

al: Would not be.

Albert H. Nahmad: You know, very excited to have market industry data decline. If it happens, I'm also looking at opportunities to bring more wonderful companies to you in partnership with us. Partnership with us. Go ahead, Paul.

al: Oh, you know very excited to have market industry data decline.

al: If it happens I'm also looking at opportunity.

al: To bring more wonderful company can do.

al: Partnership with us.

Paul W. Johnston: Go ahead Paul.

Paul W. Johnston: Now I was going to add some data about the unit data. I listened to the question, and I asked myself the question about units. Do we feel better or worse?

Paul W. Johnston: No it was not going to add about the unit data.

Paul W. Johnston: I listened to the question I asked myself. The question about units do we feel better or worse that that would be my simple way of asking that question.

Paul W. Johnston: That would be my simple way of asking that question. And so, in the first half of 2023, units were down, I think, in the team. And the second half of the year, you know, I think it's, you know, units are down two or 3%. So I think we feel better about units than worse. And of course, the crystal ball needs to play out next selling season, from April to September, when our business multiplies in size. But I think, generally speaking, you know, things again seem more stable as opposed to being volatile. Thank you all.

Paul W. Johnston: And so the first half of 2023 units were down I think in our in the teens.

Paul W. Johnston: And second half of the year, you know I think it's sitting you know units are down two or 3%. So I think we feel better about units than worse.

Paul W. Johnston: Of course, the Crystal ball is needs to play out next selling season in.

Paul W. Johnston: April to September when our business multipliers in size.

Paul W. Johnston: But I think generally speaking you know things again see more stable as opposed to being volatile.

Speaker Change: Thank you all I appreciate the insight and I'll turn it back.

Ryan Merkel: I appreciate the insight, and I'll turn it back. The next question comes from Ryan Merkel with William Blair. Please go ahead. How are you, Ryan?

Speaker Change: Yeah.

Speaker Change: The next question comes from Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel: Bringing ryan everyone. Good morning.

Operator: Hey, everyone. Good morning. My first question was on price in the Outlook for 24. What do you think price will contribute given what you've seen from the OEM? We have that information, Barry, Paul.

Ryan Merkel: My first question was on price and the outlook for 'twenty four what are what are you thinking price will contribute given what you've seen from the Oems.

We have that information Barry Paul.

Paul W. Johnston: Yeah, we've seen price increases announced already this year on existing equipment. You know, they range, you know, basically from four to 6%. So the equipment prices have already been announced. They're gonna be further supplemented again by the introduction of the A2L introduction, as I indicated in the last question. And so we're probably going to see some additional lift there. There is a lot of speculation around how big of a lift that's going to be.

Ryan Merkel: Yeah.

Ryan Merkel: Yeah, we've seen price increases announced already in the year on the existing equipment.

Ryan Merkel: And they range basically from 4% to 6%.

Ryan Merkel: So the equipment the equipment prices have already been announced.

Ryan Merkel: We're gonna be further supplemented again bye.

Ryan Merkel: Now the introduction as I indicated in the last question with the a two well introduction and so we're going to probably see some additional lift there.

Ryan Merkel: A lot of speculation around you know, how how big of a lift that's going to be.

Paul W. Johnston: So nobody has really disclosed anything on their anticipated price outside of that wide range that I think you all have heard, 10 to 15%. On the other products that we sell, we're also seeing, as I indicated, increased prices on pretty much all of the copper products and all of the metal products that we sell. And we experienced some softness on some of the insulation products last year, but those appear to be stabilized now and... We should start seeing those products not have any sort of price degradation in 2024. How much all that's going to add up to, I think it's still a little bit of a question mark, you know, as far as being able to put a percentage against that, against total sales. I think it'll be clear in the second quarter as we start seeing, you know, what the rollout prices are going to look like for the eight. Okay, I got it.

Ryan Merkel: So nobody is really disclosed anything on their on their anticipated price outside of that wide range that I think you all have heard 10% to 15%.

Ryan Merkel: On the other products that we sell where we're also seeing as I indicated our increased prices.

Ryan Merkel: Pretty much all of the the copper products in all of the metal products that we sell.

Ryan Merkel: And we experienced some softness on some of the insulation products last year those appear to be stabilized now in hand.

Ryan Merkel: We should start seeing.

Ryan Merkel: Those products not had any sort of price degradation in our 2024.

Ryan Merkel: How much all that is going to add up to I think its a still a little bit of a question Mark you know as far as being able to put a percentage against that against total sales.

Ryan Merkel: It'll be clear in the second quarter as we start seeing you.

Ryan Merkel: You know what the what the rollout prices youre going to look like for the a two well.

Okay got it.

Barry S. Logan: And then I wanted to ask about SG&A. You've taken some actions there. Anything you can quantify for us in terms of how much is coming out in 24 or what your kind of aspiration is for SG&A growth in 24, either way? The login. Good morning, Ryan.

Ryan Merkel: And then I wanted to ask on SG&A, you've taken some actions there anything you can quantify for us in terms of how much is coming out in 'twenty four or what you're kind of aspiration is for SG&A growth in 'twenty for either way.

Barry S. Logan: Mr. Logan.

Barry S. Logan: Good morning, Ryan Yeah, well first again Theres two two.

Barry S. Logan: Yeah, well, first of all, there are two sides to that equation. And it's all being driven, again, through the field, through our stores, through our regions, through our business leaders, in their 2024 plans, reducing SG&A. And when I say reduce SG&A, it's not just cutting SG&A; it's finding out the opportunities for productivity after what had been also two years of wildness in terms of SG&A growth. I talked about the business performance of 21 and 22. It was also a very unproductive period of adding SG&A to serve what was going on.

Barry S. Logan: Sides to that equation.

Barry S. Logan: And and they're all it's all being driven again through the field through our stores through our region through our business unit leaders.

Barry S. Logan: Terms of 'twenty.

Barry S. Logan: 'twenty 'twenty four plans reducing SG&A.

Barry S. Logan: And when I say reduce SG&A, it's not just cutting SG&A, it's finding the opportunities for productivity. After what had been also two years of wildness in terms of.

Barry S. Logan: SG&A growth [laughter] I'm talking about the business performance of 'twenty, one and 'twenty two.

Barry S. Logan: It was also a very unproductive period of adding SG&A to serve what was going on.

Barry S. Logan: So that's what we're looking to improve and, to some extent, simply. You know, I get back to a little bit more normalized conditions in terms of how the branches operate and so on. So this kind of single-digit decline that you're seeing, Ryan, is a composite of two things. In recent quarters, it's variable expenses coming down 10-15%.

Barry S. Logan: So that's what we're looking to improve and to some extent simply.

Speaker Change: Are you now.

Speaker Change: I'll get back to a little bit little bit no more normalized conditions in terms of how the branches operate in and so on.

Speaker Change: So there's kind of single digit declines that you're seeing Ryan is a composite of two things.

Speaker Change: In recent quarters, it's variable expenses coming down 10% to 15%.

Barry S. Logan: Fixed cost inflation is moderating, but still, there's inflation in fixed costs like rent, for example. So it's probably a slow grind of better improvement from what you've been seeing the last few quarters. This is, again, not restructuring the corporation.

Speaker Change: This cost inflation moderating, but still there's inflation in fixed costs like rent for example.

Speaker Change: So it's probably Oh.

Speaker Change: A slow grind of better improvement from what you've been seeing in the last few quarters.

Speaker Change: This is again not restructuring the corporation. This is improving you know the daily expenses the daily productivity.

Barry S. Logan: This is improving, you know, the daily expenses, the daily productivity. But in that, you know, that kind of better progress from what we've been seeing in the last few quarters is our expectation. I'll have to leave it at that. Okay, fair enough. Thank you. The next question comes from David Manthey with Baird. Please go ahead. Arnie David.

Speaker Change: But in that you know that that kind of better progress from what we've been seeing the last few quarters as our expectation now I'll have to leave it at that.

Speaker Change: Okay Fair.

Speaker Change: Fair enough. Thank you.

Speaker Change: The next question comes from David Manthey with Baird. Please go ahead.

Speaker Change: David.

David J. Manthey: Mr. Manthey, your line is open. Please go ahead with your question. Is it muted accidentally?

David J. Manthey: Mr. Manthey. Your line is open. Please go ahead with your question is it needed accidentally.

Operator: Got it. Yeah. Hey, good morning, Al. Good morning, everyone. Can you hear me now?

David J. Manthey: Yeah, Hey, good morning, Al Good morning, everyone.

David J. Manthey: Can you hear me now yeah, Yes. Please go ahead Sir.

Operator: Yeah. Yes. Please go ahead, sir.

David J. Manthey: Thank you. So, I'm going to stay on the gross margin topic, if I can, here. Were there adjustments in the fourth quarter that hit gross margin disproportionately hard? Barry, you're kind of saying the year-over-year comparison, looking back and then looking forward. Are you implying that the gross margin a year from now, give or take, will be in the range that it was this year, or was there something unusual in this fourth quarter that might affect that comparison? Yeah, good question.

David J. Manthey: Thank you.

So I'm gonna stay on the gross margin topic, if I can here.

David J. Manthey: Where there were adjustments in the fourth quarter.

David J. Manthey: It hit gross margin disproportionately hard.

Speaker Change: Barry you were kind of saying the year over year comparison looking back and then looking forward are you implying that the gross margin a year from now give or take will be in the range that it was this year or was there something unusual in this fourth quarter that might affect that comparison.

Barry: Yeah. Good question well a year from now again, we'll have a completely different blend of new products a year from now I would expect that to be a margin opportunity a year from now.

Barry S. Logan: Well, a year from now, we'll have a completely different blend of new products a year from now. I would expect that to be a margin opportunity a year from now. There are no adjustments or funk that hit this quarter that I would call out as being material or even important to talk about or even immaterial to talk about. Really nothing that stands out.

Barry: There are no adjustments or funk.

Barry: Hit this quarter that.

Barry: I would call out as being material or even important to talk about or even immaterial to talk about really nothing that stands out.

Barry:

Barry S. Logan: So, yeah, I think, You know, going back to the algebra of price and inflation and seasonality and so on. Again, I would expect, as we get into season, we have pricing actions in our pocket. We have new products being introduced. And, you know.

Barry: So yeah I think.

Barry: You know going back to the algebra of price and inflation and the seasonality and so on.

Barry: Again, I would expect as we get into the season, we have pricing pricing actions in our pocket.

Barry: We have new products being introduced.

Barry: And you know.

Barry S. Logan: I would say a continuation of the technology that we've been using to improve it, and as far as a year from now and the next fourth quarter. You know, again, I think there's an opportunity to improve margin, but nothing that penalized this quarter in a particular way that would be important. Okay, and yeah, I appreciate you engaging us in all this quarterly conversation, which I don't think, historically, we would have done here, but Barry, you also said we need to get through the first quarter, and you were kind of talking again about that year-to-year comparison. If you were down a couple hundred basis points in the fourth quarter year-to-year because of all the items you mentioned, and then we looked at the first quarter, that would put us in a range in the, what?, the 26 12, 27 range. Just trying to understand the cadence.

Barry: I would say.

Barry: A continuance of the technology that we've been using to improve margin.

Barry: And as far as a year from now and next quarter.

Barry: You know again, I think theres, an opportunity to improve margin, but nothing that penalize this quarter and in a particular way that would be important.

Speaker Change: Okay, and then yeah I appreciate you indulge us and all of the quarterly conversation, which I don't think historically, we would've done here, but.

Speaker Change: Barry you also said we need to get through the first quarter and you were kind of talking again about that year to year comparison. If you were down a couple of hundred basis points in the fourth quarter year to year because of all the items you mentioned and then we look to the first quarter that would put us in a range that $26 527 range.

Speaker Change: Trying to understand the cadence again, knowing there's a lot of moving parts. There is there anything in the first quarter unusual that we should think about there relative to your comments Barry.

Barry S. Logan: Again, knowing there's a lot of moving parts there, is there anything in the first quarter unusual that we should think about there relative to your comments, Barry? Yeah, I think the pricing actions of the OEMs are pushed out a little bit into the late first quarter and early second quarter if I look at things comparatively to last year. So you can read into that comment, and in terms of modeling, you know, you can... consider the comment.

Barry: Yeah, I think the pricing actions of the Oems are pushed out a little bit and and to the late first quarter early second quarter, if I look at things comparatively to last year.

Speaker Change: So you say you can you can read into that comment and in terms of modeling you know you can.

Speaker Change: Consider the comment.

Barry S. Logan: So, sequentially, I think... Again, there can certainly be a better margin in the first quarter versus a year ago. But you have to consider my comment about the timing of some of the pricing actions that we're describing. That's a good point, Barry, because instead of a January 1 price increase, most everybody went, you know, February 1st or March 1.

Speaker Change: So sequentially I think.

Speaker Change: Again, there can be some certainly better margin in the first quarter versus a year ago, you have to consider my comment about the timing of some of the pricing actions that we that we're describing.

Speaker Change: Oh, that's a good point there because instead of a January one price increase most everybody went February for March.

Speaker Change: March burst.

Speaker Change: So it's a little bit of a lag to Barry's point.

Paul W. Johnston: So it's a little bit of a lag to Barry's point, and a top 10 vendor that went April 1st instead of January 1st. So, some of this, the benefit will push a little bit later into 2024 than simply January 1. Great. Thanks very much, guys. The next question comes from Brett Linzey with Mizzouho. Please go ahead. Good morning, all.

Speaker Change: A top 10 vendor that went April 1st instead of January 1st so so.

Speaker Change: Some of this are the benefit well will push a little bit later into the end of 2024, then and simply January one.

Speaker Change: Okay.

Speaker Change: Great. Thanks, very much guys.

Speaker Change: The next question comes from Brett Linzey with Mizuho. Please go ahead.

Brett Logan Linzey: Hey, good morning, all.

Brett Logan Linzey: Hey, I just want to come back to the inventory. So you took another 208 million out of the system. I believe that was a little bit ahead of your initial plan. But maybe you could just speak to your assessment of inventory levels as we begin to move into the selling season? Are there, you know, more actions that need to be taken to largely complete the task? How are you thinking about that?

Hey.

Brett Logan Linzey: Hey, just wanted to come back to the inventory. So you took another 208 million out of the system by at least a little bit ahead of your initial plan, but maybe you could just speak to your assessment of inventory levels as we begin to move into the selling season are there more actions that need to be taken largely complete how are you thinking about that.

Speaker Change: Well I'll give you a bigger a big picture of it is that we do want and we'll work on higher inventory turns so I do expect to have our inventory.

Albert H. Nahmad: Well, I'll give you a bigger, a bigger picture of it is that we do want, and we'll work on higher inventory turns. So I do expect to have our inventory to produce more cash flow as it turns, and the science that we use is, To do that is being implemented, but it's a very long process, longer than I expected. But eventually, what you'll see is lower investment in inventory and higher returns when compared to sales. Yeah, absolutely.

Speaker Change: Uh huh.

They produce more cash flow as it turns.

Speaker Change: And the science that we use.

Speaker Change: Is it.

Speaker Change: To do that.

Speaker Change: Is being implemented its a very long process longer than I expected.

Speaker Change: But eventually what you'll see is laurie, but investment in inventory and higher turns when compared to the sale.

Speaker Change: Yeah, absolutely it is Paul.

Paul W. Johnston: As Paul says, historically, it's been a four plus turn industry. And obviously, during the pandemic and the supply chain disruption, everybody got lost in the mid to low threes. And so now as we strive to get back to the four turns, obviously, we're gonna have a reduction in inventory.

Speaker Change: Yeah.

Speaker Change: Historically, you know, it's it's been a four plus turn industry and obviously.

Speaker Change: During the pandemic and the supply chain disruption everybody got lost in the mid to low threes.

Speaker Change: And so now we try to get back to the four turns obviously, we're going to have a reduction in inventory.

Paul W. Johnston: Right now we're seeing better cooperation and better lead times coming out of our OEMs, pretty much across the board. And as those lead times improve, obviously that gives us a better position to not have to stock as much inventory. So that's one thing that's happening. Secondly, Watsco's got an unusual position on inventory in that each one of our operating units, Manages inventory. So there's not one big central, you know, headquarter directive that gets into the inventory, we we manage it in much smaller blocks, with each one of the operating units actually functioning against their vendors, what they need to have in stock in an image, plus Watsco invested during, before the, the pandemic, we invested heavily in the technology it takes to manage inventory, putting in new inventory management systems, it gives us daily management, Reviews, so that we can identify what we have on hand, what we have on order, by region, by.., by district, by branch.

Right now, we're seeing better better cooperation and better better lead times coming out of our Oems.

Speaker Change: Pretty much across the board and as those lead times improve obviously that gets us a better position to not have to stock as much inventory.

Speaker Change: So that's one thing that's happening secondly, watsco has got an unusual AR position on inventory and that each one of our operating units manages inventory. So there's not one big central.

Speaker Change: Headquarter directives that gets into the inventory.

Speaker Change: Manage it in much smaller blocks with each one of the operating units actually functioning against their vendors what they need to have an in stock inventory.

Speaker Change: Plus watsco, although invested during before the.

Speaker Change: The pandemic, we invested heavily in the technology it takes to manage inventory, putting a new inventory management system. So it gets us daily management.

Speaker Change: Reviews, so that we can identify what we have on hand, what we have on order.

Speaker Change: By region by.

Speaker Change: By district by branch, so a lot more visibility than than you'd find in a normal distribution company.

Paul W. Johnston: So a lot more visibility than you'd find in a normal district. Yeah, that's great. And then just shifting to the non-equipment versus equipment trends, as well as the second half being a little better than the first half of it, I guess it doesn't suggest there's a meaningful retrenchment in the consumer on the replacement side. Is there anything in terms of high efficiency mix or credit metrics or things that you're watching internally that would suggest there's a step down here in 24 early in the year? I think the stab on the equipment side, the... You know, as we indicated a year ago, when we went to the higher efficiency minimums that were regulated by the government, we expected there to be compression around the entry level product.

Speaker Change: Yeah, that's great and then just shifting to the non equipment versus equipment trends as well as in the second half being a little better than first half, but I guess it doesn't suggest there's a meaningful retrenchment in the in the consumer on the replacement side is there anything in terms of high efficiency mix or credit metrics or things that you were.

<unk> internally that would suggest there's a step down here in 'twenty four and early in the year.

Speaker Change: Okay.

Speaker Change: Took a stab on the equipment side the.

Speaker Change: As we indicated a year ago, when we went to the higher efficiency minimums.

Speaker Change: We're regulated by the government, we expected there to be a compression around the the entry level product.

Paul W. Johnston: And we went from around 65% of the minimum efficiency product up to around 85%. So we've definitely seen more product coming out. It's a higher efficient product than what we had before, but it has distorted the industry a little bit towards minimum efficiency as opposed to high efficiency. And it's a good question on credit. It's not asked often enough, frankly, so, you know, our accounts receivable represents contractor credit, getting the average contractor about $10,000 a month in a credit line, essentially.

Speaker Change: And we went from around 65% of the minimum efficiency products.

Speaker Change: Up to around 85%.

Speaker Change: So we've definitely seen more product coming out its higher efficient product than what we had before but it's it is distorted the industry a little bit towards the towards the minimum efficiency as opposed to high efficiency.

Speaker Change: And it's a good question on credit it's not asked often often enough frankly, so yeah. We.

Speaker Change: Obviously, our our accounts receivable represents contract or credit.

Speaker Change: Getting the average contract or about $10000, a month and a credit line essentially.

Barry S. Logan: And so if you look at our cash flow statement, which is published in the press release, you'll see bad debt is actually down about 20% this year. So there's no obvious indication of a change in the quality of the portfolio. And it's roughly 10, 11 basis points of bad debt.

Speaker Change: And so if you look at our cash flow statement, which is published in the press release, you'll see bad debt is actually down about 20% this year.

Speaker Change: So there's no obvious indication of change in the quality of the portfolio.

Speaker Change: Yeah, It's roughly 10 11 basis points of bad debt and compare that against any peer or any kind of other distribution model you can find.

Barry S. Logan: And again, compare that against any peer, any kind of other distribution model you can find. It's in a very favorable position, so credit is not something we're seeing as a risk. It's how we serve customers. And, you know, again, so far, so good from an economic point of view. All right, appreciate the color. I'll pass it along.

Speaker Change: It's a very favorable position so credit is not something we're seeing.

Speaker Change: As a as a risk it's it's it's how we serve customers and again so far so good from a economic point of view.

Speaker Change: Alright, I appreciate the color personal.

Jeffrey Todd Sprague: The next question comes from Jeffrey Sprague with Vertical Research. Please go ahead. Good morning, Jeffrey. Hey, good morning, Al. Good morning, everyone.

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

Jeffrey Todd Sprague: Good morning Geoffrey.

Jeffrey Todd Sprague: Hey, good morning Al Good morning, everyone. Thanks for the time Hey.

Albert H. Nahmad: Thanks for the time. Hey, just kind of back on price, just wonder what, if anything, you make of the OEMs kind of going later and, you know, kind of not at the same time. Is there sort of a message here of, you know, kind of price fatigue in the market, do you think? You know, is there in game theory or something we should be thinking about? I don't think it's that diabolical.

Jeffrey Todd Sprague: Hey, just kind of back on price.

Jeffrey Todd Sprague: Wonder if what if anything you would make up the OEM is kind of going later and you know kind of not at the same time is there is there sort of a message here you know kind of.

Jeffrey Todd Sprague: <unk> in the market do you think.

Speaker Change: It was there.

Speaker Change: Game theory, or something we should be thinking about.

Speaker Change: [laughter] I don't think it's that diabolical I think it's just a natural progression that bothers us.

Paul W. Johnston: I think it's just a natural progression of how they intend to roll out their new product introduction on the A2L, you know. And, you know, if you listened to each one of the OEMs on their public broadcast, you'd find that they each are putting out a different variety of products at different times during the year, and I think it has more to do with their engineering and their manufacturing plans and all that that goes into rolling out the product. And then just kind of back to the replacement question; it was asked, kind of, at least obliquely, in a couple different ways.

Speaker Change: We intend to roll out there are there new product introduction on the a two well.

Speaker Change: And you know if you if you listen to each one of the Oems on their hip hop.

Speaker Change: Vic broadcast you'd find that they each are putting out.

A different variety of products at different times during the year and I think it has more to do with their engineering and their manufacturing plants and all of that that that goes into rolling out the product.

Speaker Change: Yeah, an interesting makes sense.

Speaker Change: And then just kind of back to the the replacement question. It was kind of at least one bleakly a couple of different ways.

Paul W. Johnston: You know, Al, in your opening, you kind of talked about the inevitability of after a year like 2023 here. You know, if we do go back to just that kind of, you know, old school demographic replacement, it into the whole 15-year life and all that argument, you know, work, we're echoing against 20 2009 right now, right? So, you know, that that math could argue for, you know, another soft replacement year. I just wonder, you know, your thoughts on that and kind of like what you're seeing and repair versus replace. Well, our guru on that is Paul Johnston. Oh my God! I'll start with repair versus replace, you know, it's... fourth quarter, first quarter, which is not the time when you're going to see a lot of repair going on, working, you have your heat pumps and your gas furnaces, which your gas furnaces are. So, to date, we're not declaring that there are any trends that we've been able to identify in repair versus replace. Will it occur when the temperatures go up?

Speaker Change: Al in your opening you know you kind of talked about the inevitability of after a year like 2023 here you know.

Speaker Change: If we do go back to just that kind of.

Speaker Change: Old School.

Speaker Change: I'm, a graphic replacement type of Enel.

Speaker Change: Get into the whole 15 year life and all of that argument you know what work we're echoing against 22009 right now right. So.

Speaker Change: That that math could argue for another soft replacement year I just wonder you know your your thoughts on that and kind of what youre seeing in repair versus replace.

Speaker Change: Well, our girl and that is Paul Johnston.

Paul W. Johnston: Oh My God.

Paul W. Johnston: I'll start with the repair versus replace you know it's it's.

Paul W. Johnston: Fourth quarter first quarter, which is not the time when you're going to see a lot of repair going on out. There you don't have your air Conditioner is working you have your heat pumps in your gas furnaces, which your gas furnaces are generally a lower repair item.

Paul W. Johnston: So to date, we're not declaring that theres any trends that we've been able to identify and repair versus replace.

Paul W. Johnston: Will it occur when the when the temperatures goes up we'll wait and see and find out.

Paul W. Johnston: We'll wait and see and find out. Um, the other part of your question was what? Just the underlying health of replacement demand based on kind of where the installed base is and sort of the age of the installed base. Now, the age of the installed base is newer than it's probably ever been since I've been around, which is a long time. But obviously, the mix of the installed base is changing. Gas furnaces generally have a lifetime. You can make a gas furnace last 25, 30 years.

Paul W. Johnston: Hum.

Speaker Change: The other part of your question was what.

Speaker Change: Just the underlying health of replacement demand based on kind of where the installed base is in sort of the age of the installed base.

Speaker Change: Now the age of the installed base is newer than it's probably ever been since I've been around which is a long time.

Speaker Change: But obviously the mix of the of the installed base is changing.

Speaker Change: Gas furnaces generally have a lifetime.

Speaker Change: You can make a gas furnished last 25 30 years.

Paul W. Johnston: Whereas a straight cool unit, I think the industry has said it's around 15, 16 years. Heat pumps are something that are growing as a percentage of the total business, and those generally don't have as long a lifetime.

Speaker Change: Whereas a straight cool unit are I think the industry has said it's around 15 16 years.

Speaker Change: Heat pumps are something that are growing as a as a percentage of the total business.

Speaker Change: And so those generally don't have as long a lifetime.

Paul W. Johnston: Remember, they're not just operating in the wintertime; they're operating in the summertime also, so you've got more hours being packed on that piece of equipment. You know, what that's going to do to the overall mix of installed base out there right now. I think that's going to be one of the questions that we'll be able to look at probably in the next year or so. But replacement pull-up, I figure that we probably had two and a half to three million units that were pulled up during the pandemic that were installed, perhaps prematurely, perhaps not. Trying to get some data around that to see what the geography was of those replacements. Was it north or was it south, you know, where people were actually replacing equipment?

Speaker Change: Remember, they're not just stop raising in the wintertime. They are operating in the summertime also so you've got more hours being backed onto to that piece of equipment.

Speaker Change: You know, what that's going to do to the overall mix.

Speaker Change: Mix of installed base out there right now.

Speaker Change: I think that's gonna be a you know one of the questions that will we'll be able to.

Speaker Change: To look at probably in the next year or so.

Speaker Change: But replacement pull up I figure that we probably had two and a half to 3 million units were pulled up drain the pandemic there were installed perhaps prematurely perhaps not.

Speaker Change: Trying to get some data around that to see what the geography was your bill's replacements was it north or was it south.

Speaker Change: Where people were actually replacing equipment.

Paul W. Johnston: So, a lot of data, a lot of data coming in, a lot of data that needs to be analyzed to answer that question. Paul, I think you said something. I think you said something important there. Listen, BJ, in your 40 years in this industry, this is probably the most dynamic a period for the space as there's ever been between. I mean, all these questions are pointing to all the different ins and outs. And the change in paradigms between the supply chain changing again, the OEMs going with different pricing at different times, the change in rate of pricing going on in inflation, the inventory, and the change to the A2L product coming out, there's just so many, so many different things going on in the industry today, which creates a lot of noise.

Speaker Change: So a lot of data a lot of data coming in a lot of data that needs to be an analyzer DANZ answer that question properly.

Speaker Change: Well I think he said something.

Speaker Change: As he said something that isn't a J.

Speaker Change: There are 40 years in this industry. This is probably a dynamic period for the space as theres ever been between I mean, all the all of these questions are playing to all the different ins and outs and.

Speaker Change: And changing paradigms between the supply chain changing again, the Oems going with different pricing at different times, the change in rates pricing going on in inflation.

Speaker Change: Inventory.

Speaker Change: And the the change to the eighth well products cutting out theres just so many so many different things going on in the industry today.

Speaker Change: Which creates a lot of noise.

Paul W. Johnston: But I have to say that I think Watsco is very well positioned. You know, our inventory has come down. The quality of our inventory has gone up as far as lower excess and flow and damaged inventory is concerned. Pricing, Barry, you covered a lot of it. What I think you left out was a key fundamental block there is that our transaction margin, or as I think it's been written, structural margin, is going in the right direction for 2023. I think there's more momentum around that in 2024. I think we're doing a good job.

Speaker Change: But I have to say that I think watsco is very well positioned you know our inventory has come down the quality of our inventory has gone up as far as lower excess and slow and damaged inventory pricing or you covered a lot of it but I think you you left out was it a key fundamental block there is that our transaction margin.

Speaker Change: Sure.

Speaker Change: I think it's been written structural margin is going in the right direction for the client 'twenty three I think there's more mentioned around that in 2024, I think we're doing a good job our leaders and our teams in the field are doing good job managing expenses given all the craziness in the space.

Albert H. Nahmad: Our leaders and our teams in the field are doing a good job managing expenses given all the craziness in the space. And the balance sheet, you know, the balance sheet being without any debt, well-positioned for any opportunity that comes our way. So, and I guess my point is that in a crazy industry and a crazy time, I like where we sit, and I like our performance. And I remain very optimistic about this year and the future. Thank you for the perspective.

Speaker Change: And the balance sheet, the balance sheet being without any debt are well positioned for any opportunity that comes our way.

Speaker Change: I guess my point is then in a cray.

Speaker Change: Crazy industry in a crazy time, I, I like where we sit and lack of performance and I remain very optimistic about the year in the future.

Speaker Change: Thank you for the perspective.

Speaker Change: And I think that's well said.

Joe Ehlersmeyer: And I think that's well said. I agree. The next question comes from Joe Ehlersmeyer with Deutsche Bank. Please go ahead. Good morning, Joe.

Speaker Change: I agree.

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

Joe: Well everybody. Thank you for taking my questions I think right. After your last call. There was a rule by the EPA interpreting the AAM Act I'm. Just wondering if you have any thoughts on the impact of that rule as it relates to the dates around the transition.

Paul W. Johnston: Hey everybody, thank you for taking my question. I think right after your last call, there was a rule by the EPA interpreting the AIM Act. I'm just wondering if you have any thoughts on the impact of that rule as it relates to you around the Yes, it doesn't change the dates of the transition. All it really did was change the sell-through process. Originally, the AMAC came out and indicated that you had to C-sell any 410A product at the end of the year. EPA came out with that, what you're talking about, and has a one-year sell-through now.

Joe: Yeah. It doesn't change the date of the transaction all at all it really did was was changed the.

Joe: The sell through process. Originally the aim that came out and indicated that you have to.

Joe: See selling any more to any product you know at the end of the year EPA came out with that with what you're talking about and has a one year sell through now the units have to be manufactured and produced in 2024.

Paul W. Johnston: The units have to be manufactured and produced in 2024. The dead date for building any more is December 31st of this year, and then there's a 12-month cell. I think there was also some consternation around what constituted manufacturing and if that could actually apply to things that were charged in the field.

Joe:

Joe: The dead date for building anymore as a December 31st of this year, and then Theres a 12 months elsewhere.

Speaker Change: Understood and I think there was also some consternation around what constitutes.

Speaker Change: Due to manufacturing and if that could actually apply to things that were charged in the field wondered if you had any thoughts on that and then.

Paul W. Johnston: I wondered if you had any thoughts on that. And then, on a bigger picture, does this actually change the time frame over which the OEMs are taking the actions that they're taking? No, it doesn't really change.

Speaker Change: Over like bigger picture, though.

It has actually changed the timeframe over which the Oems are taken out of the actions that they're taking out just any thoughts there.

Speaker Change: No. It does it doesn't really change the manufacturers now.

Paul W. Johnston: The manufacturers have had to plan for this transition for the last several years, so it did not change the way that they're gonna flow this through. They had to get their manufacturing processes in order. They had to change their plans, get their vendors lined up. There was no real change in direction based upon that ruling.

They've had to plan for this transition for the last several years. So it did not change the way that they are going to flow. This is true they had to get there their manufacturing processes in order they had to change their plant get their vendors lined up.

Speaker Change: There was no real change in direction based upon that ruling.

Paul W. Johnston: They still have to stop manufacturing all 410 units at the end of the year. I think what you were referring to had more to do with, what was a component? Was the outdoor unit a component, and hence it could be replaced?

Speaker Change: Still have to stop manufacturing all 410 units at the end of the year I think what you were referring to had more to do with.

What was a component was the outdoor unit a component and hence it could be replaced that question is still a little bit up in the air Theres still some some fuzziness around that so that subsequent to the sell through period can you still install a four tien outdoor unit or indoor unit as a repair can.

Paul W. Johnston: That question is still a little bit up in the air. There's still some fuzziness around that. For example, subsequent to the sell-through period, can you still install a 410 outdoor unit or indoor unit as a repair component?

Speaker Change: Ponant.

Paul W. Johnston: That has not been clarified. I don't think I heard earlier what your commercial HVAC sales were year-over-year relative to residential and if you have any thoughts on where commercial can go in the future. Well, I did comment that commercial is very strong, and then we had a backlog for at least a year. Can you add anything more to that, Barry or Paul?

Speaker Change: That has not been clarified yet.

Speaker Change: Okay understood and if I may I don't think I heard earlier, what your commercial HVAC sales were year over year relative to residential and if you have any thoughts on where commercial can go in the year ahead.

Speaker Change: Although I did comment that commercial is very strong and then we have backlog for at least a year.

Speaker Change: Can you add anything more to that Barry or Paul.

Barry S. Logan: I mean, for the year, you know, commercial is up in the teens. I think that's been the trend all year long. The fourth quarter was near double digits.

Paul W. Johnston: I mean for the year you know its commercial was up in the teens. So I think that's been the trend all year long and the fourth quarter was was near double digits and leave it at that residential down a little bit.

Barry S. Logan: We'll leave it at that. Residential down a little bit and looking forward. And I was going to say, for the quarter, for the sake of algebra, we have one less selling day in the quarter, so you can adjust for that if you choose to. I'm sorry. What was your question? I just want to point out again, we don't measure backlog in the same proportions as the OEMs who make large quantities of large commercial vehicles. But like we said, I think in the release or in the commentary, the backlog is still strong. We haven't seen much variation in trend, and so there is no reason to think that they will. Yeah, most of our commercial unitary products go out at once, you know; it's a replacement demand. So there is no back.

Speaker Change: And looking forward.

Paul W. Johnston: And I was gonna stay in for the quarter for the sake of the algebra, we had one less selling day in the quarter. So you can adjust for that if you if you choose to.

Paul Johnston: Yeah.

Speaker Change: I'm sorry, what was your question.

Speaker Change: The outlook for commercial.

Speaker Change: Again. It is we we don't measure backlog in the same proportions as the OEM to make in a large quantities of large commercial.

Speaker Change: But like like we said I think in the release or in the commentary that backlog is still strong.

Speaker Change: We haven't seen much variation in trend.

Speaker Change: And so not a reason to think that there will be.

Yeah, and most of them most of our most of our commercial unitary products go at once you know, it's a replacement demand.

Jeff Hammond: But, you know, always remember to put it in perspective. Commercial, for us, is about 15% of what we do, between 15 and 20% of what we do. The next question comes from Jeff Hammond with KeyBank Capital Markets, Inc.. Please go ahead.

Speaker Change: So there is no backlog.

Speaker Change: But you always remember to put in perspective commercial for US is about 15% of what we do.

Speaker Change: Got it.

Speaker Change: Clean 15, and 20% of what we did.

Yes.

Speaker Change: The next question comes from Jeff Hammond with Keybanc Capital Markets, Inc. Please go ahead.

Jeff Hammond: Hey, good morning, guys. So I heard a bunch of different things about gross margin, and I wanted to come back to that.

Jeff Hammond: Hey, good morning, guys.

Jeff Hammond: So so I heard a bunch of different things on gross margin I wanted to come back to that it sounds like transaction margin moving in the right direction, you've got these kind.

Jeff Hammond: It sounds like transaction margin is moving in the right direction. You got these kind of, you know, headwinds that carry over maybe 1Q, 2Q, just, I mean, maybe level set us on how you think about, you know, gross margins for 2024. Is that kind of 27% margin?

Jeff Hammond: Kind of headwinds that carryover, maybe one Q <unk>, just I mean, maybe level set us on how you think about gross margins for 'twenty 'twenty four is that kind of 27% margin.

Barry S. Logan: You know, doable, or do we kind of run a little bit below that given some of the moving pieces? You'd better take that Mary and Paul you want to deal with that, yeah, yeah, I'll handle it. Well, first, I want to go back to the transaction margin you mentioned, and it's important to emphasize that, for the year, which I really want to speak about the year, In a year, they're in the headwind in terms of all this noise about weighted average cost gain, inflation, and so on. That headwind in 2023 was about 120 basis points. And that's what we expect, you know, that to diminish greatly, importantly, as we get into 2024. The margin gain, the selling margin gain, for the year was 70 basis points.

Jeff Hammond: You know doable or do we kind of run a little bit below that given some of the moving pieces.

You bet, Barry and Paul do you want to deal with backup yeah, I'll handle it well first I want to go back to the transaction margin you did mention that and it's important to emphasize that I think so for the year, which I really want to speak about the year.

Speaker Change: In a year, there and the headwind in terms of all this noise about weighted average costs getting damage inflation and so on.

Speaker Change: That headwind in 2023 was about 120 basis points.

Barry: And that's what we expect that to diminish greatly importantly, as we get into 2024.

Speaker Change: The margin gain the selling margin gain.

Speaker Change: And the year was 70 basis points, so the trend that transactional margin that we make.

Barry S. Logan: So the trend that transactional margin that we make by Improving Pricing, Improving... Everything we do relative to price and margin, you know, did improve in 2023. So the question for 2024 is, can that continue? Can that trend continue? And then some of these other, you know, some of these other noises, I would say has largely diminished.

Speaker Change: Improving pricing improving.

Speaker Change: Everything we do relative to price and margin did improve in 2023.

Speaker Change: So a question for 'twenty 'twenty four is can that continue that trend continue.

Speaker Change: And then some of these other you know somebody that there's other noise diminishes.

Speaker Change: Say has largely diminished.

Paul W. Johnston: So to answer your question, we're going to stick with 27% as the goal for 2024, and there's some good momentum in the selling margin. And some of these other pricing action discussions we're having will have to play out as we think, and the second and third quarter, especially for that to play out. But I think it's where we stand today, including the transition to the A2L product that'll be. We'll see how that plays out in the market, as well. Right. And just to clarify that the non-equipment down six, did you have a negative price in there where there was some actually real disinflation around whether it be refrigerant or, you know, copper, or steel. I don't think there was much in the way of deflation that was really occurring there.

Speaker Change: So the answer to your question, we're going to stick with you know 27% of the golf on extra for 'twenty 'twenty four.

Speaker Change: And there's some good momentum in the selling margin.

Speaker Change: And if some of these other pricing action you know discussions we're having we will we'll have to play out as we think.

Speaker Change: In the second third quarter, especially for that to play out.

Speaker Change: But I think inside of where we stand today.

Speaker Change: Including the transition to the hol products that'll be.

Speaker Change: I have to see how that plays out in the market as well.

Speaker Change: Right.

Speaker Change: And just to clarify that the non equipment down six did you have negative price in there where there was some actually real disinflation around whether it be refrigerant or.

Speaker Change: Copper steel.

Speaker Change: Yeah.

Speaker Change: Yeah go ahead Sir.

Speaker Change: Go ahead, Paul you got it no I.

Paul W. Johnston: No I don't think there was there was much of the way of a deflation that was really occurring there. Yeah. We had we had a couple of product areas, where we did see some price degradation, but it stabilized and came back.

Barry S. Logan: Yeah, we had a couple of product areas where we did see some price degradation, but it stabilized and came back. But I just think it was overall demand. And we just saw a slowdown in demand for those products. Okay, and then just last one, you know, on the, you know, Barry, you talk about, you know, kind of being a merchant, and you've got pricing kind of a little bit later. But you're also kind of managing, you know, drawing down inventory. So how should we think about, you know, kind of buying ahead of price increases to be a merchant versus managing inventories lower as you go into the selling season? Thank you.

Paul W. Johnston: But I just think of as overall demand.

Yeah, we just saw a slowdown in demand on those products.

Speaker Change: Okay, and then just last one.

Speaker Change: You know on the you know Barry you talked about you know kind of being a merchant and you've got pricing kind of a little bit later, but you also kind of managing you know drawing down inventories. So how should we think about you know kind of buying ahead of price increases to be a merchant you know versus managing inventories lower as you go into.

Speaker Change: The selling season.

Speaker Change: Okay.

Speaker Change: Sure.

Barry S. Logan: Yeah, I mean, there is a more direct question whether we're buying forward in some way and, and, and beating the price increase and so on. You know, I'm not going to, again, publicly say what we do in terms of competing for. But it's not it's not a practice that we, you know, we entertain on scale. I think we look at it here and there; we look at it market by market. At no time do we look at Watsco as a scalable company and say, let's buy Ford. It's not something that really is a responsible thing to do in that sense.

Barry: Yeah, I mean, if it is or is it more direct question and whether we're buying for it in some way in and and beating the price increase and so on.

I'm not going to again publicly say, what we do in terms of competing for [laughter], but it's not it's not a practice that that we you know where are we in entertaining on scale I think we look at it here and there we look at it market by market.

Barry: At no time do we look at Watsco is a skilled company and say, let's buy for it and it's not something that.

Barry: It really is a responsible thing to do in that sense. So I think in markets. We consider it in certain brands we consider it.

Barry S. Logan: So I think in markets, we consider it, and certain brands we consider it, but nothing on a scale that would be remarkable, Jeff. Yeah, yeah, I would say we are emerging, but we don't get better and, and we take a risk-adjusted approach where we. Right. And plus, Jeff, I think you've got the phase in phase out of 410, phasing into the A2L product. So I think right now, we'll buy the product that we need when we, Was there a follow-up, Mr. Hammond? No, I'm all set.

Barry: But nothing on scale that would be a remarkable job.

Barry: Yeah.

Barry: We are we are emerging but we don't bet the ranch and we take a risk adjusted approach there.

Speaker Change: Fair enough.

Barry: Right.

Speaker Change: And plus next lets say five plus Jeff I think you've got the phase in phase out of we're gonna be phasing out of 410 phasing into the a two well.

Speaker Change: Product, so I think right now.

Jeff Hammond: Yeah, well well by well byproduct that we need when we need it.

Jeff Hammond: Yeah.

Okay.

Speaker Change: It was there a follow up Mr. Hammond no I'm all set thank you. Thank you.

Steve Tusa: Thank you. Thank you. Again, if you have a question, please press star and then one. The next question comes from Steve Tusa with J.P. Morgan. Please go ahead. Hi, good morning. How are you?

Speaker Change: Again, if you have a question. Please press Star then one the next question.

Speaker Change: Comes from Steve Tusa with J P. Morgan. Please go ahead.

Steve Tusa: Hi, Sue.

Good morning, how are you.

Steve Tusa: So just just to just to.

Steve Tusa: So just to, you know, get the math down on the kind of resi unit cell through, it looks like if we kind of parse that between like commercial and resi, that was down roughly 10 for the year. The resi stuff? on unit. It was down eight, including a commercial.

Steve Tusa: Get the math down on the kind of a resi unit sell through it looks like if we kind of parse out between light commercial and resi that was down roughly 10 for the year the resi stuff.

Steve Tusa: On units.

Steve Tusa: Let's see.

Steve Tusa: It was down eight including.

Paul W. Johnston: I don't see... We don't include commercial in our unit volume discussion, Steve. Okay, so that was just resi.

Steve Tusa: Commercial.

Steve Tusa: Okay.

Steve Tusa: Okay.

Steve Tusa:

Steve Tusa: No. We don't really I mean, we don't include our commercial in our units and our unit.

Steve Tusa: Volume discussion Steve.

And that wasn't just residential.

Steve Tusa: Okay. That's.

Paul W. Johnston: Okay, that's great. And I guess just thinking about the gross margin, there's just such a wide gulf between what you did this quarter and what you did last first quarter. Can you just give us – and you mentioned the price increases are coming a little bit later. Can you just give us any flavor for where that 1Q might land in this whole construct?

Steve Tusa: That's great and I guess, just thinking about the gross margin I mean, there's just such a wide Gulf between what you did this quarter and what you did last first quarter can you just give us and you mentioned the price increases are coming a little bit later can you just give us any flavor for you know like where that one Q might land in this whole construct.

Steve Tusa: On gross margin.

Barry S. Logan: on Gross Margin. I would say, without constituting official guidance, I think I tried to say it earlier, which is something sequentially better than the fourth quarter. Um, you know, I started looking at things more sequentially than year over year. It takes some of the year ago volatility out.

Steve Tusa: Without that.

Speaker Change: [laughter] I'll say without constituting official guidance I think I tried to say it earlier, which is something sequentially better than the fourth quarter.

Speaker Change: You know.

Speaker Change: Started looking at things more sequentially than year over year. It takes some of the a year ago.

Speaker Change: Utility out.

Paul W. Johnston: So it's an improvement sequentially from what you saw in this quarter into the first quarter. Right, so not up year over year, but better than the fourth quarter. That's correct. Yeah, okay, that's helpful. And I guess this whole discussion on pricing, are you assuming that the non-A2L products you get a price on those? I mean, you're making it sound like the degree of price you get will depend on what kind of A2L product you sell. Are you assuming some lift on the non-A2L equipment?

Speaker Change: So an improvement sequentially from what you saw in this quarter into the first quarter.

Speaker Change: So not up year over year, but something better than the fourth quarter that's correct.

Speaker Change: Yeah, Okay. That's helpful and I guess this whole discussion on on pricing are you assuming that the non <unk> products.

Speaker Change: Get price on those I mean, you're you're making it sound like that the degree of price you get will depend on what kind of a two L product yourself or are you assuming some lift on the non H well equipped.

Paul W. Johnston: And then secondarily, if, like, there is some pushback in the channel, are you kind of prepared to ask your OEMs to kind of help you guys maintain or gain share in this market? with Price. Well, you know, those are all great questions of what if, you know, obviously, we keep in constant contact with our OEMs, and we'll be, We'll be ready to make any sort of adjustment that is required to be competitive in the marketplace. We're not going to lose our competitiveness, and our OEMs certainly are not of that vein. So yeah, we'll be working with them on that. One thing that makes the HOL introduction unusual, if you remember when we went from the 410A to the R22, 410A was introduced five or six years before.

Speaker Change: Equipment, and then secondarily if.

Speaker Change: If like you know.

There is some pushback in the channel.

Speaker Change: So are you are you kind of prepared to ask your Oems kind of help you guys.

Speaker Change: Maintain or gain share in this market.

Speaker Change: With price.

Speaker Change: Yeah. Those are all great questions of what is.

You know obviously we.

Speaker Change: We keep in constant contact with our Oems and will be.

Speaker Change: We will be ready to make any sort of adjustment that is required to be competitive in the marketplace. We're not going to we're not going to lose our competitiveness.

Speaker Change: In our OEM certainly are not.

Speaker Change: That being either.

Speaker Change: So yeah, we'll be working with them on that one thing that makes me Hol introduction unusual if you remember when we went from the 410 a to the R 22.

Speaker Change: <unk> was introduced five or six years before we.

Paul W. Johnston: We transitioned over to, you know, transitioned out of the R22. So you had a price base that gradually was inserted over that six-year period before we actually implemented the transition. This time, we're not going to have that.

Speaker Change: We transitioned over to transition out of the R. 22, So you had a.

Speaker Change: You had a price basis.

Speaker Change: That that gradually was inserted over that six year period before we actually implemented the transition at this time, we're not going to have that so I think there's a lot of question marks around you know exactly how this price can be set and will the price.

Paul W. Johnston: So I think there's a lot of question marks around, you know, exactly how this price can be set. And will the price go up? Will it be set lower? Will it be set high? And so that's a that's a what if that? I guess I'm not smart enough to answer that. Yeah, it's I think it's more of a "when not it's good" situation. I think different customer segments will adopt their new products sooner than others, and the prices will shake out as all this transpires. It's not going to happen in Q1, we know that, and so really it's this summer that... We'll see how it works out tomorrow.

Speaker Change: Go up it will be said too low or will it be set too high and so that's a that's a what if that Ah I guess I'm not smart enough to to answer yeah. It's I think it's more of a when not asked because I think different customer segments as well.

Speaker Change: Adopt their new products sooner than others and that prices will shake out as all of it transpires in.

Speaker Change: It's not going to happen in Q1, we know that.

Speaker Change: And so really it's the summer that we'll see how it works out in the market right.

Paul W. Johnston: But are you assuming price capture on the older, are you assuming price capture on the non-A2L? Where is most of the price lift from the A2L? We have not assumed the price that there's going to be capture on the 410, that there's going to be some sort of a spread that we're going to keep. Yeah. We've got the price increase so far for the 410, but it's not anticipated that we're going to be able to match that against the A2L. I don't think anybody's assuming. Oh, against the A2L.

Speaker Change: But are you assuming.

Speaker Change: Are you assuming cash or on the older are you assuming price capture on the on the non H O L.

Speaker Change: Whereas most of the price lift from the <unk>.

Speaker Change: We have not assumed that price that theres going to be capturing it for 10 theres going to be out there.

Speaker Change: Spread that we're getting now from the Oems.

Speaker Change: Yeah, sorry, I mean, we've got the price increase so far for the 410.

Speaker Change: It's not anticipated that we're gonna be able to price that up against the two well.

Speaker Change: I don't think anybody's assuming that.

Speaker Change: Oh against the two I'm, just saying like for like relative to where the price was <unk> 23 for the non <unk> like do you assume you over your capture if hol wasn't happening.

Paul W. Johnston: I'm just saying, like for like, relative to where the price was in 23 for the non-A2L. For example, do you assume year-over-year capture if A2L wasn't happening? you know, would you assume year-over-year growth on the 410A type products? Oh, certainly, yeah. With the price increases that we have, yes, of course. Yeah, okay. Yeah, I want to be really clear about that. So, as Paul mentioned earlier, if we range it out across really six, so we sell six OEM products, and the ducted side, probably another six on the ductless side.

Speaker Change: Would you assume year over year capture on the 410, eight type product or certainly with the pricing process that we have yes of course, yes.

Speaker Change: Steve.

Speaker Change: What was the first two is coming later this year.

Steve Tusa: Yeah, I want to be really clear about that so so Paul mentioned earlier, if we range it out across really sick. So we saw six oem's products.

Steve Tusa: In the ductile side, probably another six on the ductless side.

Barry S. Logan: And the range of price consistently across the group is between 4% and 6%, as we've said earlier. Your question is, do you expect to yield any of that in 2024? The answer is yes. Yes. And to what extent, time will tell.

Steve Tusa: And the range of price consistently across the group is between four and 6% as we said earlier. Your question is do you expect to yield any of that in 'twenty 'twenty four the answer is yes.

Speaker Change: Yeah and to what extent time will tell but we.

Barry S. Logan: I certainly do not see outliers, and if there's a competitive need in the market or customer type or an application... OEMs will always be asked, you know, to participate and react to what's going on in the market, but on the whole, at scale. Yeah, we do expect a price capture of $410,000. And then, sorry, I just got one more. The call usually ends early.

Speaker Change: We certainly do not see outliers and if theres, a competitive need in the market or customer type or an application OEM.

Speaker Change: Oems will always be asked you know cause due to to participate.

Speaker Change: And react to what's going on in the market, but on whole on on scale.

Speaker Change: Yeah, we do expect a price capture of Forza name.

Speaker Change: Then sorry, I just got one more call usually ends early so I'm, hoping I'm not taken are taken up anybody's time here, but.

Steve Tusa: So, you know, hopefully I'm not taking up anybody's time here. But the two and a half to 3 million units you mentioned, what's the kind of map on that? And can you just explain what you mean by the two and a half to three units that, you know, you're calculating are being installed at the peak? Well, you know, if you look at 2019 as your baseline at roughly 8.5 million units, and then we zoomed up to 9.3, 10.2, you know, we stayed above 10 million and, in 2023, the industry shipments fell back down to 2019, a little bit ahead. So if you take a normal, let's say, 2% or 3% growth rate that the industry historically has had, and put that against where we were in 2019, and take the Delta.

Speaker Change: Two and a half to 3 million units you mentioned, what's what's kind of the math on that and can you just explain that what what you meant what you meant by that the two and a half to three units that you're calculating is being installed at the peak.

Speaker Change: Well you know if you look at our 2019 as your baseline at a roughly $8 5 million units and then.

Speaker Change: We zoomed up to nine three tend to be stayed above $10 million and in 2023, the industry shipments fell back down to 2019.

Speaker Change: A little bit ahead. So if you take a normal let's say two or 3% growth rate that the industry. Historically has had puts.

Speaker Change: Put that against where we were in 2019 and take the Delta.

Paul W. Johnston: Got it. Okay, great. So that's the pull forward, you're saying like, kind of? Yeah, that looked like a pull forward to me, you know.

Speaker Change: Got it okay great.

Speaker Change: You're saying like kind of I'd.

Speaker Change: Okay.

Speaker Change: That looked like a pull forward to me you know.

Steve Tusa: And like I indicated to you, one, we've got to look at it geographically because you have longer life spans, obviously, in Michigan than you do in Miami, Florida. Right, right. Okay, great. Thank you so much.

Speaker Change: Yeah.

Speaker Change: Indicated you you know one one we've got to look at it geographically because you have longer life spans obviously in Michigan than you do in in Miami, Florida.

Speaker Change: Right right, Okay, great. Thank you so much.

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

Speaker Change: The next question comes from Damian Caris with UBS. Please go ahead.

Damian Caris: Danielle good morning, and good morning, everyone.

Damian Karas: I have a follow-up question on inventory. I know you talked about normalizing back to kind of four to five turns over time. Just curious if you're anticipating, though, later this year, maybe having to go in a restocking mode, you know, as the 454B equipment becomes available, and then basically, you kind of get your last call on getting that 410A. And related to that, I'm just curious if there are any incremental costs that you might expect just as you're kind of managing the legacy versus the A2L inventory buckets, You know, I think we, each one of our operating units is developing plans for what we call phase in, phasing in the A2L products and phasing out the 410 products.

Damian Caris: I have a follow up question on inventory I know you talked about.

Damian Caris: Normalizing back to kind of four four to five turns over time.

Damian Caris: Just curious if you're anticipating though later this year, maybe having to go in a restocking mode.

Damian Caris: For it before being Clinton becomes available and then basically you kind of get your last call I'm getting at.

Damian Caris: <unk>.

Damian Caris: And and related that you know I'm just curious if there's any incremental costs that you might expect just kind of managing.

Damian Caris: The legacy versus the eight two al inventory buckets or can you give me that pretty efficiently.

Damian Caris: Yeah.

Damian Caris: You know I think we each one of our operating units is developing plans for what we call phase in phasing in the a two well products and phasing out the four to 10 products.

Damian Karas: You know, we have a safeguard that we mentioned earlier with the AMAC where we can sell the 410A through all the way through next year. But each one of our operating units is working on that plan so that we want to be able to hit our inventory targets. We want to be able to meet the demands of the marketplace and our contractors, and we want to be able to do it very quickly. logical format so that it's not disruptive to the business, and it's not creating additional overhead for it.

Damian Caris: You know we have a and obviously we have a safeguard that we mentioned earlier with the APAC, but we can sell it for 10, a true all the way through next year.

Damian Caris: But each one of our operating units is working on that plan so that we.

Damian Caris: We want to be able to hit our inventory targets, we wanted to be able to hit the the demands of the marketplace and in our and our contractors.

Damian Caris: And we wanted to be able to do it in a.

Damian Caris: Very.

Logical format, so that it's not disruptive to the business and is not creating the additional overhead for us.

Damian Caris: Yeah.

Paul W. Johnston: Okay, I got it. Thanks. And then, kind of a follow-up question to a comment you made Barry about, you know, you sell six OEM products on the ducted side, six on the ductless side. I mean, it does appear to us there are a lot of newer players trying to make moves in the U.S. market, particularly in heat pumps and some of these alternative, you know, electric high-efficiency solutions. Would you guys foresee working with more equipment vendors over time? Or are you pretty, you know, kind of satisfied and set in your existing relationships and product breadth? Yeah, boy, it's a very new thing... Sorry? Are you satisfied? Sorry?

Damian Caris: Yeah.

Speaker Change: Okay got it thanks.

Speaker Change: And then.

Speaker Change: Kind of a follow up question to a comment you made very about.

Speaker Change: All six OEM products on the Doctor side kicks on the ductless side I mean, it does appear to us there's a lot of.

Speaker Change: Kind of.

Newer players trying to make moves in the U S market, particularly in heat pumps in some of these alternative.

Speaker Change: Electric high efficiency solutions.

Speaker Change: Do you guys foresee.

Speaker Change: Working with more equipment vendors over time or are you pretty kind of satisfied and set in your existing relationships and product breadth.

Speaker Change: Yes.

Speaker Change: Sorry are.

Speaker Change: Are you satisfied.

Speaker Change: [laughter].

Damian Karas: It's like a half hour, I want to give like a half hour answer to that honestly. I mean, I don't think we look at our portfolio brands and say, do we have enough or too much? I don't think we even consider that kind of notion.

Speaker Change: It's like a half I won't give you like a half hour answer to that honestly.

Speaker Change: [laughter] I mean, I I don't think we look at our portfolio of brands and say do we have enough or are too much I don't think we even consider that kind of that kind of notion.

Barry S. Logan: We look at, we look at, you know, the markets themselves. So, where we've acquired great businesses, we acquired a great carrier distributor in Chicago three years ago. We acquired a great ream distributor in Louisiana a few years ago. The acquisition campaign is somewhat indifferent to brand.

Speaker Change: We look at we look at the markets themselves, So where we've acquired great businesses, we've acquired a great carrier distributor in Chicago three years ago.

Speaker Change: We acquired a great room distributor in Louisiana, a few years ago.

Speaker Change: The acquisition campaign as it is somewhat indifferent to brand. It's it's focused on who are the dominant players in markets.

Barry S. Logan: It's focused on who are the dominant players in the market and, over time, building incredible franchises on top of the incredible franchises that owners have built. So, from that growth perspective. And if you ask me, you know, can Watsco double in size?

Speaker Change: And over time building incredible franchises on top of the incredible franchise that owners had adult.

Speaker Change: So so I would say that from that growth perspective.

Speaker Change: And if you asked me you know can watsco double in size.

Barry S. Logan: The answer is yes, and we would do it that way. And oddly enough, ironically enough, the brands are relatively indifferent to that strategy because we're trying to grow share and markets and legacies. You know, and that's what we did, right? I mean, we were a billion-dollar company 20 years ago; we're a $7 billion company now. And we know we can double the size of Watsco in that same kind of way of growing over the long term. Now, if your question is very short term and, you know, kind of the puzzle pieces that we operate today. We're not going to be satisfied unless market share is well above average in markets, and we're going to either build on relationships we have and add brands. Carrier. I don't think people really appreciate it, but we sell seven, seven, eight different brands that Carrier makes. And we don't have all Carrier brands in all of our retail locations.

Speaker Change: The answer is yes, and we would do it that way and oddly enough. Ironically enough. The brands are are relatively indifferent to that strategy [laughter], because we're trying to grow share.

Speaker Change: Share in markets and legacies and.

Speaker Change: You know and that's what we've done right I mean, we were $1 billion company 20 years ago or $7 billion company now.

Speaker Change: And where we know we can double the size of watsco in that same kind of way of.

Speaker Change: Growing over the long term.

Speaker Change: Now if your question is very short term and you know kind of the puzzle pieces that we operate today.

Speaker Change: We're not gonna be satisfied and less and less market share is is well above average and markets.

Speaker Change: And we're going to find either built on relationships, we have and add brands.

Speaker Change: With carrier I don't think people really appreciate it but we sell 778 different brands that carrier mix.

Speaker Change: And we don't have all the carrier brands in all of our carrier locations and that's an opportunity that we talk about in terms of how to.

Barry S. Logan: And that's an opportunity that we talked about in terms of how to bring more density to those brands and those stores. And there are niche products and manufacturers that operate in niches that we've added to our network. There's DuckList, for example, that we've added to our network.

Bring more density to those brands and those stores.

Speaker Change: And and and you know we've added there are niche products and manufacturers that operate in niches that we've added to our network and stuck with that we've added to our network.

Barry S. Logan: We have a private label that's grown over time. So, this is a very interesting question with a very long-tailed answer. I'll say this: We're never satisfied. That's part of our culture.

Speaker Change: We have a private label that's that's grown over time.

So so yeah very very interesting question with it with a very long tail to answer.

Speaker Change: But you know.

I'll say it that way.

Speaker Change: We're never satisfied that's part of our culture of our very ambitious, but always want to grow always want to move up into the right.

Barry S. Logan: We're very ambitious. We always want to grow, always want to move up and to the right. It's an exciting time in the industry, and innovation for the first time, I think, in a long time. And it's exciting. And that innovation is not only coming from new entrants, but it's also coming from our OEM partners, with products that they've brought to market or that they will bring to market. It's fun and exciting to see the improvement and enhancements in the technology that's coming into the product, and it'll be fun to take in the market as well. I really appreciate the color.

Speaker Change: It's an exciting time and in the industry.

Speaker Change: He pumps have gained traction and regulation and frankly in the changing.

Speaker Change: Markets are creating product innovation.

Speaker Change: Innovation for the first time I think in a long time and it's exciting.

Speaker Change: And if not then it that innovation is not only coming from new entrants, but it's also coming from our OEM partners with product that they've brought to market are that they will bring to market.

Speaker Change: It's it's fun and exciting to see.

Speaker Change: The improvement enhancements in the technology, that's coming into the product and I'll, just sort of taken the market as well.

Yeah.

Speaker Change: Really appreciate the color best of luck, guys and Barry I'll make sure I follow up. So you can give me the full 30 minute response [laughter]. Okay. This concludes our question and answer session I would like to turn the conference back over to Albert <unk> for any closing remarks.

Damian Karas: Best of luck, guys. And Barry, I'll make sure I follow up so you can give me the full 30 minute response. The Bulletproof Executive 2013, This concludes our question and answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks. Thanks for your interest in our company. We very much appreciate it, and... We believe that we have an enormous future ahead of us, and we hope you'll be with us along the way. Bye-bye The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. BF-WATCH TV 2021, Go to Beadaholique.com for all of your beading supplies needs! The Ultimate Parody Site! BF-WATCH TV 2021

Thanks for your interest in our company.

Speaker Change: Lee.

Speaker Change: Much appreciate it.

Speaker Change: And.

Albert: We believe that we have.

Albert: Enormous future ahead of us and we will.

Speaker Change: Hope you'll be with us along the way.

Speaker Change: By.

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

Speaker Change: Okay.

Speaker Change: Yeah.

Speaker Change: [music].