Q3 2024 Watsco Inc Earnings Call
Okay.
Good day and welcome to the Watsco third quarter 2024 earnings Conference call.
Please note that today's event is being recorded and all participants will be in a listen only mode.
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Speaker Change: Also please be aware that today's call is being recorded I would now like to turn the call over to Albert <unk> CEO of Watsco. Please go ahead Sir.
Albert <unk>: Good morning, welcome parents third quarter earnings call and this is Albert <unk>, Chairman and CEO.
Albert <unk>: With me is a J.
Paul Johnston, Barry Logan and rig Goldman.
Albert <unk>: Before we start our usual cautionary statement.
Albert <unk>: This conference call has forward looking statements.
Albert <unk>: By my S. D C laws and regulations that are made pursuant this table safe harbor purposes.
Albert <unk>: Very small.
Albert <unk>: Ultimate results may differ materially.
Albert <unk>: Lucky stage.
Albert <unk>: Okay.
Albert <unk>: Watsco produced record sales and net income for.
Albert <unk>: For the quarter.
Albert <unk>: Our markets have shown signs of stability in the fourth quarter is off to a good start with October sales up mid single digits driven.
But meaningful unit growth.
He said it again.
Albert <unk>: October.
Albert <unk>: We're up mid single digits, and driven by meaningful unit growth.
Albert <unk>: We also believe we have gained share with based on industry data and shipment trends.
Albert <unk>: We have also generated a record cash flow.
Albert <unk>: This year and our balance sheet remains interesting condition to enable investments in green.
Albert <unk>: As communicated in our press release, we are in recovery involved with one of my primary Oh, Yes fair.
Albert <unk>: Fairly large supplier.
Albert <unk>: Quint.
Albert <unk>: To us.
Albert <unk>: Yeah, so operating with them in court in Boston to make needed investments.
Albert <unk>: To regain Bill Wilson.
Albert <unk>: New customers.
Albert <unk>: Alright.
Albert <unk>: You continue to make investments in the industry's most innovative technology platforms for HVAC contractors.
Albert <unk>: Greater adoption and use of our platform by a growing number of contractors.
Albert <unk>: All produce market share gains.
Albert <unk>: Annualized E Commerce sales now exceed 2.5 billion bonds.
Albert <unk>: And our active users continues.
Speaker Change: Do you need to grow faster than non users.
Speaker Change: Yeah.
On call their watch, which is what's called a digital sales platform.
Speaker Change: Continued to expand and generate growth for our contractor customers. Thus.
Speaker Change: Thus far in 2024 on call are contractors.
Speaker Change: <unk> it close to approximately 258000 households.
Speaker Change: A 17% increase and generated one 2 billion dollar sales for our contractors, that's a 22% increase over last year.
Speaker Change: We are also leveraging our technology platforms to optimize the launch.
Speaker Change: The new mandate.
Speaker Change: Mandated eight two well systems beginning in 'twenty to 'twenty five.
Speaker Change: Historically regulatory change is good for our industry.
Speaker Change: Good for our business.
Speaker Change: 2023 energy efficiency mandates went into effect whereby contractors the ability to upgrade older systems with higher efficiency systems.
Speaker Change: The time I'll look to vacation.
Speaker Change: Also fuel heating.
Speaker Change: Australia and increased sales of heat pump system, which are sold at higher average unit prices.
Speaker Change: Bunch whole part of the system.
Speaker Change: Growing penetration of block close HDA systems.
Speaker Change: I'll submit the catalyst for growth.
Speaker Change: Revived homeowners and businesses are more energy efficient.
Speaker Change: A bunch of old systems.
Speaker Change: Now the two out a two hour transition is upon us.
Speaker Change: Look forward to the author.
Speaker Change: Okay.
Speaker Change: Turning to our balance sheet, we have a strong cash position no debt to support and that supports most of our investments we choose to make.
Speaker Change: Yeah.
Speaker Change: Although we have produced record cash flow. This year, we are still not satisfied.
Speaker Change: With our inventory turns.
Speaker Change: We are working with our OEM community.
Speaker Change: And continuously improving.
Speaker Change: Allergy.
Speaker Change: To improve where I've been very church.
Speaker Change: Yeah.
Speaker Change: We have also made progress.
Speaker Change: Improving operating efficiency across our network.
Speaker Change: Despite the modest change in SG&A year over year.
Speaker Change: There is mortgage.
Speaker Change: In summary, we operate in a great industry.
Speaker Change: And attractive geographical markets, we have a proven entrepreneurial culture.
Speaker Change: Our local leaders.
Speaker Change: We possess the industry's most innovative technology platforms for HVAC contractors.
Speaker Change: Leading scale and product diversity, particularly in high growth market.
Speaker Change: And finally, our balance sheet and access to capital and Navy as future investments.
Speaker Change: In a highly fragmented industry.
Speaker Change: As always.
Speaker Change: If you have an interest in learning more.
Speaker Change: Visit Miami and see it.
Speaker Change: We are transforming an industry and we will enjoy telling you about it.
Speaker Change: With that let's now go on to Q&A.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw a question you May Press Star then two.
Speaker Change: At this time, we will take our first question, which will come from David Manthey with Baird. Please go ahead.
Speaker Change: Morning, Dave.
David Manthey: Hey, al good morning, everyone.
David Manthey:
David Manthey: First question I have to ask is about the hurricanes, particularly how lean which hit us pretty hard here in Tampa could you talk about the the negatives and potential unwinding positives you might see from oney NAND or Melton.
Speaker Change: Well, let's see if we can get one or else to tell you Lee.
Speaker Change: At least what do you think you want to take that call.
Speaker Change: Oh sure I can get it started and then somebody else can pick up but yeah. We we had a branch we shut down for a couple of days.
For Ilene and then we also had some shut down for another couple of days with with Milton Most everything is back to normal now and obviously, where we're seeing a and an initial rush at least of the.
Speaker Change: Repair components that are going out the door in October.
Speaker Change: Hum.
Speaker Change: Milton came through so quickly it really didn't impact us as severely as are the other storm.
Speaker Change: However, when you get up into the North Carolina, Georgia area.
Speaker Change: A lot more severe damage was done and we've yeah, it's slowed us down but it didn't it didn't really impact our sales out dramatically.
Speaker Change: Yeah.
Speaker Change: Yeah, just to add to that I I've said for many years, a growing up in Florida being in watsco for 32 years that hurricane typically.
Speaker Change: Disrupt our local markets.
Speaker Change: It may not have an impact a whole market.
Speaker Change: And the reverse is true if there's a business opportunity it's good for those markets and not necessarily material for the the national scale.
Speaker Change: I think the most obvious question and thought is that you.
Speaker Change: You know when they are talking about 10, 20 $30 billion of insurance investment that all of these things.
Speaker Change: Portion of that always is our industry equipment or non equipment.
Speaker Change: But it's material materiality of that needs to play out.
Speaker Change: Sometime this year and next year, obviously, but.
Speaker Change: And that's how I would characterize it or at least over over time.
Speaker Change: Okay, so, but even though our Florida is clearly your biggest market.
Speaker Change: Helene will particular ripped up the whole coast, you're saying, it's fairly immaterial and we shouldn't view the mid single digit grow enough growth in October as just a temporary snapback from storm activities, what you're saying.
Speaker Change: Absolutely not no it it's nothing as bad as that are material relative to Helene.
Speaker Change: And either a disruption in the last week of the quarter or two of benefit for their first you know part of October.
Speaker Change: And as Barry indicated when your insurance kicked insurance just kind of kicked in within the next let's say 30 to.
Speaker Change: The 90 days, so we really don't see equipment. So what we see as some older. So the compressors that type of thing to start with.
Speaker Change: Got it Okay, and then real to watsco.
Speaker Change: Great Yeah, thanks for that.
Speaker Change: And then on the <unk> on the gross margin came in a little bit light I know you had a.
Speaker Change: Reason for that here that you discussed with your one of your major Oems, but just medium term, we still feel good about 27%.
Speaker Change: Yeah.
Speaker Change: Oh good.
Speaker Change: Cause AJ I'll jump in yeah. The answer is yes.
Speaker Change: In the short term and the ambition is much higher than that I think we've talked about publicly one day, we'd like to achieve 30%.
Speaker Change: Our engines are wrapped up and be very much of a focus on gross margin.
Speaker Change: And we're investing there and have high expectations.
Speaker Change: Yeah.
Speaker Change: And then analysis, Dave you know there's there's.
Obviously, the magic the magic words, our price and mix.
Speaker Change: And in price overall was pretty consistent this quarter. So that's not really a discussion item mix.
Speaker Change: Mixes where variations or are they so far this year and for this quarter.
Speaker Change: And the word mixes are is a broad term really there's customer mix or geographic mix product mix.
Speaker Change: And the market mix Theres brand mix.
Speaker Change: So a little bit of wait and those factors. If I spent 20 minutes explaining to you what I just said.
Speaker Change: A little bit of weight on margin this quarter, but it was a short term.
Speaker Change: Conversations and.
Speaker Change: I think if you if you consider the two I'll transition.
Speaker Change: Front of us if I look forward.
Speaker Change: It's really a an opportunity to basically.
Speaker Change: Reprice and and go to market with what will essentially be 60% new products over the next 12 months.
Speaker Change: So are Oems, who listen to this call along with all of you.
Speaker Change: This is a very critical stage two.
Speaker Change: We're making tremendous investments inventory has got a completely cycle of your you know over the next 12 months.
Speaker Change: And pricing marketing.
Speaker Change: The features and benefits mix overall mix you know it is going to be critical over the next 12 months to drive margin I think one of the messages we tried to convey in the press release and I'll convey now is.
Speaker Change: And somebody will ask this question is where are we on in terms of unit volumes and stability and things like that.
Speaker Change: And you know year to date.
Speaker Change: Unit volumes were positive in the quarter there. They are overall positive for our selling season overall positive.
Speaker Change: And positive to the extent that it's kind of conventional growth rates and units.
Speaker Change: If I look at you know a longer term average so.
Speaker Change: If I try to consider stability as well as the opportunity in front of us.
Speaker Change: That's where we are we have some optimism in what we're doing.
Speaker Change: Yeah.
Speaker Change: Great. Thanks, Barry I appreciate it all thank you.
Yeah.
Speaker Change: And our next question will come from Tommy Moll with Stephens. Please go ahead.
Speaker Change: Good morning.
Tommy Moll: Yes, Sir and thank you for taking my questions I wanted to start on some of the co investment you. You described you described in the press release. This morning, alongside one of your OEM partners.
Tommy Moll: And it's a two part question here first part is where you did call. It out this morning with substantial detail did something change since last quarter that prompted the enhanced discussion on this item and then as you look forward is there anything you can do to to Cali.
Tommy Moll: Greater expectations about how this sort of progress and ultimately fade. Thank you.
Speaker Change: Terrific question.
Speaker Change: Who wants to answer Paul Barry H N.
Speaker Change: Yeah.
Speaker Change: Uh huh.
Speaker Change: Rick.
Rick: Yeah right.
Rick: Okay.
Speaker Change: Yeah, I think I mean, I'll go first and I'll just add to it because it's a it's an important point.
Speaker Change: And our collaborative spirit, you'll get insight into how we look at these discussions internally.
Speaker Change: I wouldn't say anything critical critically changed in the third quarter as an isolated event.
Speaker Change: We felt it if needed to kind of reconcile where we are year to date a.
Speaker Change: A year ago, we talked about disruptions and.
You know what I read a range of revenue was $150 million to $200 million of revenue at the time you have to go back and look at the disclosures but.
Speaker Change: A year later.
Speaker Change: The idea of recovering that business, you know growing volume growing market share we are establishing a market share and these are markets like Florida, Texas, California that are huge markets.
Speaker Change: Carolinas as well.
And.
Speaker Change: There there is a collaboration there is a co investment we use that term intentionally in the press release.
Speaker Change: Well, we work with our OEM partner and try to figure this out and this is the scorecard year to date.
Speaker Change: And unit growth.
Speaker Change: Has outpaced overall growth rates for sure or for that particular product group.
Speaker Change: It better and when we talk about.
Speaker Change: Pricing, if there's more to it than just the price on the product or is again the mix of those products.
Speaker Change: Yeah, I'm not going to give too much competitive detail and this discussion in answering you.
Speaker Change: And the other is in centers that.
Speaker Change: We chose to put on the street.
Speaker Change: To not just get somebody back buying more from us, but getting new customers at the same time in other words play play offense.
Speaker Change: With this opportunity and that is a share costs and a shared experience with our OEM.
Thought it was important to go ahead and kind of reconcile that scorecard you year to date and that's what we've done.
Speaker Change: Now as far as his extent as far as the lingering impact.
Speaker Change: Which was the second part of your question.
Speaker Change: Theres, some lingering impact needless to say in the fourth quarter.
Speaker Change: And does that dissipates I would I would believe more so next year.
Again, all of the new all the new API products will come in.
And and we are truly working on today.
Speaker Change: A complete set of economics for those new products with all of our OEM Oems.
Speaker Change: And you know.
Speaker Change: It's a chance to kind of recalibrate.
Speaker Change: Economics looking forward.
Speaker Change: Right.
Speaker Change: Yeah.
Yeah, I'll just stress that.
Our OEM partner here is truly a partner, they're a long time.
Speaker Change: A longtime relationship I think it's very successful.
Speaker Change: Successful partnership now it has been it will be absolutely a collaboration with them.
Speaker Change: And it is nice to have such a wonderful partner.
Speaker Change: Okay.
Speaker Change: Anyone else before we move on here.
Speaker Change: Yeah.
Speaker Change: Alright.
Speaker Change: I also wanted to ask about inventory in any pre buy dynamics, we may be saying.
Speaker Change: You talked about Oh, hoping to improve inventory turns and I did note that inventory dollars were up.
Speaker Change: Versus the second quarter, which is atypical.
Speaker Change: But is some of that just the 410, a pre buy that we're seeing and what's the view there at this point.
Speaker Change: Yeah. It is yeah.
Speaker Change: Go ahead, yeah. It is it is the inventory pre buy on the 410.
Speaker Change: Each one of the Oems has come up with a.
Speaker Change: With a program to at least fill in for the 40 of them that they have to be able to manufacture and.
Speaker Change: Be completed by the end of the year and so some of them are asked if they could move the inventory quickly into our inventory so that we could.
Speaker Change: Be ready for at least the first quarter selling the 410 eight.
Speaker Change: That should taper down at the same time, that's tapering down we're gonna be bringing in the a two well inventory.
Speaker Change: So I don't see much of a fluctuation in the next quarter with our inventory.
Speaker Change: Yeah.
Speaker Change: Yeah, Tammi I would just add to that that you know when we.
Speaker Change: Most Oems have had their last call and.
Speaker Change: Those products are starting to get received and so I think as you look forward to Paul's point about you know the next quarter or two.
The seasonality around inventory, probably looks different over the next quarter or two as.
Speaker Change: As we go through this transition and then it probably picks up it's more seasonal cadence sometime middle of next year.
Speaker Change: One four tenant diminishes as a percentage of shipments and sell through really and H O L becomes just a greater proportion of sales and in our balance sheet as well.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: It makes sense and I appreciate the insight thanks al.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: And our next question will come from Ryan Merkel with William Blair. Please go ahead.
Speaker Change: Good morning, everyone. Good morning.
Speaker Change: Just wanted to ask on October to start you said meaningful unit growth improvement and then mid single digit growth can you. Just clarify you know what pricing is because my assumption was pricing is still kind of running up maybe three four.
Speaker Change: So how do we bridge to mid single digits, if volumes are popping back positive.
Speaker Change: Oh I'll cover that so let's be careful with let's be careful I'll give it to you in a spoon fed away because this is like critical data.
Speaker Change: I'm not going to comment as much on specifics for the for October other than to say, what we've said, which is it's you know meaningful unit growth, but loved ones could be.
Speaker Change: Political about it and if we can talk to the business side of it.
Speaker Change: So for the quarter overall units were up 4%.
Speaker Change: And that includes both deducted products.
Speaker Change: Which actually declined 1% in ductless products, which were up double digits.
Speaker Change: So there's it's it's a year to date trend, it's a probably an.
Speaker Change: In 18 months trend.
Where our investments in ductless art is paying off very well.
Speaker Change: This UBC angry and carriers brands and.
Speaker Change: And other brands that we sell and Duckworth I've been doing very well, both domestic and international so there's a bit of a story inside of that number.
Speaker Change: That's that's our investments our business units doing well with ductless products.
Speaker Change: But if I stick to what is more more curious maybe for the for the group is.
Speaker Change: Deducted product.
Speaker Change: And we're interested in all of it that's deducted product volumes were down 1%.
Speaker Change: And price was down 1% inducted products.
Speaker Change: And again that has nothing to do with deflation or average selling prices in terms of.
Speaker Change: You know price risk that is mix.
Speaker Change: That's what I'm alluding to earlier in the call there.
Speaker Change: If I look at brand mix customer mix and market mix.
Speaker Change: There's a little bit of a wait and price this quarter.
Speaker Change: For the year.
Speaker Change: Our year to date.
Speaker Change: Units are up.
Speaker Change: A 5%.
Speaker Change: And unitary pricing is up 1%.
Speaker Change: Dr pricing was up 1%.
And yeah, that's kind of like it makes sense to me because.
Speaker Change: So the Oems launched pricing earlier in the year.
Speaker Change: I think they've all kind of sad about the same thing about it.
Speaker Change: And you know this is a year where price is not contributed really anything to the equation.
Honestly I'm quite cloud gross margins kind of look the way they look in the absence of any at any price.
Speaker Change: And we know that's going to change, but that's kind of all from here and.
Welcome everybody else's color.
Speaker Change: Okay, well, yeah that that's helpful and that explains a done and then just back to gross margins can we bridge three Q back to 27%.
Speaker Change: It sounds like you know parts and supplies were down so there's a mix element that's occurring and then you also you didnt quantify it by the quarter, but this co investment. So just can we get back to 27% or what are the pieces.
Speaker Change: Go ahead Rick.
Speaker Change: And I I I.
Rick: I think you heard a J say the answer is yes, and I think you know, there's there's an upward bias to that over time, but let me, let me try and add.
Rick: And start with I think the most important layer of margin, which we haven't talked about.
And has been consistent is our transactional margin our invoice margin, which is the most basic form of.
Rick: Of margin that any distributor can have.
Rick: Before you get to mix.
Rick: And and to Barry's point earlier.
Rick: That that transactional market is constant versus last year in a year, where there's been relatively no contribution to price them at all in our gross margin.
Rick: That is a that is a testament to some of the pricing technology, that's been deployed and it's a testament to the work that our field leaders are doing on this subject.
Rick: So then.
Rick: You know what what what so what do we bridge if transactional margin is constant and consistent with last year.
Rick: And and it's those four basic elements of mix.
We've talked about it it's firstly.
Rick: Difference in growth rates between equipment and on equipment.
Rick: That will always weigh on on your overall margin to some extent.
Rick: Secondly within equipment.
Rick: It is a difference in growth rates between residential and commercial.
Rick: Residential has been in that you know low single mid single digit type environment and commercial has been higher.
Rick: We we we like that because we have you know profit dollars to account for that higher growth rate.
Rick: It does weigh and influence your overall mix.
Rick: Thirdly, and particularly in the third quarter, you know and in a seasonal period you tend to have a little bit more residential new construction. Then you have add on replacement right. It's a time where.
Rick: Where we're the builder channel gets a lot of things done and that tends to weigh in a little bit and it has been true that for the last year or two.
Rick: The residential new construction end market has been outpacing add on replacement.
Rick: You can look at the you know the housing.
Rick: <unk> data to tell you that.
Rick: And then lastly is this element of customer mix, which is the hardest one to untangle in some ways.
Rick: But if you just simply you know segment your customer base, you do see differences in growth rates and and what we see in our data is that.
Rick: That larger more progressive more tech enabled customer is growing faster.
Rick: And then then his or her counterpart that is smaller and less sophisticated.
Rick:
Rick: So not to write a whole paragraph about it but those are the three or four elements of mix that explain and and help contextualize a year to date margin profile that looks different I go back to where I started which is the key point of law and all of this is that that transactional margin same customer same product.
Rick: It's very consistent with last year.
Speaker Change: That's a great answer Rex thanks for that I'll pass it on.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: And our next question will come from Jeff.
Speaker Change: Men with Keybanc capital markets. Please go ahead.
Jeff: Hey, good morning, everyone.
Speaker Change: Good morning, just.
Jeff:
Jeff: Just on the a two well.
Jeff: New product introductions, just what kind of pricing are you seeing relative to kind of this you know 10% to 15%.
Jeff: And you know as you talk with your major OEM partners, just address kind of their readiness you know so there's no kind of hiccups as you transition.
Jeff: Yeah.
Speaker Change: I can you know.
Speaker Change: Cover part of that and that is that among all of the Oems that we talked to everybody is ready as a matter of fact, one OEM as a started their launch in the in the fourth quarter and we've actually taken equipment in and it started showing me too well.
Speaker Change: When it comes to the pricing the pricing has been consistently.
Speaker Change: Now in the double digit low double digit range, it's been around.
Speaker Change: 8% to 10%.
Speaker Change: Some pricing a little bit higher, but we're gonna have to wait until probably the second quarter for that to be adjusted to find out exactly what that price settled.
Speaker Change: An unusual situation for each of the Oems because.
Speaker Change: It's a total new product line, that's going to be offered.
Speaker Change: The unusual situation also that the consumer.
Speaker Change: Consumer.
Speaker Change: He's going to have to buy a system now as opposed to in the past.
Speaker Change: When we sold before 10 product they could just install the outdoor unit and now you're you're not going to be able to do that technically you're supposed to replace the indoor and outdoor unit. Both so it's not just the the raising of the price. It's also the idea that we're going to be selling more systems and less single unit.
Speaker Change: Placements once the a two well becomes a firmly lodged.
Speaker Change: And that's going to be spread out over you know.
Speaker Change: 120 million units that are installed out there right now, but at some point have to be replaced all at various times.
Speaker Change: But it seems to us that a it's a wonderful opportunity not not only for the price increase but also for the system. So.
Speaker Change: Okay, and then just a quick follow on on that can you just remind us that the multiplier effect as you do the matched versus the standard and then just maybe just touch on.
Speaker Change: M&A environment it seems like.
Speaker Change: You know the P is getting more crowded in this space and just just what youre seeing in general.
Yeah.
Speaker Change: I can tackle the the M&A piece here I mean, it's look Jeff Theres always more M&A to do Theres, no way to predict it or or to think about the cadence of it.
And I would say that you know private equity was a lot more prevalent in the space.
Speaker Change: In the last two years I I I that has subdued a little bit.
Of late and.
Speaker Change: You know this is still bigger picture and longer term a very fragmented industry.
Speaker Change: And you know I think there's.
Speaker Change: The what what what a lot of you all from the outside don't see as it relates to M&A as two things one is.
Speaker Change: That.
Speaker Change: We're very focused on partnering with the right entrepreneurs.
Speaker Change: And that's different from you know consolidating industry.
Speaker Change: We that that cultural element of M&A is very very important.
Speaker Change: We want the right entrepreneurs, who will embrace our technology embraced our growth spirit.
Speaker Change: And in our equity culture to help transform their business.
Speaker Change: So so you know it's very much a cultural discussion.
Speaker Change: Often times more so than a financial discussion.
Speaker Change: And then the second thing that I would point to that you know I hope leads to incremental opportunity going forward is today.
Speaker Change: You know our technology platform and our M&A discussions are essentially one and the same.
You know, we've always had access to capital we've always had scale. We've always had great vendor relationships. We've always had an equity culture. Those things have been constants for 35 years since we've been in distribution, what's different today than what has been different over the last five years is.
Speaker Change: We've invested in this technology platform that I think now is well better understood if not well understood out in the market.
Speaker Change: And it's leading to more and more discussions with long term prospects.
Speaker Change: So I I you know my job is to help lead some of that and so I I I can speak to it with some pride and and and we want more of it absolutely, but I will also point out that as a seven and a half billion dollar company now.
We have a whole lot of internal levers at our disposal to to grow and we're not dependent on M&A to grow profitably in the future.
Speaker Change: Yeah.
Breakfast is a J I think what you said about.
Speaker Change: These being cultural discussions one of the financial discussions and so true and it runs both ways where.
Speaker Change: It really has to be a good fit for the family. These are multi often multi family I'm, sorry, multi generational family businesses.
Speaker Change: That works out in time to be a part of our multi generational family business and U B you guys with your leadership team and your branding and your customers and her team.
Speaker Change: But do it on her umbrella and use all of our resources and those resources or capital equity to recruit and retain great people and technology, which are all about how thing.
You grow and helping our customers grow because that's what we're all about a long term sustainable growth for the business.
Speaker Change: And those families and the leaders of those families that have joined our business over the last 510 years or really going back forever.
Speaker Change: We're thriving in that in that environment, there are happy they're still running the business.
Speaker Change: They're motivated.
Speaker Change: And they are growing and in many cases faster than our.
Speaker Change: If you would call legacy businesses. If you will so it is it has to be a fit and when it isn't it's a they seem to be whole loans, which is what we're going for.
Speaker Change: Well said Mr President.
Speaker Change: Okay. Thanks.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Again, if you have a question you May press Star then one to join the queue.
Speaker Change: Our next question will come from Patrick Baumann with Jpmorgan. Please go ahead.
Speaker Change: I think Patrick.
Speaker Change: I'm wondering now how are you.
It's hot and humid.
Speaker Change: Yeah, it's a it's actually warmer up here than it is usually for his time here.
Speaker Change:
I just wanted to maybe quickly go back to something Barry sit on units.
Speaker Change: I think he said year to date up 5% was that was that a total unit comment or is that.
I assume duct it is not up that much right just maybe clarify that if you could yeah I should I should clarify that says that it is flat in units year to date.
Speaker Change: Overall was up 5%, which would suggest that was up double digits.
Speaker Change: That's helpful. And then just and just to be like you know even more refined.
Speaker Change: We mentioned this in the press release, if I look at our selling season, so I'm really looking at <unk>.
Speaker Change: Joined performance of our seasonal business you know that's joined together in second and third quarter. So Theres no.
Speaker Change: Pushing pool, you know aspect to it to the analysis.
So for the season second and third quarter combined Dr units were up 3%.
Speaker Change: And overall up 5%. So so when are we talking about stability. That's that's the frame of mind.
Speaker Change: Okay helpful.
Speaker Change: And then are.
Speaker Change: Are you have you guys been I think we talked about inventory earlier, you expect it to be stable through.
Speaker Change: Through the end of the year.
Speaker Change: Is your view that is the channel restocking currently.
Speaker Change: In terms of inventory yeah that the channel right now is picking up for 10 a equipment.
Speaker Change: They'll pick up in November.
Speaker Change: November December and January.
Speaker Change: Okay.
Speaker Change: And so yes, it's not restocking it yeah, it's kind of a pull forward if you will to its first quarter sales.
Speaker Change: Fourth quarter shipments it'll turn into first quarter second quarter sales.
Speaker Change: Right.
Speaker Change: Right Yeah.
Speaker Change: The industry.
Speaker Change: Included are.
Speaker Change: Bringing them into our barns.
Speaker Change: Our brands, our barns, but will sell for 10 eight products will sell through the first quarter.
Speaker Change: And as that is being sold through well.
Speaker Change: They can't replenish them with a pleasant and replenish some of the age of all yet.
Speaker Change: Yeah.
Speaker Change: Helpful. And then and then one for you on on margin.
Speaker Change: The gross margin side.
Speaker Change: Normally there's like a lift I think from seasonality in the fourth quarter, because the mix, which I guess hurt you in the third quarter typically improves somewhat.
Speaker Change: Is that reasonable to assume this year or are there factors like that OEM investment collaboration that holds that back into year end.
Speaker Change: I think it's it we should see some lift with the mix as we get into the colder season, we start seeing more furnaces more heat pumps, which have obviously higher margins and higher volumes.
Speaker Change: So.
Speaker Change: Yeah.
Speaker Change: With without knowing what the weather's going to be in the fourth quarter I would say yes.
Speaker Change: Okay.
Speaker Change: Okay that makes sense. Thanks, a lot I appreciate the time.
Speaker Change: Uh huh.
Speaker Change: And our next question will come from Nigel Coe with Wolfe Research. Please go ahead.
Speaker Change: Yeah.
Nigel Coe: Good morning, guys. Thanks for the time I think this is meant to be a cold winter. According to pharma Dominic so it's.
Speaker Change: If that's true then it should.
Speaker Change: It should be a little bit help you guys.
That'd be great I know, you've got a lot of ground I don't I don't want to you know retread. So you know sort of ground, we'd already taken them just on the gross margin. It seems like there was a bit of a lapping of price from familiar this year and you talked about mix ends and some Oems supports a is it C is that more discounting going on especially at.
Speaker Change: Hyatt T level is that a factor at all in some of the gross margin pinch here.
Speaker Change: Yeah.
Speaker Change: Hum.
Speaker Change: I think you know if you listened to Rick's comments as a composite we we look at the most important metric which is.
Speaker Change: The transactional margin have any material change to your again the answer was no.
Speaker Change: So I don't think.
Speaker Change: You know I'm, not saying neutral is exactly what we want but it's it means there's not been a risk factor relative to deflation, let's say.
Speaker Change: Really any level of a product group.
Speaker Change: So I think it's more subtle and in the mix of it of it.
Speaker Change: Yeah I think.
Speaker Change: Again, Paul Paul you have a good insight into this but the higher tier systems. The 16, 18 20, plus your systems.
Speaker Change: Really only came into existence.
Speaker Change: And our inventory sometime late last year.
Speaker Change: And it's not really been a factor if you will in the sales process. This year.
Speaker Change: I think it the movement of.
Speaker Change: Of energy efficiency mandates that happened in last year kind of convinced.
You know the base layer into a much more broad.
Speaker Change: Part of our business now and Paul maybe you have some perspective, yes.
It happens every time, we've gone through a change in standards with the.
Speaker Change: The federal government and that is there's a compression where.
Speaker Change: A greater percentage of the industry moves towards standard deficiency.
Speaker Change: And with this last to energy efficiency change they basically.
Speaker Change: Increase the efficiency to roughly 15 sphere.
Speaker Change: From Fourteens here.
Speaker Change: And so when they did that we definitely saw a compression worthy the high efficiency equipment shrunk as far as a meaningful size in the marketplace.
Speaker Change: Okay. That's that's helpful. Thanks, guys and then just a couple of quick ones here just on the 812 transition.
Speaker Change: Obviously, you've been through many of these transitions before what do you compare this to the 10 theaters you can see our you know 22 to 410, a 13 14 do you think the contract as the end customers are ready for this transition and obviously, you're very close to those guys you'd probably low transport et cetera are they are they ready for this.
Speaker Change: I think the consumer is probably not ready for this they don't really understand what's going to be coming at them.
Speaker Change: As I indicated earlier, it's going to be a system change out not just in outdoor change yet.
Speaker Change: And that's going to be a.
Speaker Change: A bit of a sticker shock I think for some of the consumers. Once they are once they see what the pricing is going to look like.
So it's more than just the 10% price increase it's also the entire system.
Speaker Change: The contractors themselves I think they're gonna pretty easily go through the transition the only real change in the units is going to be on the inside.
Speaker Change: You're going to have a a detector that's going to detect any sort of leak in the a.
Speaker Change: Bridger went into the home and then if it detects fit there is it would be a leak, it's going to turn that the blower motor off so it's not going to contaminate all the indoor air.
Speaker Change: It's the biggest change outside of that.
Speaker Change: <unk> is going to have a different component in it than the old refrigerant did but it's still the base component in both refrigerants.
Speaker Change: The $4 54 as well as the 32 eight is still 32 eight.
Speaker Change: So it's it's going to be the same are the same refrigerant that we we are.
Speaker Change: We've had with our 410 eight basically.
Speaker Change: Okay.
Speaker Change: Okay. So it sounds like Q.
Speaker Change: Yeah, I'll, just add that it's our job to help them get ready some of that knowledge perspective pockets.
Speaker Change: Prospective from a business perspective, and then support them with helping them figure out what product, we need and getting technical support and et cetera, et cetera, and we do that at a scale and technology background that I think is unparalleled unsafe.
Speaker Change: And.
Speaker Change: But those apart and I think it's a big reason why customers are contractors, who do business with lots of companies.
Speaker Change: Okay. Okay, and then just a quick one that's if that's M. A.
Speaker Change: Obviously, great news about October up mid singles and I know you said no more details on that but I've got to say I'm, a little surprised with the with the Hurricanes impacting Florida and the South South East.
Speaker Change: I know you've got some mix of day selling in October. So is there some benefit from selling days in October upsetting somebody how can impact or am I way off base there.
Speaker Change: Yeah again, Nigel it's something we track down to you know dollars and cents in terms of hurricane impact and.
Speaker Change: We have like the last two or three days of the quarter.
Speaker Change: And we had you know three or four days for Milton this quarter.
Speaker Change: So I think if we had any pick up it's been offset by disruption with Milton and again in relative terms not that material of an event.
Speaker Change: I think.
Speaker Change: With the destruction that is obvious in these markets.
Speaker Change: It was a business opportunity that will flow once insurance money flows nothing is immediate.
And and Oh, but the word destruction I'm using purposely because that's what has gone on and in those markets.
Speaker Change: There will be that opportunity once once dollars flow.
Speaker Change: Right.
Speaker Change: Quickly just an important client we have a lot of employees that are were in the path of the storms and very happy to say that.
Speaker Change: The body is safe and accounted for and are those who have discretion in construction or in their homes or problems that week.
Speaker Change: We could help with we are helping with the best of our ability we care very much about our team members in.
Speaker Change: We're very thankful everybody came out unscathed relatively speaking.
Speaker Change: Oh man I agree with that for the next well suited.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: And our next question will come from Steve Tusa with Jpmorgan. Please go ahead.
Speaker Change: And yard Tusa, how are you.
Steve Tusa: Hey, good morning, sorry, just a follow up to to Pat's question.
Steve Tusa: <unk> got a little bit late on the call here, how do you have complete visibility into.
Steve Tusa: No all the Oem's pricing for a two well our product at this stage is there anybody that's.
Steve Tusa: You know playing a little more closer to vast and others not just your suppliers, but kind of across the industry.
Speaker Change: Yeah, we have visibility into every every every manufacturers are pricing.
Speaker Change: There's only one or two that right now have not really are fully released their pricing I think there it's not that they're trying to be coy or of course fly about Oh. They released their pricing I just think that their timings, there's probably just a little bit off.
But for the most part we've got most of the pricing in.
Speaker Change: And he.
Speaker Change: Is the pricing you know got a hold you know throughout this entire transition. That's that's the question we ask.
Speaker Change: And N or and do you think customers are kind of looking at it as you know.
Speaker Change: A bit of like similar to like a list a list price increase where I mean, I think most of the Oems are pitching it is as you know cost push which is just inevitable versus like hey, here's the new price and then let the negotiations begin or how are they how are most of them looking at it I think most of them are very serious.
Speaker Change: But at this price you know her.
Speaker Change: They are adding cost or editing, adding two new components to the system itself.
Speaker Change: Due to that I think that are you know I think the pricing will probably be closer to the you.
The 8% to 10% range 10 to 15, but I think it's going to hold around 10%.
Speaker Change: Okay.
Speaker Change: Yeah. So the eight to 10 as is kind of a bit of a discount to what they had previously said.
I've got a little bit, but not not that much you know, what we'll have to wait and see and find out yes.
Speaker Change: That is the opinion right now you know.
Speaker Change: All right.
Speaker Change: Yeah, So you're right, Steve I want to I want to remind you I mean, maybe that maybe youre asking that question from an OEM perspective, but from our perspective.
Speaker Change: If we buy let's say $25 million of one scheme from Oh, we got them.
Speaker Change: You know and the prices you know close to us.
Speaker Change: Where are we selling that $125 million that may be a thousand different prices, depending on the customer the market. The end market. You know those variations are obviously on our selling price.
Speaker Change: And more ironically, there's variations on our byproducts depending on.
Speaker Change: Intended you again customer end market.
Speaker Change: So this is a you know an art foreign more so than district analysis.
Speaker Change: And when we allude to technology that is helping us do that.
Speaker Change: And raising margin over the last four or five years, that's what that's where technology is playing its role with us.
Speaker Change: And that Snowflake management, if you will.
Speaker Change: We have a much more gifted capability than we had three or four years ago.
Speaker Change: And in this transition has another chance to to accomplish the same thing and if we need to react to a market condition.
Speaker Change:
Speaker Change: And we have our earliest react to our cost.
Speaker Change: That fluidity is why this is hard to predict.
Speaker Change: But I can tell you why it's benefited us in the last three or four years now.
Speaker Change: Right and I guess your point is it like to take you know, 10% or whatever and like stick it into a model on a spreadsheet like it's a lot more complicated than that.
Speaker Change: But a lot more complicated than that.
Speaker Change: Great.
Speaker Change: All of those variables all the very full price out I wish it was as simple as that he probably.
Speaker Change: But it's not as simple as that because you have the different market segments, and you've got an analogy to the pricing.
Speaker Change: Got it one last one for you just on the light commercial side.
Speaker Change: Everybody has had a pretty good three Q1 in one of your peers said, it's a little bit slower in the fourth fourth quarter any any signs of a weakening there on the back of the fundamentals in the next year for like commercial.
Speaker Change: I think as is the availability of the commercial product are improved I think we saw.
Speaker Change: Some some.
Speaker Change: Some reduction in some of the pricing, but as far as the demand the demand has remained fairly strong.
Okay were still up double digits.
Speaker Change: Yep, Great Alright, thanks, guys as usual thanks for the details.
Speaker Change: Okay.
Speaker Change: Oh.
Speaker Change: Yeah.
Speaker Change: And this concludes our question and answer session I'd like to turn the conference back over to Albert <unk> for any closing remarks.
Speaker Change: Once again, it's always good to communicate to all of you and we hope you will be here for the next.
Speaker Change: Quarter numbers and performance.
And for your interest in our company and as we said earlier, it's whichever why don't you come down to Miami.
Speaker Change: Yourself.
Unknown Executive: Bye-bye. The conference is now concluded.
Speaker Change: Bye bye.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Unknown Executive: Thank you for attending today's presentation. You may.