Q4 2024 Watsco Inc Earnings Call
Speaker Change: Good day and welcome to the WOTSCO fourth quarter 2024 and year-end earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: Our financial position is stronger than ever and we are.
Speaker Change: Happy to.
Speaker Change: 11% dividend increase.
Speaker Change: The $12 per share.
Speaker Change: In corn, we are optimistic about our opportunities.
Speaker Change: Yes.
Speaker Change: First the transition to next generation agent.
Speaker Change: Products as well.
Speaker Change: The new ATM part as to why the opportunity to upgrade the installed base of existing equipment. The systems that are both more efficient and environmentally friendly.
Speaker Change: He wants to make the transition.
Speaker Change: 60% of them ourselves.
Speaker Change: Yeah.
Speaker Change: We are making in Baltimore.
Speaker Change: Thanks, Jim.
Speaker Change: Our technology and bad debts issued close to $1 billion in inventory.
Speaker Change: We also look like.
Speaker Change: This opportunity.
Qualcomm technology clients will gain momentum.
Speaker Change: Our community bankers.
Speaker Change: Oslo mobile app downloads and over 64000 units.
Speaker Change: Almost all of them of course increased 16%.
Speaker Change: Are you seeing overall growth right now.
Speaker Change: He bought beside or anything else.
Speaker Change: Which is a novel to $6 billion.
Karl: I'm Karl a digital sales platform.
Karl: Contracts resenting approximately 313000 proposals to all mothers.
Karl: 125 billion in gross merchandise volume.
Karl: Well after China inquiries.
Karl: There's no question that I'd take walgreen vessels have contributed to our performance.
Mitch: And then Mitch.
Mitch: And the importance of these investments will only grow with time.
Mitch: Finally, we believe our strong financial position is also an important.
Mitch: Jay.
Jay: We have the ability to invest in big opportunities to accelerate growth and gain market share in.
Duane: In January Duane So anytime we completed our second acquisition his 19 Adv.
Duane: There are many great family businesses in our industry it may be delayed.
Duane: And we believe offer compelling reasons for them to join forces.
Duane: Okay.
Duane: As always all of them.
Duane: Our focus is on the long term.
Duane: We have been great deal more to come.
Duane: Hello, English and we welcome any abating anytime that I T.
Duane: Image.
Duane: While most Joe Mchugh alone.
Duane: Okay.
Duane: We will now begin the question and answer session.
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.
Duane: Anytime a question has been addressed and you'd like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Duane: Yeah.
Duane: The first question comes from David Manthey with Baird. Please go ahead.
Speaker Change: Morning, Dave.
Speaker Change: Yeah, Hey, good morning, first question is with double digit unit growth.
In residential versus 16% reported I guess that implies mid single digit price mix.
Speaker Change: Was eight to L. A driver of that uptick and just a general update when when do you expect to be fully transitioned to the new technology and it seems like channel feedback is 8% to 10% pricing is that consistent with how youre thinking about things.
Speaker Change: Let's turn to Paul Johnston.
Speaker Change: Yeah.
Speaker Change: The fourth quarter no, we really didn't have much of an impact on a two well.
Speaker Change: We were 90 plus percent you're now on the <unk>.
Speaker Change:
Speaker Change: Pricing actions, yes, eight percentage is what was previously announced with the tariffs are coming online from the White house. It seems like theres going to be some more pricing actions from the manufacturers that are gonna be announced here shortly.
Speaker Change: So we're going to start seeing more single digit price increases.
Speaker Change: And Dave I mean of course, it's about Dave Your question about the unit growth I don't I'm not sure quite I follow the logic of your.
Speaker Change: Your math.
Speaker Change: And just to be Super clear about the math.
Speaker Change: We saw the residential products.
Speaker Change: What it is for the quarter, but if I look at inside a let's just be careful with it so unit growth.
Speaker Change: Rich when we say the words you grow.
Speaker Change: It is it is it equates with how AHRI looks at equipment growth, which is unitary products compressor bearing units.
Speaker Change: And so a crosswalk ESCO are all markets that that was up.
Speaker Change: 16% for the quarter.
Speaker Change: And price was an additional 3%.
Speaker Change: Domestically is actually a bit stronger than that in terms of unit growth.
Speaker Change: So it is a you know there are some price and mix and driven also by much stronger unit growth.
Speaker Change: And as Paul said Theres, a small influence a minute influence for me too well in the quarter.
Speaker Change: And greater influence as we get into 2025.
Barry: Yeah. Thanks for that Barry that's that's encouraging.
Barry: Just one quick one.
Barry: On a tangent.
Barry: You talk about Watsco ventures ownership position in house call Pro could you scale that for us and just give us an update there.
Barry: Okay.
Yeah, Watsco does not have an ownership and how it's called pro.
Barry: We had a commercial relationship which we've enjoyed with them for a very long time and have a.
Barry: Both benefited from.
Barry: The flagship in Watsco ventures portfolio is I'll call Air, which is our homegrown source.
Barry: Software and in our hometown business called Oncall Air, which is helps subcontractor yourself at the home.
Barry: And last thing is that scale now and it continues to grow about $1.5 billion worth of our customer sells to their customers now have powered through that platform.
Speaker Change: Customers of ours that are using it they're growing faster, they're winning more deals or higher margin deals are higher ticket deals and it's a win win win for everybody but to answer. Your original question Watsco does not have any any investment and Pascal trial.
Speaker Change: Okay. That's great. Thank you very much.
Speaker Change: The next question.
Speaker Change: <unk> comes from Tommy Moll with Stephens. Please go ahead Brian.
Good morning, Alan Thanks for taking my question.
Speaker Change: Sure.
Speaker Change: First question is if you look at your inventory position today.
Speaker Change: What's the best guess on when you.
Speaker Change: You run down that 410, a currently on the balance sheet and should fully transitioned to the new product and it will depend on the weather and other factors but.
Speaker Change: What's a reasonable.
Speaker Change: Look there.
Barry: All Barry you want to take a shot at that.
Paul: Alright, Paul Yeah, Yeah, we've been working.
Barry: With our subsidiaries to try to make sure that we are.
Paul: We sell through the 410, a M and do a reasonable transition into the a two well.
Paul: And at the present time, what we're looking at is I would say probably the beginning of second quarter.
Paul: We should be pretty much running at 410 down.
Paul: To almost nothing we should be almost fully engaged with the a two well.
Paul: Not to say that we're not going to still have 410 products. We still will have 410 products probably throughout the year, but.
Paul: The big transition is probably going to occur in the second quarter.
Paul: I would agree with that I'll, just also add just to clarify that our position is that.
Together the regulations say that specifically are theres noise around it is that we want to be.
Paul: Selling.
Paul: And three of our four kind of inventory by the end of 2025, and we fully expect to do that and that's in large part because of the scale and the power of watsco. It's a good time to be besides that we are because our business units can help each other there's a lot of data surrounding a watch where in terms of inventory and what product needs to be moved.
Paul: And they can help each other out and clear out what needs to be cleared out in time.
Paul: Okay.
Paul: Follow up question as you as you do start to run more of the <unk> volumes through.
Paul: It's really a two part question.
Paul: What if any impact should we think about in terms of the gross margin percentage, there obviously with the mix tailwind.
Paul: And then as you execute this in the marketplace.
Paul: Where are you, helping your customers in turn articulate the benefits of the product to the the end user here I mean, we're.
Paul: We on the coal are all prepared for substantial price mix increases.
Paul: But at the end of the day. This occurs at the kitchen table. So how are these conversations or how are you helping your customers with these conversations as we move forward.
Paul: I mean, that's what we do well.
Paul: No matter what the changes are.
Paul: But that's our job.
Paul: The more specific Paul yes.
Paul: We provided tension we provide extensive training to our customers to get them ready for the transition to the new refrigerant.
Speaker Change: As you know as Scott likes a slight flammability to it so it has to be handled in a little bit different manner.
Paul: And as Scott the other.
Paul: Other components that are going to beyond the product that arent on the 410.
Paul: So a lot of training has gone in prior to the introduction of the product.
Paul: As far as the gross profit movement.
Paul: You'll see the gross profit dollars, probably go up but because its a brand new product youre not going to see.
Paul: So much the gross profit percentage move up that much to start with.
Paul: It's going to be a more expensive product than for 10 a product.
Paul: And we expect that to be somewhere in the neighborhood of 8% to 10%.
Paul: Oh.
Paul: Yes, just to add.
Paul: Add to that obviously you know the entire database of product information that we own we need to be upgraded and has been upgraded for all the new products.
Paul: And how things match and fit them.
Paul: And even down to how permits can be pulled.
Paul: New product is all digital experience now for now.
Paul: We say, 35% of total watsco, and it's probably closer to $45, 50% of our residential business in watsco.
Paul: So you have this digital platform, that's that's kind of.
Paul: Smoothing the transition into how customers actually buy the product specify the products match the products correlated products to those products.
Paul: And you get the drift. So so you kind of have this you know I would say the last time. We did this we didn't have these tools.
Paul: On a scale at least to the way that we have them and so that's super important in this discussion.
Paul: And we mentioned on call are a J mentioned on color for those customers signed up on that program now those tools are actually feeding how how the consumer.
Paul: It's kind of learn M C and experience these new products. So.
Paul: It's very good timing I just wish the user community of oncology was 10 times the size.
Paul: But it's it is a one $5 billion of stuff that.
Paul: Consumer is seeing digitally for the first time in their lives buying these products. So.
Paul: There is momentum in and that's part of the answer.
Paul: Going back to the gross profit just to add to what Paul said it is an algebraic equation.
Paul: That has the benefit of higher cost for sure.
Paul: If we just apply the same margin that's good for business right now.
And of course, one of our other technologies as a pricing platform.
Paul: And the intent there is to make a better margin, where we can if we can and.
Paul: And use of technology to inform our teams on on how that's going so.
Paul: That's a bit more of an abstract answer, but it's one of the opportunities, we see with new pricing technology in place as well.
Paul: Thank you I'll turn it back.
Jeff Hammond: The next question comes from Jeff Hammond with Keybanc capital markets. Please go ahead, yes, good morning, Jay Hey, good morning, guys.
Jeff Hammond: Hey, just back to fourth quarter, I mean, very strong unit growth I'm just wondering if you can unpack.
Jeff Hammond: What what's kind of easy comps, what's kind of this supplier issue lapping the supplier issue and then you know.
Jeff Hammond: Was there any evidence that the contractors were taken for 10 a.
Jeff Hammond: That would have impact.
Jeff Hammond: Impacted the fourth quarter and then just last you know any kind of change in optimism around just just underlying demand. Thanks.
Yes, Jeff This is Rick I can take the Ah I can take the first part of the question about you know just the unit trends and what we saw within the customer base first on the comps.
Jeff Hammond: I think fourth quarter of last year. We said we were we were down about four and so when we looked at <unk>.
Jeff Hammond: Units organically over a two year period, it's up about 12%.
Jeff Hammond: So it is not just.
Jeff Hammond: Our comp that's benefiting that I think there's good underlying demand good underlying new customer acquisition.
Jeff Hammond: Okay.
Jeff Hammond: We think some market share that will that will be evident in the data going forward.
Jeff Hammond: Now the question then becomes did what it was with some of that demand.
Jeff Hammond: The contractor channel.
Jeff Hammond: Holding more inventory than they normally do.
Jeff Hammond: And and.
Jeff Hammond: I'll give you a couple of data points. There first just conceptually I think we all know the average contract or as a small business owner operator handful of trucks. They don't have 100000 square foot facilities just to store inventory.
Jeff Hammond: And not to invest in inventory and working capital because we are just you know we the distributor either just in time inventory partner.
Jeff Hammond: And generally they have days of inventory on hand, not months of inventory on hand.
Jeff Hammond: So conceptually the channel has never really.
Jeff Hammond: We had a whole lot of inventory beyond us the distributor.
Jeff Hammond: So secondly, when you look at our movement throughout the fourth quarter.
Jeff Hammond: If if if if contractors are buying you'd say you'd see a spike in December.
Jeff Hammond: And and and what we saw was very balanced growth throughout all of the fourth quarter and October was just as strong as December.
Jeff Hammond: Which which does not would not easily lead to the conclusion that that there is more inventory out there.
Jeff Hammond: And we then looked at at our own customer level trends, among our largest customers they would be the ones who would have the capacity to buy.
Jeff Hammond: By Ford and hold inventory.
Jeff Hammond: And theres nothing in that data.
Jeff Hammond: That that points to.
Jeff Hammond: Large scale buying.
Jeff Hammond: And fourthly just to just to beat the horse dead now.
Jeff Hammond: I think our own inventory says a lot about this question and beyond the dollars that you see on the balance sheet.
Jeff Hammond: Units in inventory have been very balanced and flat.
Jeff Hammond: Flat versus two years ago believe it or not.
Jeff Hammond: So we don't see a whole lot of evidence that that contractors are carrying much inventory beyond us and the channel.
Jeff Hammond: And nothing that would cause alarm about what 2025 growth rates might look like.
Jeff Hammond: Okay, great color.
Jeff Hammond: Go ahead.
Jeff Hammond: I feel like beating up being that the dead horse on more Jeff.
Jeff Hammond: Turning to the Glu.
Jeff Hammond: [laughter] you mentioned about recovery of business from one of our Oems, who had issues a year ago.
Jeff Hammond: There is a recovery, but that's not what's driving the growth that you see it's a component of it but it's not anywhere near the principal reason.
Jeff Hammond: And one of the principal reasons that that I want to emphasize Rick said as new customer growth, we really we really have seen.
Jeff Hammond: Progress either technology or.
Jeff Hammond: Whatever market share generation concepts, we're doing.
Jeff Hammond: The the two greatest component of growth this quarter is new customers.
Jeff Hammond: I want to say those words like next year next year and feel like we have a really progressive trend going in that direction, but we saw that this quarter for sure.
Jeff Hammond: We've seen it year to date.
Jeff Hammond: Okay.
Jeff Hammond: Great color guys.
Jeff Hammond: Our balance sheet is in great shape, just maybe talk about the M&A environment. It does seem like you know private equity's been more present and in the space. Just just what are you guys seeing.
Jeff Hammond: And in your pipeline et cetera, and the ability to get stuff done.
Jeff Hammond: Barry.
Speaker Change: Yeah. David This is the same same story that you've heard for much of my career, our careers right is theres still.
Speaker Change: Easily 50 to 100 families that own businesses that are $100 million and more.
Speaker Change: Tried to always know the families have a personal relationship have.
Speaker Change: Now multi generational relationships into his family as much of them are second third generation at this point.
Speaker Change: And I would say the B C.
Speaker Change: Ability of the last year.
Speaker Change: Year or two you know COVID-19.
Speaker Change: Covid you had wild increases in.
Speaker Change: And in earnings. The question is was where they're wild variations in and valuation or not.
Speaker Change: Now we have a couple of years behind that to kind of know where things are and nowhere near where things stand and it's I think it's a confidence builder for us to invest.
Speaker Change: It's a it's reality in terms of how some of these businesses should look at their own valuation.
Speaker Change: I would say private equity seems seems still interested but less a factor then maybe during COVID-19 when the valuations had had run wild and there are people taking the bait.
Speaker Change: In that respect.
Speaker Change: I would say, it's a bit more business as usual in that respect now.
Speaker Change: But we'll see as always our job is to have great relationships and be there when the families want to play something out and.
Speaker Change: We feel good that there is some good activity in that respect going on today.
Speaker Change: Thanks, a lot.
Damian Karas: The next question comes from Damian Karas with UBS. Please go ahead.
Damian Karas: Thank you Dana.
Speaker Change: Hey, good morning, Al Nice work on the quarter.
Damian Karas: Thank you.
Speaker Change: I guess, the one area, that's maybe just a little bit stagnant still it is the non equipment sales did.
Damian Karas: Could you maybe give us a little bit color around.
Speaker Change: What youre seeing in that area of the business.
Damian Karas: Yeah.
Damian Karas: I think yes, I think youre seeing a couple of things happening there one.
Damian Karas: We've got a lot of that business. It is driven by commodities copper refrigerant.
Damian Karas: Steel.
Damian Karas: I think we're going to skip a pop perhaps in steel and a pop in copper.
Damian Karas: Refrigerant still has been slow.
Damian Karas: When you get into the parts business, which is that what it takes to actually install the unit.
Damian Karas: Or repair a unit in the field we.
Damian Karas: We saw a definite increase in fact, we had a double digit increase in parks, which would indicate that there there could be a.
Damian Karas: Kind of a dual action going on in the industry right now where we've actually seen parts sales go up at the same time machine equipment sales go up.
Damian Karas: So outside of the commodity portion of that would have to say, where we're very pleased with what we're seeing in the aftermarket right now also.
Damian Karas: Yeah.
Damian Karas: Great that's really helpful.
Damian Karas: And my follow up I know you guys are.
Speaker Change: Absolutely delight and talking about gross margins.
Damian Karas: But I wanted to kind of just hear your confidence in the path to getting back to.
Speaker Change: 27% or higher.
Damian Karas: When that might be.
Speaker Change: Just curious if any of these new customers that.
Barry talked about are driving a lot of the growth.
Speaker Change: If you expect that to have any kind of meaningful impact on your profitability as you bring some of these new customers into the mix.
Speaker Change: Well, you may or may not have heard.
Speaker Change: 30%.
Speaker Change: And we think we're going to add a lot of value to our customers to achieve that.
Speaker Change: Just curious stage so we aspired more then.
Speaker Change: Or then we presently have.
Speaker Change: And do we do we have a time period that.
Speaker Change: No no.
Speaker Change: It's possible.
Speaker Change: And.
Speaker Change: We have the tools and the means to get there probably better than anybody else.
Speaker Change: Yeah.
Speaker Change: Anything to that.
Speaker Change: Yes, Matt I'll add something again and just some some depth you know within watsco. We have you know a number of business units and like any any portfolio, yeah, the outperformers and our outperformer business units or are at or near 30 today. So it's not a.
Speaker Change: I understand a number it's something we see within our network.
Speaker Change: By getting again like any portfolio, we want to work towards the maturity as well as the.
Speaker Change: You know the overall capability of much higher margins, but in the near term the short term, which is your question.
Speaker Change: Now obviously, we had some impact this year that we described last quarter about the recovery of with one of our vendors.
Speaker Change: Cost us about 30 basis points this year.
Speaker Change: We expect to recover that in.
Speaker Change: And hopefully expand on that in future periods.
Speaker Change: And that's a cost of doing business. This year that was needed and now we move on from that point of view.
Speaker Change: Also the technology story that we've told on pricing and technology and again anyone is welcome to come down and understand this better so it's not just us.
Speaker Change: A sound bite on a conference call anyone is welcome to come down and learn more.
Speaker Change: The idea of our culture.
Speaker Change: Of improving technology to price every product we sell is still ongoing and that's part of the long term.
Speaker Change: Short term it's basis points long term, we want it to be percentage points.
Speaker Change: And product mix is another this.
Speaker Change: This year, a little bit of headwind, probably 20 basis points or so in our.
Speaker Change: The growth of our equipment versus the flatness of our non equipment.
Speaker Change: And I Wanna, Paul to be right in their sentiments because if they grow together.
Speaker Change: That's accretive to margin and certainly in the short term.
Speaker Change: I appreciate your time, good luck with everything.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Yeah.
The next question comes from Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel: Hey, everyone.
Speaker Change: Yes.
Speaker Change: Hey, I wanted to come back to you.
Speaker Change: Yeah.
Speaker Change: I wanted to go back to the fourth quarter.
Speaker Change: The new customer growth being the big driver.
Speaker Change: While the sudden in the fourth quarter did you see that.
Speaker Change: And then who are these customers at east more tack for contractors that appreciate your technology or is there anything similar about these customers.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Go ahead.
Speaker Change: Yeah right.
Speaker Change: Well.
Speaker Change: Goodbye.
Speaker Change: Alright.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Sure.
Speaker Change: The trend was not isolated to the fourth quarter I think we saw that trend kind of build throughout the year. If you go back in time. This time last year it was a.
Speaker Change: I'll call it a choppy sideways kind of <unk>.
Market those are generally markets, where we do very well in.
Speaker Change: And and have been good or gaining share.
Speaker Change: And so we just saw it build really throughout the year.
Speaker Change: And it really showed itself in the fourth quarter, a little bit a little bit more.
Speaker Change: But for it but the the annual trend is almost exactly the same where.
Speaker Change: We saw the highest amount of.
Speaker Change: Revenue contribution from new customers since we started measuring that metric many years ago.
Speaker Change: What do they look like I mean, the yeah. It's a good question. It's it's it's like snowflakes. They all look a little bit different I would say that you know that.
Speaker Change: That mix is is.
We are well represented with the large contractor and what we always want to do is.
Speaker Change: Is is go after that.
Speaker Change: Mid tier contractor in the market and you know.
Speaker Change: That's where our non equipment offering sometimes resonates even more that's where the product out to the diversity of what we carry an inventory matters a great deal and it's also where our technology can be a bit of an inflection point for that contractor.
Speaker Change: We've heard this a lot a jay can expand on it is that you know what our technology does a very very good job of it is turning that 234 truck operation and.
Speaker Change: And giving them the same tools and the same sophistication than the biggest customer we have in our portfolio has and that is a meaningful contributor over time I think.
Speaker Change: Yes, I mean, if I add to it if I had to just to just to add some depth as an example, and I'm gonna be purposely intentionally abstract choose not to protect some of the competitive.
Speaker Change: Discussion that that you know that we that we need to be careful with but.
Speaker Change: You know one of our big part of our network historically, its DNA was large customers large dealers.
Speaker Change: <unk> brand dealers people that had been you know par.
Speaker Change: Part of the nucleus of our large customers for a long time to grow that business it needed to serve the other thousands of contractors in its local markets.
Speaker Change: And when we say working with OEM partners.
Speaker Change: Sample has to go to that partner and say listen here's part of the market that we're not addressing.
Speaker Change: And it needs to be investment in inventory and price and programs and inventory built for.
Speaker Change: To serve that market I think that you know again without being too specific that's an example of something that's been playing out probably over the last year or two.
Speaker Change: And we wanted to them and them to keep going because it's adding <unk>.
Speaker Change: Sure, it's adding sales dollars to every location.
And and at a nice margin level.
Speaker Change: Okay. That's helpful.
And then you know it sounds like the improved volume growth at least as continuing into the first part of the year and I guess my question is in the press release, you mentioned <unk>. There is an incremental growth opportunity and share gain opportunity can you unpack what you mean by that.
Speaker Change: Yeah.
Speaker Change: Well first I think any new product offers the opportunity to create value with customers that you know rather than just selling the same old thing year. After year right. Every every juncture like this presents opportunity.
So the sales force is energized the technology has enabled.
Speaker Change: The energy flow from this kind of change as an opportunity to do that but it takes investment.
Speaker Change: And so that's where we think our competitive advantage lies is in making those investments and bringing that energy.
Speaker Change: After this kind of transition.
Speaker Change: And so that'd be that's how I would look at it.
Speaker Change: And on the on the pricing side Youre going to see a lift in price.
Speaker Change: The product has a higher cost youre going to be installing an indoor and outdoor.
Speaker Change: Can't just replace the outdoor unit and not replace the indoor unit all the safety devices for the refrigerant or on the indoor unit and have to be replaced and they can't be field installed.
Speaker Change: So we're definitely going to see a definite uptick in AR and revenue dollars and gross profit dollars from that.
Speaker Change: Okay.
Speaker Change: Alright makes sense. Thanks pass it on best of luck.
Speaker Change: Okay.
Operator: The next question comes from Jeff Sprague with vertical research. Please go ahead.
Speaker Change: Good morning, everyone, Hey, I'm glad to hear you all.
Speaker Change: Just wonder what your final verdict. If there is one is on the notion of pre buy and the reason I ask it so simplicity right as an AR. So simplistically is your inventories do not look unusual in any historical light.
Speaker Change: And you just made a pretty convincing case that.
Speaker Change: The dealer channel is not up to their eyeballs.
Speaker Change: So.
Speaker Change: When you look back at this and kind of all the ink that's been spilled on pre buy and what it might be.
Speaker Change: Do you have kind of a final view on what actually happens.
Speaker Change: It actually happened.
Speaker Change: It's that one.
So it sounds like a Rick question.
Speaker Change: Thank you Paul I'll take a stab at it Jeff Yeah I think.
Speaker Change: Some of the Oems have have tried to quantify this and that.
Speaker Change: That math exercise I would say is more art than science.
Speaker Change: And so but if we just if we take what they've quantified.
Speaker Change: And if you assume you know and you know an average selling price for an outdoor unit.
Speaker Change: You get to <unk>.
Speaker Change: Two or 3% of what is nine 510 million systems a year.
Speaker Change: Right and so the question is did it happen did it happened somewhere in pockets maybe.
Speaker Change: Is it is it fundamentally anything to anything that would alter a competitive thailand dynamic or our growth algorithm for the year I just don't think so.
Speaker Change: Oh, yes interesting that those seem to be to.
Speaker Change: The takeaway and then as it relates to your own inventories as.
Speaker Change: As I indicated they look pretty normal to me, but would they would they be mostly for 10, a in your reported inventories as we see it or.
Speaker Change: There is now a balanced mix there as you prepare for the new year.
Speaker Change: As we indicated our sales were.
Speaker Change: Overwhelmingly for tenet and our inventory was overwhelmingly for 10 a M.
Speaker Change: And we basically have it pushed out the purchase of the <unk> L product until the first quarter of this year and into the second quarter of next of this year also.
Speaker Change: But it's pretty.
Speaker Change: Pretty much as it's been for 10 a year.
Speaker Change: Yeah.
Speaker Change: I'll say that.
Speaker Change: That our goal was for a harmonious transition from the old product to the new.
Speaker Change: And I think so far we've had.
Speaker Change: Pretty good success on that scale.
Speaker Change: Scale of harms harmony.
Speaker Change: Yeah.
And it sounds like Youre getting a.
Speaker Change: Kind of a market signal from the Oems set of tariffs happen, obviously theyre going to want to push through price would.
Speaker Change: Would you expect us to be sort of almost a mechanical immediate reaction sort of de tariffs go into place stay one prices move up in concert with that.
Speaker Change: We're definitely going to see a price increase was what has been already announced as far as tariffs in China.
Speaker Change: You know most of the ductless product.
Speaker Change: And a lot of the Sag discharge product comes from China directly.
Speaker Change: So until the until the manufacturers can adjust the location of the manufacturing of those products I think youre definitely going to see an uptick in pricing.
Speaker Change: No I was referring more to maybe Mexico risk any thoughts on that.
Mexico, We don't have a clue yet you know what's going to happen if that's going to satisfy a.
Speaker Change: President Trump or it's not going to satisfy them is something that only he knows I believe.
Speaker Change: So once we once we identify the asset obviously it would be a big mover as far as what the pricing action would be.
Speaker Change: If we put it down there.
Speaker Change: Thanks, Thanks for the remarks I appreciate it.
Speaker Change: Okay.
Speaker Change: Yeah.
Operator: The next question comes from Brett Linzey with Mizuho. Please go ahead.
Hey, good morning, Yeah just.
Operator: Just one more on this price mix dynamic and specifically gross margins. So you talked about the high single digit to double digit price mix. This year, our new units, but also some of this additional tariff pricing is there any way to think about how that drops through mix versus incremental pricing on.
Operator: Gross margin per cent for watsco.
Operator: Again, I would think would be very careful about this any any kind of a two hour increase that we're talking about just the idea that any OEM makes a product that's eight or 10% more cost. We then sell for eight or 10% more in price. There is no gross margin kind of gift in that equation.
Operator: So so you have to be careful and mixing.
Operator: Price concepts versus the margin benefit from any of those those those pricing right.
So just look at it we said it in the press release, 50% to 60% of our business gets impacted by a two well.
Operator: You've heard during the call.
Operator: Certainly more than half of our business as for today. The first part of the year than it inverts as we get into the second half of the year.
Operator: So you can blend that as you see fit across the next the next four quarters.
Operator: The inflationary concept that Paul talked about where.
Operator: And inflationary price increase on top of that is.
As that plays out and that's where some of the gross margin benefit as well as the pricing benefit flows through.
Operator: And that would affect you.
Operator: You know whatever yeah, maybe the last three quarters of the year, Paul I'm not sure what your Crystal.
Operator: Crystal Ball tells you but.
Operator: It's something that would be not that's not current state its something in the in the second quarter and the rest of the year.
Correct.
Operator: Okay got it just to add one element to that.
Operator: Just to add one element to that quickly as I think I mean, there's rightly a lot of focus on gross margin as it relates to this I think the.
Operator: The more direct into more.
Operator: Or equally powerful.
Operator: Aspect of this is that you.
Operator: You are able to leverage your SG&A base as you do this and so the ultimate beneficiary is probably EBIT margin at the end of the day.
Operator: Because you have elements and growth in our SG&A that arent really reacting to some of this in the near term.
Operator: And it's probably I think a more compelling profit margin opportunity at the operating level and at the gross margin level.
Operator: Correct.
Operator: Okay got it yeah I appreciate that.
Operator: And then just last one for me. So there is this ongoing debate on repair versus replace doesn't look apparent that you've seen a big step down in replacement to repair, but anything in the parts of the component data. That's that's ticked up at all that would.
Operator: Maybe inform that or or suggest that is the case, but it does look pretty resilient, but just any thoughts there.
Operator: You know we've already indicated that we saw.
Parks and unit sales go up double digit.
Operator: So we're seeing we're seeing both of them occur at the same time, we're not seeing a repair versus replace its repair and replace.
Operator: And will that will that continue throughout the year.
Operator: We will have to wait and see.
Operator: Got it appreciate the insight.
Operator: Yeah.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: Our next question comes from Steve Tusa with Jpmorgan. Please go ahead.
Steve Tusa: Hey, good morning, guys.
Speaker Change: How are you good how are you.
Speaker Change: Let love it love It love it when the <unk>, the CEO and chairman reads our forward looking statements.
Speaker Change: That's.
Speaker Change: That is that is quite unique so thank you for that.
Speaker Change: Just on the kind of how we're trending into this year. Thanks for all the color on like pre buy et cetera.
Speaker Change: Are you guys seeing anything on the refrigerant side.
Speaker Change: You know any volatility in price there to speak of and how this may be yes.
Trending differently than what happened with R 22 to <unk>.
Speaker Change: Yes, Paul you deal with that.
Speaker Change: No we're not really seeing the price of 410 spike yet no.
Speaker Change: Not seen any any great movement, there and that's what I indicated earlier with the issue that we're having with commodities is we're not seeing any sort of uptick.
If that's what you're talking about on the 410 side, obviously, when we get to $4 50 for if any for 54 is used in repair during the year that will be a higher price than the 410.
Speaker Change: Right and I guess are you or do you think the channel is.
Speaker Change: It's my understanding that you need a little bit of aftermarket refrigerant actually install.
Speaker Change: To charge it in the field are top that off.
Speaker Change: I mean do you have any availability are price issues there.
Speaker Change: We're seeing a little bit of availability issue right now and it has nothing to do with the refrigerant has to do with the containers.
Speaker Change: And as far as the.
Speaker Change: The containers the availability of containers because it does take a special container to be able to handle the $4 54, 4% to 32 ways.
Speaker Change: Got it and then just on this are on the kind of reestablish men of that supplier that had the issue last year.
Speaker Change: My understanding is that those volumes are up pretty dramatically. This quarter can you just maybe clarify a little bit more how much that may have helped the volume number.
Speaker Change: Yes, Steve I again, it's competitive data I think so I'm gonna be careful with it but that that vendor in general is somewhat less than 10% of total watsco.
Speaker Change: In terms of sales product sales I mean that brand sale.
Speaker Change: So in context, it can only be you know a portion of the current quarter's growth.
Speaker Change: Right and then just one last one for you you talked about how you can't just replace the outdoor unit you've got to kind of do a full soup to nuts type of replacement here.
Speaker Change: What's the difference in the cost to the consumer for doing that.
Speaker Change: Relative to the just the outdoor unit.
Speaker Change: They have been sold enough to really come up with a good number on that.
Speaker Change: It's going to be a higher price, obviously, because you saw it in indoor unit.
Speaker Change: The Android unit.
Speaker Change: Sensor.
Speaker Change: Well as a switch to be able to turn on the airflow in the event of a leak.
And so you've got more cost out in the indoor than you did on the <unk> unit.
Speaker Change: Uh huh.
Speaker Change: Maybe by the second quarter, we will be able to provide you with more information as far as what the Delta difference is we know it's going to be more though.
Speaker Change: Right and you don't think the contract or each that deal no I do not.
Speaker Change: Alright.
Speaker Change: Okay.
Speaker Change: Alright, perfect. Thanks, Thanks for all the info as usual.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Albert Ahmed for any closing remarks.
Speaker Change: Thanks again for your interest.
Speaker Change: We look forward to.
Speaker Change: Great year and we appreciate.
Speaker Change: Yes.
Speaker Change: Boeing is Daniel.
Speaker Change: I'll limit bye bye.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.