Q1 2025 Watsco Inc Earnings Call
Good day and welcome to the Watsco First Quarter 2020-25 Ernest Conference Call.
All participants will be in lesson only more.
Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: Walker reported a good first quarter.
Speaker Change: We have a lot of positive things going on related to the transition of the product and the new eight to al system. It will ultimately impact around it.
Speaker Change: Several of our global sales.
Speaker Change: Our teams are working to convert nearly $1 billion in inventory.
Speaker Change: Yes.
Speaker Change: When you have thousands of customers that we have updated all of these pipelines provide the Beatles Bobby.
Speaker Change: Our customers are ahead of us.
Kelly.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Nevertheless, irregular.
Speaker Change: Start again, similar regulatory mandates that require every 10 to 15 years.
Speaker Change: Yeah.
Speaker Change: Historically been good for business.
Speaker Change: The new system offers solutions to homeowners and businesses.
Speaker Change: Both.
Speaker Change: More and.
Speaker Change: But more sustainable that'd be.
Speaker Change: And provide enhanced sales and profitability for both us and our customers.
Speaker Change: In terms of trends.
Speaker Change: Our core <unk>.
Speaker Change: Replacement business is off to a strong start.
Speaker Change: Sales of replacement sits at the core of our business increased 10% on higher volumes.
Speaker Change: Look like he was introduced in real life in the market and we also sold a richer.
Speaker Change: Most of our systems.
Speaker Change: Gross margin was also improved an important benchmark following the launch of the new system, which will lead continues to be an area of opportunity.
Speaker Change: I want to emphasize the first quarter.
Smallest and most seasonal quarter of the year.
Speaker Change: I may be wrong.
Speaker Change: Early in the selling season.
Speaker Change: Sales and marketing front Havent probe.
Speaker Change: Looking forward, we expect the bulk of it takes them a new way to all products will become proportionately larger over the remainder of the year, especially during the seasonally stronger second and third quarters.
Speaker Change: Our balance sheet remains in good stead.
Speaker Change: <unk> condition with gourmet $30 million in cash.
Speaker Change: No doubt.
Speaker Change: $3 billion in equity.
We raised our annual dividend of 11% to $12 mature in April.
Speaker Change: I mean 25 months.
Speaker Change: The first and second.
Speaker Change: And you are paying dividends.
Speaker Change: Now turning to current events, we are carefully monitoring the potential impact of proposed tariffs on our business.
Speaker Change: The muscle bunched plant.
Speaker Change: The medical part, which represent 91% of those cortisol.
Speaker Change: Collateral lending closely with our OEM partners.
Speaker Change: Future pricing action.
Speaker Change: Hey, Jamie required will smoked in response to the tariffs.
Speaker Change: You see greater uncertainty or 9% of their sales that are in carry that mathematical and we will act and react as needed to grow sales and profitability in those markets.
Speaker Change: Big picture, we can see.
Speaker Change: The scale.
Speaker Change: Technology and the relationships so that.
Speaker Change: Quickly and efficiently to these changing market conditions.
Speaker Change: As always we feel it's important to keep the long term perspective in mind.
Speaker Change: Well it will deliver superior long term returns in their most anytime board.
Speaker Change: We're the market leaders on a holiday.
Speaker Change: Family 4 billion dollar distribution market.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: The products, we sell are in May.
Speaker Change: And the install base continues to grow.
Speaker Change: Well, you'll be collaborating relationship will be any street neighbors Oh, yeah.
Speaker Change: We offer the broadest product variety and upgrade but largest network.
Speaker Change: Yeah.
Speaker Change: And our unique.
Speaker Change: Let me say quality.
Speaker Change: More than 4000 employees rewards them incentivize long term performance.
Speaker Change: As always we invite you to call me.
Speaker Change: I mean, if you want to learn more and share the continued optimism that we have for our company.
With that let's turn it to you or no.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: We'll now begin the question and answer session.
Speaker Change: Ask a question you May press Star then one on your telephone keypad.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Steven Volkmann from Jefferies. Please go ahead.
Steven Volkmann: Barring Wow first good morning, everybody. Thank you for taking the question maybe I'll dive in on the residential side I think you said plus 10% can you give us a sense of what you're seeing are you know how much of that was kind of our four or five four b versus 410, a M and how the <unk>.
Speaker Change: Pricing kind of layered into that.
Speaker Change: Oh, yeah, well most most what we saw in the first quarter was 410 eight.
Speaker Change: We only had about 20, 25% of it that came out is 454. So when you look at the residential what we're talking about being up over 10% is the replacement market not the new construction.
Speaker Change: And so the bulk of that in the first quarter was 410 a.
Speaker Change: Early in the second quarter, we're starting to see the transition over to the a two well product.
Speaker Change: And hopefully that will continue as a as the summer goes on because we're going to be out of 410, probably by the end of the quarter.
Speaker Change: Okay, Great and then maybe just following up we've seen a fair amount of price that's come through from a variety of suppliers across the industry and traditionally that drives your gross margin a little bit higher at least in the near term is there any reason to think we shouldn't see that happening as the year progresses.
Speaker Change: Yeah.
Speaker Change: But I think after April.
Speaker Change: April is when we had the two big price increases from the OEM. So that's really what's going to be.
Speaker Change: It could be it.
Speaker Change: Impact obviously in our gross margin, but in the first quarter, we were fairly clean as far as price increases.
Speaker Change:
Speaker Change: Most of the improvement in the gross margin really was related to the segment mix that we had moving more towards add on replacement less towards commercial less towards residential.
Speaker Change: New construction.
Speaker Change: Understood. Thank you I'll pass it on.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: The next question comes from David Manthey with Baird. Please go ahead.
Speaker Change: Great.
Speaker Change: Good morning, Hi al.
Speaker Change: So as it relates to the top line. It seems international was weak, but really not big enough to move the needle and what Paul just said about the mix.
Speaker Change: And that along with other HVAC products being somewhat weak parts and supplies I understand but should we read into this that residential new construction, even though it's less significant for you guys was substantially softer year to year and are you holding share there do you think.
Speaker Change: I mean I'll give some.
Speaker Change: Okay.
Speaker Change: Go ahead.
Speaker Change: Let's get some insight oil first Ed.
Speaker Change: We don't we don't really do the algebra for you, but there is one less sales day in the quarter. So that is actually a bigger impact than the new construction does by the way.
Speaker Change: In terms of algebra.
Speaker Change: But the infrastructure element of it is also a choice being made by.
Speaker Change: But by the contractors that do work for builders in the quarter to use for today or a way to use 400 before it be upon availability.
Speaker Change: So so there is some some disparity in and how a market like that this time of your operates in terms of of this transition.
Speaker Change: The other reality, David as you know is we're a 40% larger business in the second quarter.
Speaker Change: So new housing, which was relatively equal in four quarters has a bigger impact in this small quarter.
Speaker Change: And and should have less of an impact over time.
Speaker Change: And I think also there was some backlog that's built.
Speaker Change: That will consume forced before b and as time goes on.
Speaker Change: Yeah, I don't think there was a I don't think we've lost any share in the new construction market I think we're still.
Speaker Change: You know, what what where we do it we do it well and I think it had more of an impact on the supply side than it did on the equipment side.
Speaker Change: Yeah, that's good to hear.
Speaker Change: So and pressing on gross margin a little bit here too as you think about the transition of refrigerant and along with the kind of the mix driven by seasonality and so forth and then you've got these what I assume are apples to apples kind of.
Speaker Change: Tariff driven and general price increases, we're seeing as you pointed out in April ball.
Speaker Change: As we think about the normal cadence of gross margin from first quarter through the year should just directionally and bigger than a bread box can you tell us do you think it'll be less of a of a degradation as we move forward because of those positive factors that are rolling in here.
Speaker Change: Alright, Thanks, a lot of question [laughter].
Speaker Change: I would.
Speaker Change: I wish I could see that far out in the future but right.
Speaker Change: Now let me give you let me give you.
Speaker Change: Aspirational goal that we've stated before.
Speaker Change: Watsco.
Speaker Change: Working.
Speaker Change: To achieve its goal of 30% gross profit margin.
Speaker Change: That's where we think we're headed.
Speaker Change: Ed.
Speaker Change: Now when we're going to get there, but we're working to achieve.
Speaker Change: And we have several of the large deals.
Speaker Change: Okay.
Speaker Change: Now do we have.
Speaker Change: But generally changes it's about.
Speaker Change: Yeah.
Speaker Change: But that's our goal and we aspire to.
Speaker Change: Fair enough guys. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Jeffrey Sprague with vertical research. Please go ahead.
Speaker Change: Thank you good morning, everyone. Good morning.
Jeffrey Sprague: Good morning, Ah interesting times, no doubt hope everybody's doing well just wanted to kind of think about the sort of the cadence of what the Oems are you know are doing on on the price side. I think you said you're collaborating closely with them you know just got off the call with our key player they should prices gone up twice.
Speaker Change: Here you know just in the last several weeks or so.
Speaker Change: You know, maybe just give some view on how.
Speaker Change: How this collaboration is working how the lags of getting price through into the channel and.
Speaker Change: Now whether you are seeing any kind of.
Speaker Change: Negative demand response, and you know given the magnitude of price that's coming through the pipeline.
Speaker Change: No I don't think we're seeing any real pushback yet from the customers. It is such a newsworthy subject to tariffs.
Speaker Change: I think most contractors and consumers who are assuming that there's going to be higher prices. How much of that price has been related to the consumer you know, we really don't have visibility to that.
Speaker Change: The Oems have been very prudent as far as getting the price increases out we have the technology to go ahead and implement the price increases instantaneously.
Speaker Change: So it's it.
Speaker Change: It really hasnt been that much of an issue to date.
Speaker Change: We'll have to wait and see what happens in Q2, and Q3 and now as far as how long. These these price increases stay and you know what the impact is on the consumer.
Speaker Change: Is there a mechanism in place or should we expect.
Speaker Change: You know if the tariff pressure changes that you know this will feed back into the market as some relief on price. How you know how much of the prices you know surcharge, which is visible and could go away versus what might be in the base and you know what you might be able to maintain even if there is some tariff relief.
Speaker Change: Yeah.
Speaker Change: Outside of one manufacturer I think every every pricing.
Speaker Change: Every pricing action by every manufacturer right now is a price increase.
Speaker Change: It's not a surcharge.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Tommy Moll.
Speaker Change: Steve. Please go ahead.
Speaker Change: Good morning, Tommy.
Speaker Change: Thanks for taking my question.
Speaker Change: Sure.
Speaker Change: In the earnings release, and I think as Paul just mentioned you talked about.
Speaker Change: Being able to leverage the technology to quickly if not instantaneously implement some of these price increases.
Speaker Change: But I want to unpack what other levers you have with the technology because.
Speaker Change: As <unk> discussed before it's not just one standard increase across your entire customer base you have to be a lot more nimble. So in this environment.
Speaker Change: OEM price increases what additional.
Speaker Change: Capabilities do you have through the technology to really customize if not profit ties.
Some of that at the branch level.
Andrew: Andrew do you want to shed yeah, yeah, I'll take that one.
Andrew: My Instinctive answer is I don't mean that to be flippant, but it's infinite.
Because the technology, we put in place what it does.
Andrew: Is provide visibility and tooling for world class analysts to see opportunities not across all of our business units and collectively as an enterprise. So just are an example.
Andrew: And this is this is an environment, where there are raising prices, which by the way there are and there will be from not just our major equipment manufacturers that from the 1000 parts and suppliers manufacturers that we buy products from.
Andrew: And just to give you the facts of the scale. It's it's a thousand parking excuse me 1000 manufacturers of products.
Andrew: We sell products to 100000 contractors and it's not.
Andrew: It's not too hyperbolic to say that we have a different price for every product for every customer almost.
Andrew: So the tooling enables that sort of intricacies.
Andrew: Intricacies and gained dynamic.
Andrew: And seeing where there are opportunities to raise prices too.
Andrew: Market level that you see.
Speaker Change: Or is there a particular segment.
Andrew: Our size buying at which perhaps it.
Andrew: It needs to be adjusted for others or the other way round, perhaps are out of market with the price and we need to get in line and so that we can actually get more sales.
Andrew: Just I mean again as a small example, let's say we sell a product a b C and one market.
Andrew: Miami you probably saw in 20 locations here to several thousand customers at several thousand prices and S. And if you put that on the histogram that the spread is too big too big.
Andrew: So if we can put a floor and a ceiling and do something.
Andrew: Yeah.
Andrew: Analytics.
Andrew: Can affect margin impacts as well.
Andrew: Okay.
Speaker Change: Thank you a J as a follow up I wanted to ask for a little more detail on the early selling season trends.
Speaker Change: You mentioned that there has been some improvement and so while we're all here alive I wanted to just give the opportunity to give give any quantification there or additional insight into what you were referencing there. Thank you.
Barry: Barry you want to deal with that.
Barry: Sure again I will focus on domestic we we've said that international is still it's still probably greater uncertainty, but if I address the domestic 91% of our business. It is mid single digit growth.
Barry: Thus far in AR in the quarter.
Barry: Great I appreciate it and I'll turn it back.
Barry: And if I add a sentence to that and margins are are behaving well as you know Additionally.
Barry: Thank you.
Ryan Merkel: The next question comes from Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel: Hey, everyone. Good morning, I guess I'm going to follow up on that last question I guess it sounds like we shouldn't extrapolate the weak first quarter to the rest of the year is that the right read here you feel like the business has found better footing.
Ryan Merkel: Yes.
Ryan Merkel: Okay.
Ryan Merkel: Simple simple answer.
Ryan Merkel: And then can you just unpack I think you mentioned the a two well transition with a negative in the quarter what was the impact there and what was that negative.
Ryan Merkel: Thank you Dan negative no okay.
Ryan Merkel: Okay, So I misunderstood that yeah yeah.
Ryan Merkel: Okay. So.
Ryan Merkel: So the the one third of the business that was weak it was the international down nine and then what else was in there that caused the weakness because again the algebra is kind of difficult for some of us to figure out.
Ryan Merkel: Sure I understand what you mean, let's go through it. It's it's I think a lot of the numbers are there in the press release Ryan you have you have not equipment are going down.
Ryan Merkel: For the quarter was about 30% of the business right.
Ryan Merkel: The duration is a small a small component nonetheless, it's part of of what else is down.
Ryan Merkel: <unk>.
Ryan Merkel: We have commercial products.
Ryan Merkel: Which was down right around 10% for the quarter.
Ryan Merkel: That too has a heavy influence going on with the product transition in 14, a versus worst before be in and we think that.
Ryan Merkel: That levels out or at least has less disruption or less disparity going on as time goes on commercial products as a component of what's what else went down.
Ryan Merkel: International we talked about.
Ryan Merkel: And then there are other some other products that I would just some other segments I would categorize as large accounts national accounts.
Ryan Merkel: We're again for today versus where it before it be have some disruption in it.
Ryan Merkel: And Thats short term in.
Ryan Merkel: Now, we don't see that as a seasonal a reality.
Ryan Merkel: Overtime.
Ryan Merkel: And I mentioned the same day, one less selling day in this quarter is about it's almost a 2%.
Ryan Merkel: Impact on sales.
Speaker Change: Okay. Okay. That's helpful. The commercial pieces, yeah, I thought that might be part of it last question. The price mix outlook. You know we've had some new price increases any any chance you'd help us will look like youre thinking there.
Ryan Merkel: For the year.
Ryan Merkel: Well I would say we tend to talk factual about what we see what we experienced in the first quarter end and not extrapolate out until we have more data and more time in the season Ryan.
Ryan Merkel: But price was up about price and mix.
Ryan Merkel: Oh for what is our unitary business was up about 5% for the quarter.
Ryan Merkel: Okay.
Ryan Merkel: Right great. Thanks, Barry I'll pass it on.
Ryan Merkel: Thank you.
Brett Linzey: The next question comes from Brett Linzey with Mizuho. Please go ahead.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Wanted to come back to the <unk> transition one of your peers have noted some delays there maybe a little bit more on the commercial side, but it was related to the learning curve and I'm just curious what's what's the industry readiness like on the transition from a technician standpoint are you seeing any bottlenecks.
Speaker Change: Is it driving some delays in residential and any color would be great.
Speaker Change: Yeah.
Speaker Change: This is Paul I don't see any real delays with the.
Speaker Change: The product I mean, if you consider that for Kenny is basically 50% of <unk> 32.
Speaker Change: And the balance of it is a 125 combination.
Speaker Change: Whereas when you get into the $4 54, and a 32 products that we sell.
Speaker Change: They just become 70% on the $4 54 becomes 32 and of course 32 is 100%.
Speaker Change: So we're really not seeing a bottleneck from the mechanics viewpoint now.
Speaker Change: I just think you would say there is a price difference between an <unk> product and a fourth gen product and I think the contractor gravitated towards the 410.
Speaker Change: That's just an opinion.
Speaker Change: Yes, I think alright, thanks Derek.
Speaker Change: Editorialize that probably the right way is as you know this is a quarter.
Speaker Change: As we said seven times, thus far the smallest time of year.
Speaker Change: But also had a lot of a lot going on with <unk>.
Speaker Change: Whether <unk> was in the channel or not if you own a lot of poor today and he leaned into it.
Speaker Change: You have some short term benefit this quarter you have long term risk of obsolescence.
Speaker Change: It should be obvious by our balance sheet at year end, we did not lean into four today, we did not choose short term.
Speaker Change: Consequences with what with longer term risk we wanted to move to the 454 B, we have the pricing the margins the activity with replacement is a good indicator of that decision.
Speaker Change: And maybe some of the large giant customers that wanted.
Speaker Change: I wanted to chisel under 410, a M and get some short term wins.
Speaker Change: That's a that's a transient business that is short term.
Speaker Change: Got it and then just a follow up on the second quarter I guess near term.
Speaker Change: So I think the industry is talking about some destocking on the E. R. For today, but also we're seeing the industry raised prices really across the board on tariffs what would you expect some level of pre buy on price escalation here in the near term or how do we think about the netting of those two pieces as we get into.
Speaker Change: <unk> been selling season here.
Alright, I don't see it.
Speaker Change: I don't see any pre buy coming on.
Speaker Change: On the <unk> product you can't really get for 10 products from many of the Oems They had to stop manufacturing that end 12 31.
Speaker Change: So anything that we would have in stock right now that's coming in is going to be an <unk> product.
Speaker Change: The price increases are very rapid to happened on April 1st and then a second price increase.
Speaker Change: Occurred for most of the Oems on the third.
Speaker Change: So unless there is a reversal of the of the tariff I really don't see much of a <unk>.
Speaker Change: Each of a pre buy opportunity for $4 54.
Speaker Change: Okay.
Speaker Change: Alright, Thanks ill pass it along thanks.
Speaker Change: Thank you.
Patrick Baumann: The next question comes from Patrick Baumann with Jpmorgan. Please go ahead.
Speaker Change: Good morning, Patrick.
Speaker Change: Good morning.
Speaker Change: Thanks for taking my questions.
Speaker Change: So I just had a question on the gross margin in the first quarter and I was wondering if.
Speaker Change: You were able to optimize price.
Speaker Change: On the <unk> inventory that was sold.
Speaker Change: And whether that had a benefit there.
Speaker Change: Asking kind of in context of I think you said price mix was a 5% benefit in the quarter and I don't think the Oem's raised price on the four today.
Speaker Change: Since you're not really making anymore. So I'm just curious if you give any color on that.
Speaker Change: Yes, Pat it's a good question.
Speaker Change: The answer is yes.
Speaker Change: Most distributors were able to gain some price on for today.
Speaker Change: As we started the year.
Speaker Change: And also.
Speaker Change: Wasn't a.
Speaker Change: Is that in this call so far but mix also improved meaning energy efficiency mix that tends to help.
Speaker Change: Margin to an extent.
Speaker Change: And third as Paul said or I think as we have a higher mix of replacement versus new construction that helps margins to an extent.
Speaker Change: And the rest of the pricing discussion is.
Speaker Change: I think Paul mentioned, 25% of the business is forced before b in the quarter.
Speaker Change: And obviously, the the higher pricing contributed something to that equation.
Speaker Change: Yeah.
Speaker Change: Yes that makes sense.
Speaker Change: The benefit on the price optimization may be in the <unk> stuff is that like in the tens of basis points.
Speaker Change: Yeah, it's not material enough.
Speaker Change: It was not like a you know something to exploit Pat it was something to add a bit of inflation as we started the year and in basis points.
Speaker Change: Helpful and then.
Speaker Change: We've been hearing about shortages of the $4 54, B refrigerant due in part to container issues.
Speaker Change: Just wondering if you are.
Speaker Change: If you've seen or heard anything on this front and what your view is on on whether that could have any impact any impact on the selling season.
Speaker Change: Yes, we have heard that it's supposed to be over by June you know as far as the containers, but it is not yet signed $4 54. It's also won 32 way they both use almost containers. So it's not there's no real difference.
Speaker Change: So yes, there's been a shortage who had been on allocation everybody in the industry is on allocation right now they are apparently there's still some 32 out in the marketplace.
Speaker Change: But the 454 has become increasingly difficult to obtain.
Is it going to impact us longer term no it's not.
Speaker Change: Our creative branches had come up with our other ideas to be able to satisfy the need of the.
Of the contracts are to be able to get the refrigerant they need to top off a new system. You do know that all the equipment is free charged with $4 54, there is no shortage of $4 54, it strictly the container.
Speaker Change: That's this missing right now.
Speaker Change: Okay.
Speaker Change: I appreciate the color.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: The next question comes from Jeff Hammond with Keybanc Capital Markets, Inc. Please go ahead.
Jeff Hammond: Hey, good morning, guys morning, Dan.
Speaker Change:
Speaker Change: The consumer just can't can't catch a break they keep getting hit with these price increases and high rates, just wondering if you're hearing or seeing anything on kind of.
Speaker Change: Repair versus replace or or mixed down as people maybe choose D featured product.
Speaker Change: Hey, good question.
Speaker Change: Alright.
Speaker Change: In the first quarter, you really aren't going to see a lot of compressor sales in compressor sales.
Speaker Change: But when you look at parts and supplies parts is what it takes to repair units suppliers is generally what it takes to install a unit.
Speaker Change: And so when we look at it we look at the motors when we looked at the compressors.
Speaker Change: As I've said I think on the last call on the call before and I'm, hoping that we'd have a repair and replace market.
Speaker Change:
Speaker Change: Motor sales for the quarter were up 7%, which is good and then we were up.
Speaker Change: Slightly with the compressors.
Speaker Change: It wouldn't really be indicators of a.
Speaker Change: Our repair versus replace type mode, yet so I think with the dichotomy that we have in the homeowners I think we're going to see.
Speaker Change: I think we're going to see a lot of replacement and I also think we're going to see a lot of repair.
Speaker Change: Yeah.
And the trade down dynamic.
Speaker Change: I am not sure Jimmy Hasnt shown up go.
Speaker Change: Go ahead ma'am.
Barry: Hi, Barry.
Speaker Change: Yeah, yes.
Speaker Change: Yes, that's I mean, that's something we've seen it's obviously.
Speaker Change: Two comments first energy efficiency mix actually improved this quarter.
Speaker Change: I want to ring the Bell in October when we have our third quarter conference call. If the trend continues.
But also what what's competitive for us every location and watsco has multiple brands multiple price points.
Speaker Change: Many of our competitors, including OEM networks have have do not have that variety do not have that.
Speaker Change: That functionality or flexibility at a store level. So.
Speaker Change: You know, we we can make hay in a tricky environment, if that's where the consumer is and.
Speaker Change: I'm glad we have that variety in our stores.
Barry: Okay, and then Barry you mentioned.
Barry: People that leaned in on on <unk>, which was not your Tac maybe benefited <unk> in.
Barry: And maybe they're a little bit behind so I'm. Just wondering if you think <unk> was impacted at all because maybe you had less than your fair share for today and and maybe your catch up some of that and then it seems like your inventory position is really strong coming out of <unk>, just kind of thoughts around.
Barry: Playing the merchant and gross margin arbitrage around these kind of follow on increases.
Barry: Yes, I mean, obviously I don't have access to anyone else's financial statements.
Barry: To note what somebody else sold versus what we sold.
Barry: But the anecdote and the market is there are some national accounts.
Barry: The family channel facilities maintenance channel.
Barry: That consume four today.
Barry: And you know and I think that that provided that short term opportunity those arent channels that we necessarily.
Barry: We're going to take product away from our other good higher margin customers and serve that market.
Barry: And and instead, we're going to try to serve the good customers that would be there.
Barry: You know longer term.
Barry: So that's just an anecdote Java I don't.
Barry: But we that's volume where those customers are.
Barry: And in a more conventional environment.
Barry: 60 days from now when four today is gone.
Barry: Our our customers that.
Barry: As opposed to maybe being more opportunistic.
Barry: Over the last quarter or so.
Barry: Yeah, I think I think that's perfectly frame I mean, you can't you can't see it even within our business some of our business units you did have.
Barry: Higher position afford Saturday products they did have.
Barry: Pumps this quarter.
Barry: And mass and in total and Warsaw that was not our tax as you said, but.
Speaker Change: But I think that was a Q1 dynamic and that is as well because the prevalence or the more prominent.
Speaker Change: Product set it's going to.
Speaker Change: Leveled out that playing field and yes, we will be merchants ends.
Speaker Change: Again, I think looking at Q1, our corporate formats in our core AOR business. It shows that were.
Speaker Change: Healthy and strong and poised for a.
Speaker Change: Good here.
Speaker Change: Okay Barry.
Speaker Change: All knowing over over.
Speaker Change: 25 years I've known you.
Speaker Change: But I understand you can't can't see everything I appreciate the time guys.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: The next question is from the line of Chris Snyder with Morgan Stanley. Please go ahead.
Chris Snyder: Thank you I wanted to hey, good morning.
Chris Snyder: The other question I wanted to follow up on some of the prior commentary it seems like you.
Chris Snyder: You guys didn't lean into 410, I as hard as others and maybe there was some softness in Q1 as a result I guess my question is do you have any sense of how much for 10, a your distributor competitors still have into Q2, because it seems like maybe that share shift back to you were $4 54.
Chris Snyder: <unk> will happen really ultimately when the <unk> is just totally done being sold.
Chris Snyder: Yeah, Chris This is really have no idea.
Speaker Change: Go ahead Eric.
Eric: I was going to say that thats awfully hard to to to have a line of sight into our best.
Eric: And it's purely anecdotal, but obviously, we talked to a lot of other distributors and our.
Eric: And our quest for more acquisitions and.
Eric: And as we do that this is obviously.
Eric: Recurring topic and something that is on everyone's mind.
Eric: I don't get the sense from talking to those independent distributors that they have you know.
Eric: That they were planning on or that they have enough inventory to get very much past, the second quarter and nor could the OEM supply a whole lot of that to close out the year. So I think by the end of QQ, Fortunately will largely be in the in the rearview mirror.
Speaker Change: Thank you I appreciate that.
Eric: And then I.
Speaker Change: I think you guys said, maybe 20 or 25% of your volumes in the quarter were $4 54, if I heard that right.
Speaker Change: So I imagine we're still the field is still not installing a ton of $4 54 b.
Speaker Change: You know maybe in April that's changing but I guess do you have any sense of the rate at which were 54 is being installed and just trying to figure out like how do we tested the demand or even maybe the price elasticity on 454, because it still seems pretty early in the process. Thank you.
Speaker Change: Yes, it was going to say I don't feel like it's that early I feel like it's a it's going on materially and importantly, and we do have a view into what's going on I mean, 25% of the first quarter is.
Speaker Change: Well, it probably $250 million of product.
Speaker Change: I don't think that's a small number that's that's larger than most distributors for a full year and so there is there are some insight into it.
Speaker Change: If I look at the last two weeks, it's probably over 60% of what we're selling is.
Speaker Change: Fourth before B products. So the ramp is happening pretty quickly.
Speaker Change: So when we when we talk about current trend and current margin visibility.
Speaker Change: We're satisfied the new product is being accepted well.
Speaker Change: I appreciate that thank you.
Speaker Change: Okay.
Speaker Change: Thank you. The next question comes from Steve Tusa from Jpmorgan. Please go ahead.
Steve Tusa: Hey, guys good morning, Hey.
Speaker Change: Sorry, just to follow up Pat questions, just philosophically as a distributor and when Youre looking at like these are the situations.
Steve Tusa: What what is the difference between a how do you look at the difference between like a surcharge and a price increase in and you know like what what is there to read into from Oems that are.
Steve Tusa: Picking surcharges versus versus price increases just broadly.
Steve Tusa: What what do you what do you take away from that from an industry perspective.
Steve Tusa: I think as surcharges temporary and I, you know because of some exterior condition.
Steve Tusa: And our price increase is longer term.
Steve Tusa: A surcharge doesn't affect your inventory of price increase does.
Steve Tusa: To my knowledge, there's only been one OEM that's issued a surcharge.
Steve Tusa: Right I would say is that this is such a new and dynamic.
Steve Tusa: Environment or in with these.
Extreme tariffs or potential tariffs. So everybody is working their models in and figure out the best approach and this is where we have reference alright, great relationships with our Oems and our collaboration there's a lot of conversation about.
Steve Tusa: Oh the.
Steve Tusa: To do this without creating much friction or as little friction as possible and make us a harmonious that's possible and that's one of the dimensions.
Steve Tusa: Discussed thoroughly and there's pros and cons of doing a surcharge versus a price increase.
Steve Tusa: And and like Paul said, I think one OEM surcharge.
Steve Tusa: But I don't think there's too much to read into that other than just trying to.
Steve Tusa: Do the best we can or anybody can keep harmony in the market.
Steve Tusa: Or are you guys doing any surcharges are you, mostly like you know price increases I. Obviously, you guys can be pretty agile with with the tech you have but I E are you is mostly of what you do surcharges or or price increases.
Steve Tusa: Or a mix.
Steve Tusa: It's mostly price increases yeah, yeah, yeah, okay.
Steve Tusa: Prices.
Steve Tusa: And that makes a reminder.
Steve Tusa: And Steve to remind you of the texture of events because it's just important to note.
Steve Tusa: Two sided equation, we deal with it.
Steve Tusa: As I said earlier, if we have 1000 customers in South Florida, We may sell the same product at a thousand different prices.
Steve Tusa: We also by the product purchased the product the same product at different prices, depending on the market segment, we are addressing.
Steve Tusa: So you know an oem's price to us varies depending on those variable so that double sided equation. There's a lot of I think artistic and good ways to use technology.
Steve Tusa: To deal with these kind of environments, where we're again I'm not sure our competitors have it.
Speaker Change: Hey, one last one.
Speaker Change: Paul just from an industry perspective, how much of that like unitary product do you think is.
Speaker Change: Like sourced directly from China, like where you have a Chinese manufacturer who may be.
Speaker Change: Shifting it over here and he's sticking a label being out with the U S guys sticking a label on it and I guess, it's not huge but like it's been growing in the last couple of years, how much do you think there is of the industry.
Speaker Change: I think I think in the industry is less than 5% on the ductile side and then on the on the duct free side, obviously, it's higher.
Speaker Change: We make a single unit in the U S.
Speaker Change: A few units made in Mexico.
Speaker Change: The ductless side would be heavier.
Speaker Change: Ductile side would be very small.
Speaker Change: Yeah, the only okay.
Speaker Change: Maybe one manufacturer left I think they're choosing.
Speaker Change: Our product is made in China.
Speaker Change: And then sorry, one last one I know, we got like 15 minutes left for the ourself I might as well get one more and I heard the kind of the tail end of Pat's question on 454, B like what why is Honeywell, putting this huge price increase out there. If there is such a bundling and it's just a.
Speaker Change: It's a container ratio.
Speaker Change: Trying to figure that one out.
Speaker Change: I went to I would like to figure out why there's not more of a shortage on 32, because its the same container [laughter].
Speaker Change: But.
Speaker Change: Yeah, no clue, but youre not at the same time that theres only two manufacturers that make a $4 54.
Speaker Change: And that's Honeywell and Tomorrow and tomorrow.
Speaker Change: On the other side, we're starting to see allocations forming around 32.
Speaker Change: Yesterday, we saw them.
Speaker Change: A material price increase on 32 that we buy.
Speaker Change: The price spread between the two products now has narrowed to just a little over $3 a pound. So it's not it's not as big of a of a difference or delta as it was when they were introduced.
Speaker Change: Okay. That's great color. Thank you very much.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session.
Speaker Change: I would like to turn the conference back over to the management for any closing remarks.
Speaker Change: Well thanks for your interest in our company and we look forward to catching you up at the end of the next quarter Bye Bye now.
Yeah.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].