Earnings Call: Q1 2020

Apr 23, 2020

I would now like to turn the conference over to Albert Nahmad, CEO. Please go ahead. Morning, everyone. Welcome to the 1st quarter earnings call. This is Al Nahmad, Chairman and CEO. With me is A.J. Nahmad, President, Paul Johnston, Executive Vice President, and Barry Logan, Executive Vice President. Now before we start, our cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. Once again, good morning. I hope you and your families are healthy and getting through this period safely. Today's press release speaks to Watsco's strength and innovative spirit. These are attributes that we believe will bring comfort and confidence to our employees, our customers, OEM partners, and our shareholders. As we highlight in our press release, Watsco's financial strength is our most important attribute. Our philosophy of maintaining a strong balance sheet, low debt levels, and ongoing access to capital is a significant advantage for us as we work through the impact of the pandemic. We are well-positioned to support our customers, employees, and OEM partners while actively looking to invest in expanded product offerings, new locations, and acquisitions to benefit our long term. Our ability to generate consistent cash flow also represents an important strength. Next week's scheduled dividends, which reflects an 11% increase, signals our confidence in our business. We also operate in a great industry as HVAC products are fundamental necessities in homes and businesses. Local authorities in our markets have deemed our industry as essential. Our branches are open, providing needed products and services to our contractor customers. Watsco's technology team has also accomplished a lot in recent weeks, and adoption of our tech platforms is rapidly expanding. In terms of day-to-day activities, our leaders took immediate actions in response to the pandemic, in many cases in less than 48 hours. For example, branch locations were quickly transformed from retail walk-in showrooms to no-touch e-commerce curbside pickup centers. These changes have been well received, and our customers are asking us to sustain these services going forward. As to growth and investment, we remain in touch with great companies, knowing it's an opportune time for them to join the Watsco family. Our resources can help them grow and develop scale, and we can provide access to our great technology platforms. In terms of results for the first quarter, sales growth was driven by strength in U.S. markets for residential HVAC equipment, which grew 5%. Sales and earnings to international markets declined due to softer market conditions and strong comparable results. Results also reflect 35 new locations, mostly from acquisitions completed in 2009-- I'm sorry, 2019, including Peirce-Phelps, DASCO Supply, and N&S Supply. These companies come with great leaders who are now part of our culture and team and are responding to current events in their respective markets. Further analysis of our financial results are provided in our press release. I will not recite these details in my prepared remarks, but we'll be happy to provide more color during the Q&A. With that, A.J., Barry, Paul, and I are happy to answer your questions. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question today comes from Joshua Pokrzywinski of Morgan Stanley. Please go ahead. Morning, Josh. Morning, Al. How you guys doing? Well, it's sunny and pretty here, but we got our heads down, building the company. Understood. You know, to be fair, just another day in Miami, so I won't hold that against you. I hear you. Not nearly, not nearly as fantastic as being cooped up in Connecticut. Appreciate the visibility is, you know, kind of tempered right now. You know, a couple questions that I just want to make sure that, you know, to the extent that you don't really have a ton of visibility, maybe you can still answer. I guess first, have you seen any change in consumer behavior vis-a-vis trading down in, you know, efficiency or more repair versus replace? Anything that would give you an indication of, hey, you know, people are still spending money, but under the surface there's a couple, you know, there's a couple changes afoot. Has that shown up? Have you gotten that anecdotal feedback yet? Well, our data expert, Paul Johnston? Jesus. A little bit. In the first quarter, we really didn't see it. You know, we had a pretty good balance between, you know, system sales as opposed to just an outdoor replacement. Perhaps, you know, anecdotally, we'll see a little bit more of a repair or just replace the outdoor unit in the second quarter, perhaps. Really we're not at the consumer level, but, you know, what we hear from our contractors is, you know, regular checkups and, you know, service calls that don't require repair are pretty much being pushed out right now. Consumers aren't looking for someone to be in their home. Got it. Which would be more of a social distancing comment, not a like, "Hey, I ran out of money," comment. Correct. No, but you also have a very effective consumer finance program that would help with such a thing if it should come to that. Yeah. Got it. I guess, you know, I'll leave some of the other kind of, you know, near term or, you know, macro questions to some of the other folks. You know, maybe to turn away from COVID for a second, you know, obviously one of your major equipment partners, you know, is now kind of liberated from their multi-industry, you know, owner. What have been kind of the early, you know, changes, observations, you know, engagement, action that you guys have seen with Carrier now? Well, first it was good news that they separated. They can be focused, excuse me, on our industry, and they are. They're very well led. They're very responsive. I think it's all great news going forward. I couldn't be happier. Anything, I guess, more specific on where they're saying, "Hey, we did this before, but now we've rethought that initiative." Anything, you know, I guess more tangible on an action? well, I keep saying the focus. They don't have to worry about dividends going up to the parent, United Technologies. They can be more focused, and they are, and they assure us in investing in their own industry, in their own company. It's all great news. There's nothing negative about what's occurred, and we very much like the leadership. Okay. Thanks, Al. We good. Okay. The next question today comes from Brett Linzey of Vertical Research Partners. Please go ahead. Morning. Hi. Good morning, guys. Hope you're well. Hey, just a question on pricing. I guess from your vantage point, are you seeing any signs of deflationary pressures across some of your markets as we've shifted into April here? You know, be it on the equipment side or other products, which I think you typically do see it first in? Paul? No, we're not seeing any deflation. In fact, we've had some of our commodity pricing actually starting to move back up again. No deflation. Okay. I guess I'll ask the April question, maybe just an update on the trends so far. You did mention in the release it decelerated, but just any sense on the magnitude. If you could maybe just drill down into the regional or state-by-state view, you know, any particular regions that stand out strong or weak. Thanks. Well, in terms of April, and we don't like to get ahead of ourselves, 'cause once again, the most important thing is that the first quarter is over. That's always the fourth and first quarter always don't tell you much. April is the beginning of the second quarter, and that's about the same time that people were asked to stay home or people were shut into their homes. Now that we sensed at the beginning of April some softness due to that transition that was going on. People didn't want any strangers in their house or contractors they would know. They just didn't want much of that. However, I will say that we think since the beginning of April it stabilized. That was a quickie that happened in the beginning, first couple of weeks of April. We believe that everything is stabilized now. Okay. I'll leave it there and pass it along. Thanks. The next question today comes from Stephen Volkmann of Jefferies. Please go ahead. Morning. Good morning, gentlemen. Thanks for taking the question. A couple of sort of recession questions for you since we seem to be heading into one. I think you alluded earlier, maybe it was Paul, to the fact that you might see some mix shift toward parts and away from units. Is that something you've seen historically, and should we expect a little bit of margin improvement because of that? Well, I can say this unequivocally, that last time there was a downturn, the product mix went a little bit more towards parts than equipment because consumers wanted to repair more than they want to spend money for new equipment. What were the results to our company when that occurred? Well, first of all, our working capital came down, and then second of all, our cash flow jumped. Enormous cash flow gains. So everything has a benefit. If there is a slowdown or more of a conversion from new equipment to repairs and parts and that sort of thing, sure, it may slow sales, but from a perspective of cash flow, it'll be very strong. Do we see any evidence of that now? I don't think so. It's too early. No. It's just beginning to get into an air conditioning season. Okay. Great. You sort of predicted my follow on, Al. Are you guys planning to reduce your inventories, already, or is it too early to make that decision? Well, we're going into the season now. I wouldn't say we're planning to reduce, but we're certainly I think the question is well asked if we're talking about how we're handling orders for the future. We have great software that helps us with that. Basically, we're a decentralized organization, and our regions, people that lead our regions, they influence that question. If they think they need to ramp up with inventory using our tools, they can do that. If they think they'd rather be more conservative, they'll do that. We don't try to determine inventory levels at the corporate level because we think that it's better to make those determinations in the markets that we're in. Okay. Okay, great. Al, it's Barry. I just wanna add one layer of thought to what you asked earlier about, you know, the product mix. you know, first, replacement parts themselves are under 10% of what we do, just to put that in perspective in terms of the understanding of that question. what we highlighted in the press release is diversity of products. just like any other consumer product, what we see always is mix that can happen within the brands we sell, within the price points we sell, within the entire kind of array of products that we sell, when it comes to equipment. contractors who are at the kitchen table, or at least today using our selling platform, maybe not be at the kitchen table, is offering that variety of price points. That's what we like about our business a great deal, is that diversity is there. There, you know, I would say our competitors, in some cases, have more concentration of fewer brands versus the wider array of more brands and those kind of circumstances. Again, when we use that term diversity in the press release, that's part of what we're talking about. Great. Thanks, Barry. I'll pass it on. Thank you, guys. The next question comes from Ryan Merkel of William Blair & Company. Please go ahead. Hi, Ryan. Hey, good morning, Al. First off, I just wanted to clarify the comment on April. It sounded like you saw trends decelerate right at the beginning of April. Decelerate, yes. Yeah, decelerate. I think, Al, you said kinda stabilized here. </edited_transcript Correct. Yeah. Is that just in the last couple days, last week? You know, you never wanna over extrapolate a couple days of sales, but what makes you confident that maybe we could be stabilizing? </edited_transcript Daily sales numbers. I would say over the last few days. I guess we'll see. The 5% resi equipment growth, you know, that's what I would have expected, but then it was 2% for the total company, so it implies some big declines in some of the other areas. Can you just expand on that? Well, I'll let Barry add to it, but we said in our statements earlier, Canada, Mexico, and exports into Latin America compared to last year were much softer and, excuse me, it's been a soft business, the international business. There's also the regions that you could, I mean, common sense is if the Northeast of the United States is having all the problems that they have been having, it gets soft there, at least temporarily. The rest of our network has been stable throughout the period. Yeah, I would not add much to that. It is, you know, the international markets, revenues are down, profits are down. There was dilution in the quarter for the international business. Last year was particularly strong in those markets, so part of that is a comparison. Yeah, that's probably. Those things obviously stand out more in what would be the smallest part of our year, which is the first quarter, in terms of their impact on EPS and so on. As Al suggested, where the sun is out and the earth is warm, as you go south, we're, you know, we're seeing, again, stability in the business. Okay, got it. Thanks for that. I'll pass it on. The next question comes from David Manthey of Baird. Please go ahead, James. Morning, David. Hey, good morning, everyone. First question, what part of your business goes away under social distancing? I'm thinking if my AC stopped working down here in, you know, mid-eighties Florida today, and I knew for a fact that my contractor had COVID, I'd probably still take my chances. I'm just trying to understand. I hope you don't. No, I mean, conceptually, I mean, how do you miss sales if air conditioners are doing what they're doing? I mean, where's the gap in someone saying, "I'm just gonna wait," or, "I'm not going to have that service"? Well, that's a very valid issue. I don't think that people will do that because you don't wanna be uncomfortable in the heat. It comes, you know, the hot weather. If it's mild, you'll postpone. The weather's mild. You don't want a stranger in your home. I'm guessing these things. I don't have data to reflect that. I think as the temperature warms up, the choice will be less and less. Consumers will have to get their systems working, either upgraded or fixed, fix the problem that they have. Right. Okay. That makes sense. It's a pretty necessary industry, as you know. In fact, as you heard me say- Yeah We're considered an essential industry. And, um- Yeah For good reasons, you know. You gotta have the cooling, and you gotta have the heating. Yeah, I definitely consider you essential. Second question. In when we look back to 2008, 2009, it was obviously a housing, a housing-driven recession. That's probably not a good template. If you go back to 2001, 2002, the housing market barely paused during that timeframe, and your revenues, I think, were down 5%-7% in that timeframe. Is that not a reasonable expectation? You know, like you're saying here, Al, you know, there's clearly if an air conditioner goes out, someone's going to either repair or replace it. There's this trade-down effect, and I think that's what leads to those kind of declines, is people repairing rather than replacing, lower ticket size and/or- Right. Right trading to the, you know, the good from the better and best. Right. Can you talk a little bit about that as sort of a, an initial outlook, just to say, you know, mid-single? Is that kinda what we should be thinking about? You mean in terms of revenue growth? Yes. Oh, gosh, you don't wanna do that. It's too early. Much too early. I don't wanna guess. I'd rather report something a little more certain of. I do know that we are so strong financially that we have an edge over our competition, and our technology gives us an edge in our competition against our competition. We're feeling pretty good about ourselves, and I certainly hope that the M&A program will be used in order to help some distributors be part of us. I always see opportunity with an industry that might slow down. I'm not saying it will, but I'm saying if it does, we'll see opportunity there. Yeah. Sounds good. Thanks a lot, Al. Appreciate it. Sure. The next question comes from Steve Tusa of J.P. Morgan. Please go ahead. Hi, Steve. Hey, good morning. How are you? Are you in New York City? </edited_transcript I'm in the great state of Connecticut. Good for you. Okay. Yep. Yep. We're good. Thanks. Maybe one of the few guys left here when all is said and done with taxes, et cetera. You know, born and raised, so I'm not leaving. I hear you. I guess you guys aren't gonna comment really on your revenues, but, like, you know, Lennox was out talking about a 15% decline in the industry. I mean, any broad color on kind of, you know, what you think the industry is gonna do this year, not really talking about you guys? Gee, I'm not that smart. Paul, do you wanna give it a shot? Boy, Al, if you're not that smart, I'm certainly not that smart. You know, Steve, you know, we represent so many different products, and we represent so many different OEMs, and constantly polling them for what their outlooks are and that type of thing. Frankly, there's no consensus that I've been able to locate out there, you know, to guide us in our direction. You know, we're with the market. We think we can outpace the market and outgrow the market. Whatever that market is, we think we're gonna outperform it. That's about as close as I can come to a guess on what's gonna happen. Right. Right. Okay. On the margin side, how are you guys thinking about gross margins kind of over the course, you know, assuming, I don't know, if you assume kinda trends that are in line with the first quarter, I guess, or like a flat kinda revenue dynamic? Like, where would you how do we think about gross margins going forward here? I understand why you wanna know that, but again, that's hard to predict. But ne-nevertheless, let me tell Mr. Logan he should try to answer that. Sure. Well, again, with the concentration in equipment and the OEMs, you know, having, you know, fairly close watch over their own pricing and margin, I don't think there's any disruption or any real strangeness or weirdness that we would expect to come from that. The price increases of a couple of years ago obviously did disrupt what ended up being margins, and we're kind of climbing through that and working with our OEMs through that as well still. Steve, I don't expect anything dramatic or epic or disruptive or necessarily helpful either, as we're in this kind of, you know, this kind of arena. I, you know, I think, you see some progress in terms of, you know, this quarter versus the sequential change of last quarter and the prior one. again, we'll get into the season, and we'll know more, but I don't expect any disruption to price. I guess you guys had guided for up gross margins last quarter. I mean, is that? Did we kind of read into that too much? Is that still kind of on the board, or maybe misread that comment? Oh, gosh, whatever we did last quarter, no pandemic was in view at the time. That's a very very fair comment. Just one last one. I know you guys don't touch commercial a ton, but you know, what are you seeing there in the last several weeks on the commercial, you know, unitary front or VRF front? Paul? Yeah, obviously Well, the Northeast for sure. Yeah. It's very heavily skewed towards internationally and the Northeast for us on the VRF and the commercial applied products. It's, you know, all those projects and jobs have basically been stopped, so Right Perhaps we'll have a little backlog there. On the unitary side has been weak. You know, it's gonna probably be a little bit longer term before that comes up. Once again, when you take commercial in total, it's, you know, small % of our total business. They just, you guys always have a good window and, you know, hear what's going on out there, so thought I'd ask. Yeah. All right. Thanks a lot, and, best of luck to you guys executing through whatever comes the next couple months here. Thanks a lot. That's very nice. Thanks, Steve. The next question comes from Jeffrey Hammond of KeyBanc Capital Markets. Please go ahead. Hi, Jeff. Hey, good morning, guys. Just on, I guess, you know, maybe focusing on the one Q margins, which were down, you know, I know it's a shoulder quarter. Can you just give some better color, you know, because I think you gave, you know, on the same store and ex the investments, you know, margins were still down. I'm just trying to understand, you know, was it mix? Was it some, you know, another added, you know, SG&A costs, et cetera? I'm not sure I understood, but Barry, you're the numbers guy. What do you got? Sure. Well, on the gross margin, Jeff, again, we do operate with higher gross margins, internationally and in the Northeast. So there's some algebra there that did impact the, you know, the performance, you know, in the quarter, accounts for some of the profitability, dropping down to the EBIT line as well. On SG&A, we, you know, there were investments made in the business to start the season as we get into the year, and that SG&A does stand out in a, again, in a shoulder quarter like this. Some technology investments, as we highlighted, is in that number as well. So it goes into the mix of how our leadership is managing their local markets and SG&A will play out very differently and very sensitively to what's going on in local markets. to start the year, you know, just some of these numbers show up more materially in terms of their impact in the shoulder quarter. you know, I keep trying to communicate a picture here that financial strength that we have, little or no, you know, very little debt, allows us to move with the market wherever it goes. If it gets softer, we use all the attributes that we have. We've talked about diversity of products. We've talked about technology that allows for speedier service. We've talked about our ability to finance the contractor and the homeowner. All these things come into play, so I'm very, very happy in our position now. I'm so glad we have very little debt. I just think that wherever the markets go, we're just gonna be a probably the strongest distributor out there. This is AJ. I have to say that in my own words, I appreciate the micro questions on the Q1 and April and, you know, those are very hard to see forward. We have to remember the macro picture of Watsco. This is a long-term company, and we have tremendous leadership at the local and the regional level. In the words we used earlier, we've got our heads down. Every part of the business and everybody in the business is focused on not surviving this pandemic, but how we're gonna thrive and how we're gonna be a better company and how we're gonna take market share. The early results of what's in play and the expectations of what, how we'll operate and what we'll look like on the outside of this relative to our competitors is exciting, and it makes me very proud. You've heard some examples with the contactless pickup. I mean, that happened in about 48 hours on a manual basis. In the next week or so, that'll be digitized throughout our apps facing the contractors and apps facing our warehouse guys and teams. That will transform how we operate, and the customers love it, and this is just one example. just there's a lot of exciting energy going on, about processes, about leveraging our technology and our data in ways that we never even thought to explore before or put more focus, more heads down, and we're gonna thrive. This is awkward to say maybe, but it's sort of an exciting time from that perspective, if you think of the long term. Okay, great. Then just, you know, I guess if we get into an, I mean, it sounds like you're seeing some stabilization into April, but if we get into a period of, you know, 5%-10% declines, you know, this settling season because, you know, the economy's taking a big hit and, you know, unemployment's high, et cetera, do you guys anticipate just continuing to invest through that decline period? Absolutely. are there ac- No, absolutely. We will. That's the nature of our thinking because our financial strength allows us to invest, during downturns as well as, steady markets. We are long-term orientated, and we have the ability to invest, and we'll continue to invest. Yeah, that's what I mean. I mean, we're relatively a $5 billion revenues in that size. It's a $40 billion market. We're very ambitious. In order to get some growth, you gotta continue investing, and you gotta continue improving the customer experience, things that we're really getting good at. We're not gonna stop the investing. Jeff, we reminded everyone in the press release that in 2009, that is when we made our largest investments in our careers. It wasn't just buying a company or doing a joint venture, it was adding capital and adding branches, adding people, adding an entire renaissance to a business in the middle of the recession last time. Dividends were increasing and cash flow was increasing. Again, it's a script that we know and can play out. Hey, just a final one on the mobile. I just wanna 'cause it looks like about 8% of your contractors use the mobile app, but like 36% of sales are e-commerce. Is that just that still a lion's share of the e-commerce is done through, you know, computer-based, you know, online ordering? Or, you know, I just wanna understand like the difference between mobile app usage and ordering on there versus just kind of the broader e-commerce comment. Well, I don't know where you got the data, but we've expressed that data in the press release. Pick it up from there. No, no, I have it. That's what I'm pulling out of the press release. Yeah. Yeah. You're looking at weekly active users on the mobile app. I mean, if you look at monthly or quarterly, you know, it's a much larger portion of our customer base. Those numbers, you know, double. I mean, last year, for example, in 2019, which is the number I have off the top of my head, I think we had about 110,000 unique users of our mobile app. So it's a much bigger portion than your reference. Yeah, I mean, mobile app, by the way, is focused on technicians in the field, right? The idea is that when a technician shows up at your home, he can very quickly understand what system you have, all the components in it, understand which part he needs, see those inventory in our locations, get every document ever written about that part and that piece of equipment, check warranty, process warranty, order the product, have it delivered. I mean, that's very much a technician tool, and an extension of e-commerce, but it goes well beyond just the e-commerce capabilities. Okay. The mobile app usage is much higher than what you would have indicated in the press release. That's just a point in time number or? Well, it's just the period that you're looking at. The number in the press release is weekly unique users, average weekly unique users. The number I gave you before was increased in 2020, or the run rate has increased in 2020. Okay, great. Very helpful. Thanks, A.J. The next question comes from Chris Dankert of Longbow Research. Please go ahead. Morning, Chris. Hey. Morning, Al. I saw the Credit for Comfort numbers, utilization's up quite a bit there. Obviously, Watsco goes in a very strong liquidity position. You know, how are your customers feeling right now? Is there any stress there? Just any comment on credit, yeah. That's a great question. Yes, they're feeling it, naturally. That's where we come in. We can help them. We can give them dating programs so that they can use our money to develop their business. We can help their consumers same way. It gets rough for our contractors. As we continue to say, that's when we shine. When things get tougher, we use our financial strength, which, some of our competitors don't have to use. Could you add to that, Barry, Paul, or A.J.? Yeah. Yeah, I can. A.J. I'll take a stab, Barry. I mean, we have probably about 2,000 Watsco associates calling on contractors every day over the last several weeks. The first question being, "How can we help you?" Is it access to product? Is it longer credit terms? Is it whatever it is. We are getting interaction with customers that we do business with often and customers that we don't do business with often. There's a lot of follow-up activity. There's a lot of goodwill being earned. There's a lot of more exposure to some customers that we don't or contractors in the market that we don't touch every day, that are now understanding who we are, what we're capable of, and how interested we are in helping them grow their business. These contractors have a long memory. Even in periods, especially in periods when they might have some difficulty in their markets or with their customers, when we are there and we're providing a helping hand, it's not only helpful now, but I believe it will again potentially change the paradigm going forward. Go ahead, Barry. Yeah. Chris, you mentioned about the Credit for Comfort, and just to be very specific about what that is. This year there'll be about 7 million replacement systems sold in the U.S., and only a very small fraction of them can a contractor sit with someone and offer credit to help that homeowner acquire that system and install that system. Consumer credit really has been a laggard in this industry for most of my career. Credit for Comfort is our digital platform that takes all of our product information, takes all of our capabilities as a distributor into the contractor and into the home to help, you know, provide consumer credit through different credit companies. We don't provide the actual financing. This is all third-party financing, but bringing the actual technology into a digital platform that's easy to use, that a contractor can use to grow its business. That's the growth that we're seeing because inevitably, you know, two things can happen. Innovation can help the entire equation, and then necessity helps the whole equation. Part of that customer engagement over the last, you know, several weeks is engaging contractors in that potential of this financing platform. That's what Credit for Comfort is. Got it. Thanks so much for the color there. Certainly a market share opportunity to be had. I guess just one other thing for me, you know, is there any way to quantify kind of any additional cost to operate some of the shorter-term costs, I assume, in terms of social distancing, additional PPE, that kind of thing, or can't you really break that up from the SG&A at the moment? Oh, no. Those categories that you mentioned don't apply to us. We're not installing anything. We're, you know, our customers are. I don't see any additional information there. Anybody else? Paul? No. No, we're really not. Really hasn't impacted us. Yeah. I just think in the DCs, trying to make sure everyone stays safe, but yeah, obviously if it's a smaller impact, then non-material. Well, thanks so much, guys. Good luck and take care. Thank you. Thank you. Thank you, Chris. The next question comes from Corey Fulton of Gabelli Funds. Please go ahead. Hey, guys. How you doing? Where are you from? What firm are you in? I'm with, Gabelli, Mario Gabelli. Oh, I know that guy. He's a good man. Yeah. He was sad to miss you when he was in Miami a few weeks ago. He met my better half, my son. Yeah, that was like the most fun 30 minutes of my month. You know, that was great. He's fun. Yeah, he could ask some very straightforward questions, so. Guys, just a quick question here. I know you guys made a flurry of acquisitions, last year, and typically when you make those acquisitions, they're a little bit below the normal margin of the overall business. Can you just kind of give an update on where margins for those acquisitions are now, and how COVID might impact or prolong them reaching the overall Watsco margin level? Well, generally speaking, we don't ask them to change their gross profit margin because that's not our business. They have to figure out. Boy, I just had a phone interruption. Is that just me? Hello? Yes, we can hear you. Yeah, we're still here. Yeah, we can hear you. It's very difficult. In fact, we cannot answer that because those three companies are very independent, and we want them to be very independent. We want them to continue very entrepreneurial. If they need us to improve their margins, they'll use us. I cannot answer that question. Okay. I think that may be an answer to my second question, which is so I know it's obviously a decentralized business model. You allow your regional managers to make decisions at the market level. Anything in terms of what you're seeing or potentially seeing from a maybe a cost-cutting perspective, anything impacting the business in terms of layoffs or furloughs or anything like that so far maybe is giving you an indication of something that might take place throughout the year? You're talking about these three companies that we acquired or in general? No, just overall business level for this question. Oh, Barry? Yeah, again, as you said perfectly, you know, it is a decentralized model and that local knowledge and that local intimacy with the market is gonna play out, and SG&A is gonna be the component of that leader's daily life. As A.J. said, so is growth. How can we engage more customers? How can we grow our business? How can we add more technology? How can we do more training? All that is going on at the same time. It is a dance. It's a short-term dance with managing the business and a long-term hustle to grow, share, and to invest and get more business out of this. Both are going on in the local markets. There's no one answer. There's no big paintbrush here at all. It's all being dissected and led in local markets. Yeah, no, I'll just pick up, A.J. I'll give you just an anecdote to your first question as well. Those three businesses we acquired last year are in the Northeast, which is the epicenter of this pandemic. The benefit that they are realizing, which I've paid witness to, is the ability to just communicate with each other. These are business leaders that have very successful businesses that have been doing what they do for a very long time, but they are connecting at least weekly and sharing ideas and hearing what each other are doing and seeing if there's ways to help each other or share each other's resources or what have you. again, just being a fly on the wall in those conversations, I know how valuable those are for those guys and how helpful it is to be part of a bigger company like Watsco that has that sort of resource. Okay. That's. Thanks, guys. I appreciate the color. That's it for me and Al and AJ. I'll make sure to tell Mario you guys said hello. Please do. Thank you. Please do. Thank you. Yeah. Again, if you have a question, please press star then one. The next question comes from Blake Hirschman of Stephens. Please go ahead. Good morning. Good morning, guys. First one for me. Could you give us any rough sense as to, you know, what kinda top line declines or just really what kind of combination of different factors would have to occur, for the dividend to be at any risk of potentially getting cut? Oh, gosh. Barry, I haven't got a clue. Barry, go ahead. I mean, we're in such financial strength that if this slows down, our cash flow increases, it doesn't decrease. I mean, I'll give you a textbook answer, then I'll give you some track record answer, and I think both are, you know, can be given the weight that you wish it to. You know, Al's right. This is a business where if revenues go down, working capital responds within a few days. You know, we, I mean, we're placing orders with OEMs every day. We're collecting money every day. Our working capital, you know, essentially gets adjusted every day. In a short period of time, working capital gets produced and cash gets put in the bank and is available for use either in paying off debt. Today, for example, our debt is under $100 million. The idea of- It's $85 million. </edited_transcript That's right. The idea of having a bit of an ATM machine in a softer environment is both, again, comforting, but also it helps answer the question of having cash available to sustain a dividend and keep people very involved and comfortable in the story. The track record is in going back to 2008, 9, 10, again, we were seeing three things. Epic knives falling in the market in terms of new construction coming out, an immense investment being made in the Carrier joint venture, second thing, and third thing, our cash flow and dividend went up about 60% during those three years. Those are pretty epic, you know, bullet points to answer your question. What does it answer your question for the future? We'll see. You know, that's the track record, and I think that's the good mechanics to what goes on in this kind of condition. Got it. I know a lot's changed since last call, but I believe there was like some ongoing OEM price cost negotiations. Did everything that's happened, you know, the pandemic and stuff, has that impacted, you know, those ongoing talks or is the margin outlook and stuff just more based on the uncertainty around what happens with the market? Oh, our OEMs, are very cooperative. We work as a team. It's in their best interest also to keep us competitive, and I certainly feel they're doing that. It's just a very strong relationship. We are generally I think we have a thousand vendors and I'm guessing, but I think we're the largest customer of a thousand vendors. </edited_transcript Yeah, Al, I would have fun and say in the last 59 minutes since this call started, we've been, you know, pricing and competitiveness and reaction to marketplace dynamics has gone on in the last 59 minutes, Blake. There's no end to that. In this environment, again, we think we have more data technology insight, corroborating evidence across markets of what pricing and margins should be, and it's a every minute of the day grind. We and this is Paul. We end up working with our vendors on a daily basis to make sure that we've got a steady flow of product coming in, that there aren't any interruptions on the product that we have. There's a change in the market conditions is reacted to almost almost immediately. We have a whole team of people at the operating units who are working those relationships not only at the OEM level, but also at the vendor level. All right. Got it. That makes sense. I'll leave it there. Thanks. Thanks a lot. Yeah. Bye. Thank you. As there are no further questions, this concludes our question and answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks. Yes, thank you very much. I wanna say again that I'm sure hoping that all of you are safe and stay healthy and let's be together as Americans during this pandemic and come out stronger than when this started. I certainly hope so. Thank you again for your interest in our company. Bye now. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.