Earnings Call: Q4 2018

Feb 14, 2019

Good morning. Welcome to the Watsco fourth quarter 2018 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Al Nahmad, CEO. Please go ahead. Good morning, everyone. Welcome to our first quarter conference call. This is Al Nahmad, Chairman and CEO. With me is AJ Nahmad, President, Paul Johnston, Executive Vice President, and Barry Logan, Senior Vice President. As we always do, before we start, the usual 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. 2018 was another record performance year with sales, operating, profit, net income, and EPS all reaching new highs. 2018 also represents a milestone marking Watsco's 30-year anniversary in distribution of HVAC. If we reflect for a one moment on our distribution history, we have accomplished much as evidenced by gaining the industry leadership position while generating a 30-year compounded total shareholder return of 18%. I'd like to repeat that. We've gained the industry leadership position, and we've been producing 18% compounded returns for our shareholders for those 30 years. While that is a heck of an accomplishment, we passionately believe Watsco is still very much a work in process. Substantial room to grow exists, given a moderate share in the $35 billion North American market. Great family businesses exist in this industry, many of which were founded more than 20 years ago. It would be very satisfying to associate with more of them and sustain their legacy as part of Watsco. We also have strong OEM relationships, and in many cases, I would say in most cases, Watsco is the OEM's largest customers. We also believe that we are still far from reaching our full potential and scale with our OEM partners. Furthermore, in recent years, we have developed a culture of innovation and have launched a number of technologies for the benefit of our customers. In terms of adoption and scale of these technologies, we are only partly there and have yet to realize the long-term benefits that we believe are possible. Our leadership team is filled with talented, ambitious people that have long-term equity to drive performance over the span of their careers. I consider this most important, our balance sheet remains pristine and allows for almost any size investment. On to the year. 2018 was a record year with success in many markets and challenges in many other markets. On balance, it was another solid year of growth while continuing to invest in technology as well as in our organization. Our press release provides important details about Watsco's 2018 performance, including a summary of important technology metrics that might highlight our progress. I really would encourage reading that press release. It's a very thorough report on much that's going on in the company. I will not recite these details in my prepared remarks. We will be happy to provide more color during Q&A. One last thing I will add is an invitation to visit Miami and spend time with us to learn more. We wanna be accessible and informative to those that are interested, not to mention the fact that Miami is a great place to visit. With that, AJ, Paul, Barry, and I are happy to answer your questions. We will now begin- Albert? Yes, I'm here. We will now begin the question and answer session. To ask a question, please 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. At this time, we will pause momentarily to assemble our roster. Our first question comes from Robert Barry with Buckingham Research. Please go ahead. Morning, Robert. Hey, guys. Good morning. Congrats on the 30-year anniversary. Thank you. Feels good. Just trying to think about the growth rate going forward here. I mean, given what's happening in Florida, and I guess Latin America too, do you think this 3% growth you posted in the quarter is kind of how we should think about where the business will be growing, at least in the kinda near to medium term? Gee, I hope not. We certainly don't think that way. I mean, it sounds like. I mean, these markets change from time to time. The only thing we've found over the last 30 years is that we're steady. Sometimes we grow at a faster rate than at other times, but we always grow. I wouldn't be happy with 3% growth rate in revenue. Yeah. I mean, is there any relief in sight on the pressures that you're facing in Florida? Mr. Johnson. The pressures we feel in Florida is just there was a slight slowdown last year towards the second half of the year. Obviously, 6 months does not make a trend for Florida. It's gonna be hot in Florida this summer, and our full expectation is that we're going to recover what Florida will recover and our sales will grow again. Yeah. In 2019, I mean, what do you think would cause it to improve? It seemed like it was down double digits in the quarter. In which quarter, Robert? Absolutely not. No way. Yeah. No. Yeah. I was just, you know, rough math, it seems like the business grew three or seven ex Florida. I don't know exactly what % it is of the business, but I mean, big picture, I guess it's causing some real pressure, and I'm just curious what you think would cause the pressure to alleviate. Well, I think we've answered that. Just, yeah. I just think it's gonna, you know We went into a slight downturn in the state of Florida in the second half of 2018. It's our expectation that we think it will try to normalize again in 2019, and we'll grow our market share again, as we always have in Florida. For us, it wasn't a market share issue, it was a market issue. Not only that, you know, when we first started, we were primarily a Florida business, and we knew there were risk in focusing in one geographic area. In order to produce steady results, we decided, and very actively, extended our distribution throughout the nation. Sometimes you'll have soft markets in part of the nation, sometimes you'll have strong markets. That's what's happened to us this time. I feel very confident that because we are diversified in geography, that we'll just be a steady grower in a steady, strong market. Got it. Robert, I just want to While Robert is there, I just want to clean this up so we're clear. Okay. There certainly was growth in Florida in 2018. As Paul suggested, the second half didn't equal the first half in terms of growth rates, and that slowness affected earnings because the, you know, the infrastructure is built at a higher level, and that can be addressed. It's Latin American markets are the ones that had sales declines in 2018 and an earnings decline after really 4 or 5 years of pretty incredible growth. So that team has the same task, reacting and to market conditions and reacting with SG&A and reacting with market share and moving forward. Just wanna make it very clear about growth in Florida this year. Okay. Okay. I guess my other question is really just on the SG&A performance, seeing that grow above the rate of sales or close to it. Just curious what the goal is there. I know you'd spoken about 250 excess headcount that you were gonna try and work down. Curious where that stands and just what the expectation is around the SG&A growth going forward. Thank you. Perry? Again, Robert, the concept was, during this technology phase the last few years, was to have our team in the field, prepare and do and execute and prosecute all this stuff as they saw fit. It did add headcount throughout that period of time, and both technology headcount plus the 250 people you're talking about. Now the challenge is make something of it. It's not cutting headcount, it's not reducing the workforce. It's asking our leadership to go back out in their 2019 execution and plans to make hay out of those investments as well as, you know, be wise about growth versus SG&A growth. We've done that. We've asked for that. They've produced plans. We are comfortable going into 2019 that it'll be a better, you know, a better spread between sales and SG&A. In February, we're not going to project that out for a full year 'cause, you know, the market really for us shows up in spring and summer. Those, you know, those plans have been laid for 2019. Got it. Thank you. Sure. The next question comes from Brett Linzey with Vertical Research Partners. Please go ahead. Morning, Brett. Hi, good morning, guys. Just wanted to follow back up with the Florida, Latin America. Just to be clear, Florida did not decline in Q4, it was all just a Latin America issue? Is that correct? That's correct. Yes, that's correct. Okay. Could you maybe size how large Florida and Latin America are as a % of sales? Then I guess the follow-on to that is, what really is the root cause there? Are you seeing increased branch coverage from competitors in those particular regions? Then any sense as to what the markets did in the quarter? Barry? Well, there's a lot there in the question. We'll focus on Florida. About 20% of our locations are in Florida. If you wanna impute something, you can probably use that as a baseline, number one. Which would make it, you know, approaching a billion-dollar business. Obviously, if you look at any competitor in our market in Florida, there's nothing that's close that I think is going to irritate market share to the extent that anyone might wish. As Paul just said, point-blank, you know, we did gain share in Florida. We can see the industry data, we know our unit data, and are comfortable with saying that. It is a market issue in the second half that simply needs to be reacted to. Latin American markets, again, I think our 10-K breaks out some of our foreign operations as percentages. It's in the, probably the 4%-5% range. You can look at the 10-K and verify that and validate that. It is a profitable market, again, has been growing exceptionally well the last few years. You know, it's part Mexican politics in terms of the elections, I think now that that's been settled, that's something that our team can move forward on with knowledge in what they're doing. You also have a weaker U.S. dollar in some of these markets that makes our products more expensive in those markets. Again, that's a reaction that OEM and distributor and customer and our teams, you know, react to in those markets. Okay. Yeah, appreciate that color. Just in terms of the field level incentive comp for 2018, a bit of a headwind here in Q4. What was the total spend for 2018, and does that continue into 2019 as a, you know, incremental spending headwind? It's all ears, Barry. All right. Well, again, it is a pay for, pay for performance culture. When we talk about incentive pay at the field level, it starts with 570 branch managers. It starts with their teams, their regional managers, and their leaders in the markets. There's about 30 such divisions that operate PNLs within Watsco. Many of those 30 had very good years versus last year, and many of those 30 have earned and been paid incentive compensation in excess of last year. That's really a scorecard on how well much of the company did this year versus last year, and we've given you some insight into the data behind that. It's simply that pay for performance being better this year in many of those regions. For next year, 2019, I hope all 30 hit their budget. I hope all 30 have incremental incentive pay. I hope all 30 reach those targets because it'll be good for Watsco. Obviously, in 2018, you see a couple large penalties in 2 big markets for us. That doesn't mean the rest of the company didn't deserve and earn and get paid more incentive comp. Okay. All the catch-up was basically in 2018 and nothing else expected in 2019 until you kind of prove it out. Is that the right way to think about it? They must grow EBIT. Yes. They must generate cash flow to earn, and the answer is yes. Yeah, the answer I think is. Okay, great. I appreciate it, guys. You bet. The next question is from Ryan Merkel with William Blair. Please go ahead. Morning, Ryan. Hey, good morning, everyone. I'm sorry to ask more Florida questions, but just wanna be clear here. It's okay. It is your biggest market. Did trends sort of level out and stabilize in the fourth quarter? Is that, is that the read here? Paul? Yes. Yes. In the fourth quarter, we did see a pickup in the quarter, which brought Florida overall as a market for the year at about even to 2018. Yes. Okay. things aren't getting worse, potentially stabilizing. Can you comment on was the whole state of Florida weak? 'Cause I'd heard it was mostly South Florida. Can you just comment there? Wow. We don't have that level of expertise to be able to give you that, I don't think. It was a pretty much across the board Florida weakness that we saw in the fourth quarter. Maybe a little bit stronger in the north, but not a big move. I mean, the downturn wasn't that severe. It was just a very small downtick. Okay. Which we haven't experienced in several years. You don't view this as a leading indicator for the rest of the HVAC industry at this time? For the rest of the HVAC industry at this time, I would say no. I think in most areas of the country, we're still seeing a buoyancy from the replacement market that's gonna continue to grow. Okay. We have good analytics and we use our analytics internally for our strategy sessions, and we feel pretty good. Okay. Just secondly, you mentioned growth initiatives you're initiating with supplier help to take share. Can you just expand upon that a little bit? You know, those are, really, those are our best kept secrets until we launch them, and it's just not something that we wanna present out. Be glad to talk about them at the end of the second quarter at the second quarter call, because by that time, we'll implemented them, and they'll be out in the field. Yeah. No, that's fair. Thanks. I'll pass it on. The next question. Hello? Did we just lose? I'm here, but I heard that. Hi. Yeah, we lost you. The next question is from Stephen Volkmann with Jefferies LLC. Please go ahead. Morning, Stephen. Hello? My apologies. A slight technical error. If Stephen Volkmann would mind getting back in the queue, I will put you on next. Right now, we do have David Manthey on the podium from Baird. If you would just go ahead. Yeah. Hey, good morning. Hi, David Manthey. How are you doing? I apologize. Jeff Hammond is on the queue. KeyBanc Capital Markets. Good morning, Jeff. Hey, morning. We'll get it right. You know, I guess looking more broadly, you know, away from just the Florida and America or maybe that, you know, simply answers the question, you can see that the AHRI data better, but it just seems like the, you know, the industry data has been much more robust, you know, on a unit basis even than your total growth, and I imagine you had some price in there. I'm just, you know, as you kind of analyze, you know, market share shifts, you know, what's kinda, you know, what's kinda driving the apparent share loss? Did you hear that, Paul? Apparent share loss. I sure did. Apparent share loss. I don't go with that, Jeff, you know, I do have good data, you know, looking at the entire country, frankly, you know, what we saw was a more normal growth rate in a lot of our smile states in the Sun Belt. When you got up into the Midwest, around the Cleveland area and Detroit, Michigan, Illinois, those states were up strong double-digit. In fact, we saw some states in the Midwest up by 25% to 30%. Those states that have a weather impact to them, you know, grew faster this year. You know, we saw very strong sales throughout our Northeast and New England. They're a small part of our overall picture. They just don't represent enough to overcome, you know, what we have in the Sun Belt. We've always been a very, very strong player in the Sun Belt, as you know. I would characterize it as a year where you had, you didn't have a flat growth rate across the board. When you see the entire industry up, X%, you know, it could be up 20%, 25% in some states and, you know, flat to down some in other states. Just on free cash flow, it looks like, working capital was a pretty big use this year. Inventories build. Can you just kinda, you know, speak to that, you know, around, you know, around the inventory levels. Sure. There's 2 things, Jeff. Obviously, the units that we own at the end of this year are at a higher price, that would drive some inventory investment. Also, coming into this year, we did decide to use our balance sheet and bought some products at the closing bell, so to speak, in December that averts a price increase heading into 2019. That lets us, you know, have some either profit or competitiveness in our pocket going into 2019. That's, you know, the inventory story. There's also a tax story, which we explain in the press release of the timing of tax payments between last year and this year. That's about a $100 million swing in working capital if you compare it year-over-year. That's just really something that happened in 2017 from the hurricanes that didn't recur in 2018. Moving forward, cash flow will not have any influence like that. If we work inventory down from this point, which we expect to for the rest of the year, this is gonna be a strong cash flow year. Okay. If I could just fit one last one in. Barry, can you just kinda re-explain the non-vested restricted stock line item? It seems like it kinda, you know, if you sum it for the 4 quarters, it doesn't equal the year. You know, I know that kinda swings the, you know, kind of full year EPS a little bit. If you could just help us understand that. Yes. Well, again, this is Barry, the accountant for a second, Jeff, I appreciate it. I appreciate being able to do this for you. Restricted stock, obviously is a percentage of our outstanding common stock, the accounting for the restricted stock is really done through the EPS line. The numerator simply is a matter of, for EPS, takes our income, subtracts what's allocable to restricted shares, and that's the numerator for net income in EPS. If there's a quarter where our cash dividend exceeds earnings, that is also accounted for in the numerator for EPS. A quarter like we were, what we were just in, where our dividend rate exceeded our EPS rate, there's a small, there's a $0.03 hit in that quarter for that impact. It doesn't affect the year. It doesn't affect the first half of the year. It just affects quarters. That algebra affects quarters where that's the case. That doesn't make any sense to you at all. I can explain it again. What I wanna say is this: In the first quarter of 2019, where our dividend rate is now $1.60 compared to, if you look at what consensus EPS is, for example, the dividend in the first quarter will exceed that, and we'll have to do the algebra. When you build a model, you'll have to do the algebra for that, just for the quarter. It does not impact the full year. Again, feel free to call me back, and we can go through it. It's something that has to be carefully modeled in the first quarter as we head into 2019. Okay. Thanks, Barry. The next question is from Stephen Volkmann with Jefferies LLC. Please go ahead. Hi, Stephen. Good morning. Good morning, guys. Can you hear me this time? Perfectly. All right, great. It's always fun to be speak out into the ether with nobody there. Fine. Anyway, thanks for looping me back in. A couple quick things. Barry, I think you mentioned a couple times, and I just wanna make sure I understood this correctly, that, you know, you have plans set up to sort of size the business or sort of react accordingly relative to what you're seeing in places like Florida and Latin America. I'm just curious if you can expand on that a little bit. I think you mentioned something about gaining share, but is there something to do on the cost side as well? Should we be modeling, you know, maybe some slight declines in SG&A or something as a result of this? Well, again, let's talk about culture to answer it initially. The answer is yes, though. We expect that in these markets that our leadership react in on the cost side, because that's how you can help grow earnings. The more definite opportunity is to grow sales and then make hay during that type of a period and really use these conditions to fire things up and gain share. Both are going on. It's not one or the other. It's absolutely both. In terms of materiality to the whole picture into 2019, I think culturally, again, we're pushing for better SG&A performance just in general. In these specific markets, you know, probably the efforts will be that much more. This is a really universal, you know, kind of leadership challenge we've put out across the 30 business units and having, you know, the culture react to the conditions and not just these individual markets. Okay. Good. Thanks. Then maybe if I could just switch to some of your technology investments. I think you said in the release something like 30% of your business is going through your digital platforms. I think I have that right. I'm curious, I'm sure that's a rounded number, but I'm curious how that sort of trended through 2018 and what type of curve you think we should think about going forward. Maybe as a quick follow-on, I'm guessing it's probably a lesser number of your overall customers who actually do more business with you. Just I guess I'm trying to get to is, you know, are you satisfied with the take-up at the customer level? Is there more you could be doing to shift people in this direction? Just any commentary around that. Well, I would say that there's no question we're gonna do more. The trend is certainly there. We're gonna. It's such a great digital platform. We're gonna be very focused on going to e-commerce. No one can do that much as much good as we do with it, the information that we provide along with e-commerce, what we call the PIM, Product Information Master. It's a very valuable tool for our contractors, and we certainly expect further and further adoption. Wish I could say it's all gonna be adopted in the next, you know, number of months or years, it's just hard to say. I think it's such a useful tool for contractors, and we are so passionate about helping our contractors that we're just going to continue to improve the technology they have and teach them how to use it and be the partners in the learning curve. The answer is yes, expect growth beyond the 30%. Has the uptake been slower than you might have hoped for? You know, these are all I could make up a story, but I just don't do things like that. We don't know. We just went out there and did this. You know, nobody's done this in our industry for the scale that we have. We're very happy. I mean, we started this, what was it, AJ, four years ago? Right. Now we're $1.2 billion, of a four and a half billion dollar business. I mean, it's satisfying. It's gratifying. Do I think it's a great service to the contractor? We absolutely believe that. Do I think we're gonna have much more adoption of it? Yes. Can I tell you when that's gonna occur? You know, you guys ask those questions, and we try to answer them, but we really don't know. If the trend is followed, it's going really good. Okay. I appreciate the color. Maybe, Barry, is there any meaningful change in spending on these things going forward in 2019 versus 2018? Well, there is one. AJ? Go ahead, Barry. Sorry. No, go ahead, AJ. No, maybe I can give some context since we're talking technology. First, we've said from the beginning that we're a long-term company, and this is a long-term program to really modernize our business. It's not just technology. It's people, process, technology, and being competitive in 2019 and for the next 20+ years, 30+ years. This has been a very deliberate and very important process for us. We've been very cautious in our approach. We've been risk-averse in how we do this. We're okay taking our time and trying to get it right. Over the last 4 or 5 years, really what we've done is reestablished a foundation of who we are as a business and what our capabilities are, right? Business intelligence, data analytics, e-commerce that you mentioned, Product Information Management, where we now have 800,000 or so SKUs mastered in our database, Our contractor apps, our apps in our warehouses, these are all platforms that have all gone through a cycle of due diligence and design and development and eventually rollout and now adoption. Again, there's been serious adoption of some of these tools, right? We have 2,000 people using our business intelligence tools. We've got 30% of our sales online. To your point earlier, that's about 15,000 contractors using this tool. We've got almost 100,000 contractors use our apps last year and over 1 million times. Even our ERPs are now on the latest version of software for the first time in a long time. We've got a new web service API. I won't go down the technology. The point is that we've got this new foundation that's kind of materialized that can put us in a position to do new things, right? Take on new technologies or modern technologies to modernize our core business processes to gain efficiencies, operations of the warehouses, logistics, pricing, how we manage credit and payments, everything along those lines. It puts us in a position to take advantage of cutting-edge, best-of-breed technologies to really help our customers. Whether that's help them gain efficiencies, bring them new products to sell, bring them new ways to sell product, new ways to grow their businesses. We've got these 15,000 customers buying online, 90,000 in total. You know, I guess where we are in the life cycle of technology is we're now re-established sort of our capability set, and we're positioned to take advantage of more sales, more margins, lower cost to serve, all with the focus of helping our customers. The customers feel that, and that's why they're buying more online. That's why the adoption rates are what they are and continue to tick up. Great. Thank you. I will pass it on. I appreciate it. If David Manthey still has a question for the speakers, please re-enter the question queue. Next, we have Ronald Newman, a private investor. Please go ahead. A former employee. Hi, Al, Barry, and AJ. Hi. I just, I just- Hey. I don't have a question. I'm just calling to congratulate you on the 30 years in the industry and the absolute amazing things you've done in it. Oh, that's nice, Ron. We miss you. How long has it been? It's been 20 years. Twenty years since you left. Wow. Yeah. Big changes. Yeah. Yeah. Anyway, I knew that I could get all of you at the same time on this call. That's why I joined in. I don't wanna distract from the questions, I just think it's great. Yeah. Say big hugs to your wife and your boy. Okay. Thanks, Ron. Well, he's not a boy now. He's a big man, I guess. Yeah. 45 years old. Okay. All right. Congratulations again. Bye-bye. Thanks. Thank you very much. The next question comes from David Manthey with Baird. Please go ahead. Hi, Dave. Hey, good morning. That's a tough act to follow there. I'll bring it back to questions about the quarter here. First off, price mix has been very strong for you lately. Can you give us an idea of what price mix contribution was in the fourth quarter and then what your expectations would be for 2019 as you look at it right now? Who wants that one? You, Barry or Paul? Hello? Are you guys on the line? Are we blank again? Nobody's on? Hello? We lose them? It looks like everyone is still on. Yeah, they couldn't hear me. I don't know what's going on. Barry, are you still on the phone? They are still connected. Madam, they're not connected. They're not hearing us. Right. We're not hearing them. Okay. Let me troubleshoot a moment. Well, while we're waiting, Al, let me add to the congratulations on 30 years. Okay. Thanks very much. It's been a joy. I'll tell you this, I'm more excited about the next 30 years than I am about the last 30 years. This technology stuff is really a great way to embrace our customers in a way that very few can do. I hope to be here another 30 years. How's that? That sounds good. Where are you physically? I'm still in Tampa right now. Is it cold? Yeah, it was a little chilly this morning. It's supposed to get up to the mid-70s, though, by this afternoon. Next week is probably the 80s. Yeah, it's real nice. Nice. I have a fond spot in my heart for Tampa. I used to spend time there. Well, as you know, Watsco, was my inspiration to move to Florida in the first place, so thanks for that. Wow. If I knew, I forgot, but nice to hear. Thank you. I don't think we've ever had this kind of a technical breakdown before. Right. We are rejoining Barry Logan to the conference, and when he's back in, I'll let you know. I've reconnected Barry Logan. Hi. Well, Barry, go ahead and answer his question, if you remember it. Yeah, let's dial it back and I think maybe I didn't hear the question. Yeah. Hey, Barry, it's Dave Manthey here. My question was, you know, price mix has clearly been very strong for you lately. Any comments about what it was in the 4th quarter? As you look to next year, would you still expect a, I don't know, low to mid-single-digit kind of positive contribution from price mix? I'd rather speak to the year than the individual quarter, Dave, just to be a little careful about it. It's been kind of in a mid-single digit price for most of the year. I think the fourth quarter is similar. That's above average from any, you know, recent year or a normal year, I would say. That would be a little more moderate heading into next year. Let me just say this also in the context of that. If I take Florida out of the fourth quarter, our equipment business grew almost 9% in the quarter. There are some, you know, some real positives going on. Part of that's units, part of it's price. For next year, I think of something more normal based on what we're hearing and seeing so far in February. It's still early, but that's what we see. Yeah, that makes sense. Second, by what % was the international business down in the fourth quarter? Yeah, I'd rather not implicate that story any more than we have, Dave. It's off and it's not, you know, it's not a tsunami. It's just a, you know, a business that is high, great margin and in a short quarter like this, it has a bigger impact than normal. All right. You said it was about 4%-5% of annual sales and, you know, if it's down double digits, maybe something like that. You said it. All right. Well, thanks very much for all the time, guys. Sure. Are you still there, operator? Yes. The next question comes from Blake Hirschman with Stephens Inc. Please go ahead. Hello, Blake. Hey, guys. First off, just on M&A, it's been kind of quiet. Can you talk about the pipeline? I assume there's probably been a gap between buyer and seller expectations holding back deal flow. With the overall housing outlook having softened a bit, have you seen potential sellers return to the table and become a little bit more elastic when it comes to the multiples that they're asking for? Mr. Logan? Yeah, it's Blake, I wish it was about money. It's usually not. It's really an emotional process and a timing for a family and in terms of conversation, we would always try to meet what an owner's expectation might be in order to make them happy and reduce risk going into a deal. The real question is anything for sale? Where are people's emotions and so on. I can tell you 2 things. We've put much more effort into prying loose, prying open some of those discussions, and we're having some success. Secondly, we're using our technology story as an ingredient to that conversation, which again, I think is helping bring some success to those discussions. Like the press release does intimate, we do like the conditions. There is some good activity. I never want to jinx it by mentioning it or saying anything much about it. We do like the conditions that we're in. There has been, I would say, better actions and reactions going on in that respect. Got it. In the past, you've kind of talked about those three indicators of cycle health being margins, bad debt, and mix. As of last quarter, sounded like all three were hanging in there all right. Is there any update to provide on those? Well, mix, again, is an important one, and it's the 25th straight quarter where we've seen improvement in mix. What that means, again, is the percentage growth rate of high-efficiency systems beyond the standard SEER. That's a good benchmark for what consumers are spending and investing in their products with our customer. From a bad debt point of view, past dues and so on, again, one of the healthiest years we've had, and certainly current trends are again, remain favorable. You know, price and Price and unit volume, if we're growing gross profit margin, which we did in the fourth quarter, and the year, our equipment business even more so than optically what you can see in our financials. That speaks to, you know, the ability and capability of passing through price and gaining that. That is, you know, those are positives that remain. Got it. Just lastly for me on the UTX split. Carrier obviously an important strategic partner of yours. With the planned breakup now confirmed, can you touch on some of the dynamics at play there and some of the more structural or bigger picture impacts that would come as a result of them being a standalone entity? Well, we listen very carefully to the UTX report to the public. Their CEO, Greg Hayes, I think is very articulate on why they're doing what they're doing. He also has gone further to say that a separate Carrier means that they'll be more aggressive in pursuit of share market. Whereas as part of United Technologies, they had to sustain certain margins. He said such things. I expect a much more aggressive Carrier, and I think it's good for us, good for the industry, and we're gonna be very strong partners of theirs. We're gonna invest whatever is needed to continue to be the great partner. In terms of other stuff like consolidation, it seems like that's pooped out from what I know in terms of major OEMs merging or being acquired by others. Got it. I'll turn it over. Thanks. You know, operator, AJ Nahmad is not connected. Okay. We will get him connected too. I apologize for that. He looks connected on our. We'll disconnect him and reconnect him. Thank you. Next question, please. The next question comes from Jeff Hammond with KeyBanc Capital Markets. Hey, Jeff. Hello? Hello? Jeff is on the podium. We have an operator who is working to get him back on. Barry, you ever seen something like this before? It's my first experience. No. Are these new people? No. No, these are unusual circumstances. I do see that AJ Nahmad is back in. Jeff Hammond. AJ, are you on? I am on, yes. Yeah, Paul needs to be reconnected as well. Paul Johnston needs to be connected. Okay, he's being reconnected now. Jeff, can you hear the conference? Jeff Hammond? Apparently Okay, we'll get him reconnected as well. Okay. Paul is back online with us, and Jeff will be shortly. Jeff, are you on? Guess not. We are still reconnecting him. Are there any other questions? There are no other questions in the queue. Operator, are any others connected to this call? I believe that everyone is connected still. No. Yes. Let's see. Everyone shows up on my end as in conference, except that Jeffrey D. Hammond is still idle. The operator is attempting to get him back on. We actually do have another person who has entered the queue. I'll put his question on the podium. This is Christopher Dankert with Longbow Research. Please go ahead. Hi. Can you hear me? Yes. Sorry about all these problems. We've never had this happen in the past. Well, this is actually Carl on for Chris. I figured I'd just jump in front of Jeff here. Sure. When I had the chance. You kind of talked about gross margin improving in the fourth quarter, it sounded like. Can you talk about maybe where price cost is started entering 2019? Barry? Well, first, yeah. A little early. Yeah. Yeah. There were some 4th quarter price increases that were implemented. Again, it speaks to how they pass through as gross profit did go up in the quarter. There are some 1st quarter price increases for some of our OEMs as well that play out more into February and March. Again, you know, maybe some moderate benefit and then a market test in April, May, June. There is more price coming and not to the same extent, but I would say a more normal pattern should happen this year. We'll know more when it plays out in the spring. Got it. Thanks. That's all I had. Okay. We do have Jeff Hammond. He is with KeyBanc Capital Markets. Please go ahead. Jeff, hi. Are you there, Jeff? Hello? Jeff, your line should be open. You are in talk and in the conference. Are there any other questions after this one? There are no other questions after this. Barry, why don't you call Jeff? Jeff? Barry? Yes, I'll call him. Call him because who knows where this is gonna end. Operator, what can I say? This is probably the worst connectivity we've had in 40 years for our conference call. I do apologize for that. It's not your apologize. It's the owner or the manager that has to know what is going on too. Right. They will. Bye. Bye-bye. They were definitely will.