Earnings Call: Q3 2018

Oct 25, 2018

Welcome to the Watsco Third Quarter 2018 Earnings Conference Call. I would now like to turn the conference over to Albert Nahmad, CEO and Chairman of the Board. Please go ahead, sir. Cheerio. Good morning, and welcome to Watsco's third quarter earnings call. This is Al Nahmad, Chairman and CEO, and 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. Now on to our performance. Watsco achieved record third quarter results. This includes record sales, profits, net income, and earnings per share. Sales growth was driven by increased unit demand, price, and mix for replacement HVAC systems. We also announced a 10% raise to our annual dividends to $6.40 per share effectively in January of next year. 2018 marks the 44th consecutive year that we have paid dividends. In addition, adoption and use of our various technology platforms continues to grow, and our run rate for e-commerce sales now exceeds 30% of total sales. Now that our selling season is concluded, we are on a mission to accelerate the pace of adoption with customers as well as within our own organization. Further investment into technology was made during the quarter as we completed the acquisition of Alert Labs, a technology company in Canada. This is a terrific team of entrepreneurs that has talent and products to help our customers grow and become more profitable. This morning's press release also mentions a company-wide initiative to leverage our technology investment, improve productivity, and reduce costs. Watsco's culture is to challenge our leaders and provide necessary support. To that end, unprecedented investments were made in technology and our organization to support the launch of our many innovations. Given the results this year, we are now challenging our leaders to use our business intelligence platform to find and execute on opportunities. Progress was made in the third quarter and there's more to come over the next several months. Our balance sheet remains conservative with a debt to total capitalization ratio of 7%. The fourth quarter is a strong period for cash flow, and we expect to close the year with very little debt. This positions us to take advantage of almost any size investment opportunity. Now the detailed third quarter results. Revenues grew 5%, including a 7% increase in HVAC equipment sales. Gross profit increased 8% with a gross margin improvement of 50 basis points. Operating income increased 7%. Operating margins expanded 10 basis points to 9.4%. EPS increased 16% to a record $2.11 on net income of $79 million, including the benefit of lower income taxes. Looking at our 3rd quarter results a little closer. Profits in our Florida locations were down $3 million after growing during the 1st half of the year. Margins and mix were all positive, unit growth was offset single-digit during the 3rd quarter. In Mexico, profits declined $2 million on lower sales. More importantly, all of our other operations had a terrific quarter, achieving an 8% sales increase, including an 11% increase in HVAC equipment sales, along with 18% higher operating profit and expanded margins. Now results for the 9 months. Revenues grew 5%, driven by a 7% increase in residential HVAC equipment. Gross profits increased 6% with a gross margin improvement of 10 basis points. Operating and income increased 7% to a record $314 million. Our operating margins expanded 10 basis points to 8.8%, and EPS increased 18% to a record $5.43 on net income of $203 million, including the benefits of lower income taxes. In terms of our outlook for this year, we estimate annual EPS in 2018 to be in a range of $6.40 to $6.50 per share versus 2017's adjusted EPS of $5.54. This represents a growth for 2018 of 16%-17%. Finally, let me highlight important fundamentals that differentiate our business from others. Watsco's primary markets are large, fragmented, and replacement driven and provide opportunity for steady growth over the long term. In addition, our conservative mindset towards debt and maintaining a powerful balance sheet provides us safety and the flexibility to take advantage of any size opportunity, especially during periods of economic volatility. Given the large amount of long-term equity held by our leaders, Watsco's culture remains risk-averse with a focus on the long term. We believe our culture and actions will continue to serve well all of our stakeholders, our customers, our fellow employees and their families, and our shareholders for many years to come. With that, A.J., Paul, Barry, and I are happy to answer your questions. We will now begin with the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using 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. The first question comes from the line of Brett Lindsey with Vertical Research Partners. Please go ahead. Good morning. Hi. Good morning. hey, just wanted to focus on the incremental costs on investments. You did indicate they're approaching, you know, $25 million this year. How much does that need to step up next year to achieve the fulfillment and continued rollout of the technology strategy? Sure. Let me ask A.J. Nahmad, who's running the technology program. Yeah, that number has been relatively consistent for some time now. As I've said on previous calls, it's more about what we see as opportunities and for long-term returns. There may be some fluctuation in those numbers, but we're probably more likely pretty consistent. Okay. Just shifting to the top line. I think Carrier realized about 2 to 3 points of price in the quarter. You know, your equipment growth was up 7. That does imply, you know, kind of low single-digit volume growth for Watsco. Just looking at, you know, shipments for the industry, July was up 8, you know, July up 14. You know, September sounded pretty strong. I'm just trying to understand, you know, what Watsco needs to do from a resource or positioning perspective to help lift that volume number going forward. Well, I'm glad you asked the question because as you saw us in our press release, we're not losing share, we're gaining share. Maybe we should explain the fundamental idea about what markets we serve. Why don't we go to our data guru, Paul Johnston? Brett, we're seeing, you know, the markets, you know, kind of split into two buckets. You know, one is where the marketplace is very weather sensitive, and the weather sensitive part of the U.S. is outside of the Sun Belt. It's up in the Midwest, New England, Northeast, Central Plains. About 40% of the U.S. market, 60% of the U.S. market is really not weather dependent. What we saw in the summer, the entire summer, not just the quarter, but we saw it incredibly warm compared to prior year in the weather sensitive states. Degree cooling days were up 30-33% in those areas. What we're looking at right now is that the growth in the weather sensitive states where Watsco frankly doesn't play, were up materially, I would say mid-teens, low twenties. You know, whereas the Sun Belt states, when you look at the replacement demand, it was fairly flat to up slightly. Yeah. Okay. It's important for us to explain that, in addition to that these are manufacturers that you're reading the data of, not distribution data. In the markets that we serve, which are primarily replacement markets in Sun Belt, we're doing great. It's not, it's You should not compare us to the markets that we don't serve, where they're experiencing double-digit growth rates because of weather in those markets. Our markets don't react to weather. It always gets hot. Now, sometimes we show a little faster growth than others, but we're okay. We're doing well. We're gaining share in what we serve. Okay. Then maybe just to follow up on my first question on investments, you know, how did operating margins perform relative to your expectations? I guess, you know, another quarter of, you know, little or no leverage. Just trying to understand, you know, where you're seeing pressure on that cost equation. Thanks. Well, again, we try to explain the concept of what we've done. We designed software and programs to enhance our customers' business. We did the same thing internally with our business intelligence. We told our leadership when we first introduced the technology, "Do what you need to do. Hire whoever you need to go. Just go at it, because it's gonna be brand new to our customers." These customers are not used to change. Many of them have been doing the same thing for a long time, very successfully, I might add. A lot of people were added, and that's fine. We supported all that. Now that the platform's pretty much proven they should and will produce efficiencies that you'll see the return coming as time goes on. We knew what we were doing. We said, "Go at it with everything you need." They did. Now we're gonna say, "Go at it, but do it with increased productivity." That's what we expect, and we're starting to see that. We started to see it in the third quarter. Okay, great. I'll pass it. Thank you. Next question comes from line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead. Morning. Hey, morning. This is Brad on for Jeff. Just a follow-up on the demand question. You called out some flattest sales in Florida. I guess, just with, you know, the Irma comp from last year, and you called out some meaningful disruptions last year. I guess I would think that would be a little bit better, but just curious if there's any kind of, you know, dynamics underpinning that. Great question. Let's go to our data guru. Yeah, we're probing into that. You know, we had a very strong front half of the year in Florida, and then during the peak replacement year period, you know, we actually saw a flattening and even a slight downturn, obviously, in single-family replacement demand. Lot of theories out there right now. We're interviewing a lot of contractors and obviously looking at the marketplace in total. I would say right now, the jury's a little bit out on, you know, exactly what was driving that and whether it's a trend or just a bump in the road. Were manufacturer shipments into that Florida also down? Yes. Manufacturer shipments in Florida are down through September. Even though new construction, which we're a somewhat of a player in, but new construction demand is up and total industry shipments into the state are down. I guess, just a follow-up on that. It's industry-wide. It's not just Watsco. Have you seen any normalization thus far through 4Q that you could speak of? Or do you think it's, you know, like you said, a continuation of this, you know, industry-wide dynamic? Too early to tell right now. You know, October is starting out good. You know, whether or not it's a summer phenomenon. We look at the season, the primary season, which is from approximately April through September, and that's really where we saw some softness in demand. Okay, great. Thanks for the color there. Just on pricing, you know, what's your view on receptivity in the market? It seems like, you know, after a year of kind of really unprecedented number of increases from the OEMs, you know, are we starting to hit at that threshold where you're getting a little bit more kickback than you normally would, or just kind of broader thoughts around price? Thanks. Go ahead, Paul. Yeah, it's, it is unprecedented. You know, I've been in this industry for, I guess since Willis Carrier, I've never seen this many price increases. The first two, very smooth. The third one, probably a little bit of pushback. Pretty much universal among all the OEMs that we're seeing price increases. Whether or not we're gonna see any elasticity changes as far as market demand because of those, I think that's a far stretch because the price increases generally have been cumulative, about 7%-10% so far. One of the OEMs already announced a price increase next year. Correct. All right, I'll pass it on. Thanks for the time, guys. Sure. Next question comes from line of David Manthey with Baird. Please go ahead. Morning. Hey, good morning, Al. First question. Based on the data that you gave us that sales were pretty flattish, I assume that's sales dollars, in Florida for you this quarter, is it safe to assume that pricing was up low to mid-single digits? In Florida? In Florida, nationwide, HVAC equipment, anything you're willing to give us. Our overall sales increase includes both a mix of unit increases as well as price increases. In Florida specifically, our revenues included in price increase, but in the third quarter, unit sales went down slightly. Right. Okay. Yeah, Dave, I would just add to that. Margin obviously, you know, margin for the quarter is up 50 basis points. That's driven by the equipment business, and we should also tell you, in a market like Florida, margins were also higher. In terms of price realization and capture in the market, that's the evidence. Given that the third quarter, if you look at the state of Florida, precipitation was pretty normal, and we had record heat. I'm still trying to get to the why here in terms of why replacement revenues and unit volumes would have been lower. Do you put any credence in the thought that we're 13 years out from the industry peak back in 2005 that was followed by 4 years of decline? Could we be hitting that part of the curve? Do you think about that at this point? Wow. Let's go to our data guru. Yeah. Paul. That's certainly something is built into our econometric model as far as looking at demand. Yes, I do think that has some impact. Actually, it was not record heat in Florida. It was actually cooler than normal, but it was hot enough. It doesn't matter. Okay. Florida's always hot. It's always hot, and it's always gonna create demand for replacements. What we're trying to say is outside of the Sunbelt, higher temperatures does improve the demand for HVAC equipment. In the Sunbelt, it's steady. It doesn't act like the northern markets do. When you hear these great increases, you're hearing them because they participate in those northern markets that we don't have a position in, of any size anyhow. We're trying to explain this so that you understand the fundamentals, that the markets we serve, we're doing well and gaining share. In the markets that we don't serve, this particular year, they did really great. The hot weather did drive double-digit increases in those market areas. And that- Long term, we like the markets that we're in. That doesn't mean eventually we won't go north. At the moment, we like the consistency of demand for replacements in the Sunbelt areas that we originally serve. Right. Okay. yeah, I'm intimately familiar with the weather in Florida, but as you're thinking about these trends, and Paul, you mentioned it, is it possible that when you look at these unit shipment trends, that we could see slower growth, even flatness for years in the equipment business? I'm just wondering how worried should we be about this cycle? Trust me, whatever is gonna sell in Florida, we'll be doing it. Go ahead and answer that, Paul. We're gonna be gaining share. There's other market segments within Florida which we're entering. You know, we've really have been the czars of the single family replacement. We're moving steadily into other market segments now, particularly on the commercial side, the multifamily side. There's a lot of other segments besides single family homes. I think you've identified well the Florida situation, which is a little unexplainable at the time, but Florida is the largest market for HVAC equipment in the U.S. This is our area. We have more locations here. What is it? Over 100. Yep. We are especially with the technology that we're offering our contractors, they will be able to gain share whatever business there is in Florida as they adopt it. It is a slow adoption, but as they do it, they'll gain share. Plus, we're gonna enter other segments of this market. I think your observations are very well taken, but don't count us out in Florida. We're the powerhouse and will continue to be. Very good. All right. Thanks very much, guys. Appreciate it. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star followed by 1 on your telephone keypad. The next question comes from the line of Ryan Merkel with William Blair. Please go ahead. Morning. Hey. Morning. Why don't I ask about Mexico? What's going on there? Mexico. I thought Mexico was doing really well maybe this year. Yes. Yes, it does. Especially since we bought it from Carrier, it's been a winning combination. Paul? Yeah. As you know, this was the year of the election down in Mexico, where they elected a new president. He's very far left. I think there was some concern about added investment during the election cycle, that, you know, probably slowed the market down. Now that we're past the election and the new president's in office, I think he's moving further to the right, and I think we'll start seeing some activity down there picking up again. For example, they have a major renovation at the airport, and we're a supplier to that re-renovation. Well, that was put on hold by the incoming president. We'll see how that develops. It's still a very healthy business. It's just had softer sales, and that caused the decline in profitability. Long term, I don't think it's gonna be an issue at all. A 100 million people. That's helpful. What? There's a 100 million people down there and, it's a developing country. It's a great market. Okay. Thanks for that. You know, I wanna ask about the maturing investments that we've been talking about on these calls for a little while now, but I guess I wanna come at it a little differently. Operating profit growth has been growing mid-single digits. What do you think operating profit growth will be once these initiatives mature? Should it be growing at 10%, I guess is my question. Gee, I wish we had precision on that. We just don't. We just know we're leading the innovation in the industry. We're spending more money, as we should, because we are the largest. We just think it's a very positive thing to do, even sacrificing growth rates in the short term, as long as we explain ourselves, as long as we explain that our goal is long term, which it is. What is it gonna amount to in numbers? Well, it's hard to figure out. We have 90,000 contractor customers. Now, they employ many technicians, so we're probably talking 300,000, 400,000, 500,000 technicians. How long will it take them to adopt the mobile apps that we have, the e-commerce? All those questions, we'd like to have answers. We just don't know. We just think it's a slow-moving adoption, although we're gonna try to do better with it. Do I think it will materially improve our performance? Absolutely. Do I think it would give us a competitive advantage over anybody else that distributes product in the industry? Absolutely. I wish I could give you with precision what numbers we're talking about, but we just don't know the, for the reasons I just stated. We just can't give you precision on numbers. Okay. Fair enough. Just quickly, lastly, you mentioned launching productivity initiatives. Any more details you can provide? Yeah. What we mean by that is, for example, the order fulfillment and tools that are now in the hands of our locations. That improves. The tools that we provide allows our branches to do more but with less. The increase in productivity will hopefully reduce our employment costs as we introduce these tools. Which is particularly important right now given that, you know, there's all this buzz about labor shortages and labor demand. You know, I think it's appropriate that we put these in place before that so that, we can do more with less. Okay. Very good. Thank you. Next question comes from the line of Robert Barry with Buckingham. Please go ahead. Hey, guys. Good morning. Good morning. I guess I wanted to follow up on the productivity and just see if, you know, you could maybe detail what you think the size of that nut is over the next 12 to 18 months or so. Well, another estimate. Barry? Yeah. Robert, good morning. I think the press release gives a little bit of color on what we're talking about. You know, about 250 people were added over a few years. What Al said earlier was important. What he said was, we went to our leaders, we're going through this monumental change, monumental transformation in our business and asking them, "Go do it and figure out how to do it and protect our business and protect your customer and protect, you know, the supplier relationships and so on." Around 250 people were hired, which was about a 5% increase in workforce at the time. That's, you know, one of the principal things that's being addressed in productivity, is now to go back to those leaders and say 2, 3 years later, "Now what? How do we find the productivity that we know is being gained? Let's rationalize what we should be doing in the marketplace, and let's make sense of all these investments and how it's played out, you know, 2 or 3 years later." That's the challenge that went out earlier this summer. Some of those plans were drawn. We're not ready to say, "Here's what it means." There were reductions by the end of the 3rd quarter. There'll be more to come as the year plays out. That's the brackets I would put around it, is around, you know, 250 headcount additions that were made during that period. The second bucket, obviously, is our second-biggest SG&A item is our facilities. How much square feet do we need in this new paradigm of operations versus what we had 3 or 4 or 5 years ago? That's been reduced, it's been tweaked, it's been, you know, made smaller. Actually, we have more locations today than we had 3 years ago with less overall square feet. That's, again, a slow grind to produce less space and save some money. That's in the discussion also. The third is freight and delivery. You know, we are the last mile delivery company for our company. It's about 1,000 trucks across, you know, 560 locations. They all have drivers, they all have resources tied up and largely fixed costs. That's again, another third layer that is part of this productivity initiative to rationalize over time. It's early stage. We're not ready to throw out a bunch of numbers and wish lists, but that's the nature of what we're doing. Got it. I can tell you what my goal is from an operating margin perspective. It's at least 10%, at least. We'd like to move our operating margins, EBIT margin, to at least 10 and beyond. Do you have line of sight to? No. get down there? I like your persistence, we really don't. We see progress even now. I mean, we've reported progress. That's never been done in distribution. I think we have the capability of doing that. Got it. Just to clarify, when you talk about 250 people, is the plan to actually have a reduction in force, or are you just able to grow without adding people? Both. Obviously- Oh, sorry. Go ahead. Go ahead, Barry. Go ahead. Obviously, there's attrition in every business and that's how we would always want to intend to, you know, kind of carry out that type of program. It's a brand-specific, location-specific, entrepreneur-driven specific local market thing. You know, this is not a broad stroke of Watsco. This is asking and challenging local markets, local leaders to look at this every day, give them data that they now have that they didn't necessarily have a couple of years ago to look at those decisions and make them. Not only that, if we have attrition, our culture is very much a proponent of fill it with existing employees. If they aren't familiar with the technology, train them. We'd rather look inside before we look outside to fill the opportunities that are provided by the new technology. That's a cultural thing. We wanna give our employees long-term careers. All of this is long-term thinking. As Barry says, attrition is hopefully our goal is to replace by promotions with training. Got it. Maybe just a question on gross margin. Very nice gain there. Just maybe some comments around how sustainable that kind of year-over-year performance might be going forward. It does sound like, you know, the price increases continue to come through and environment generally inflationary. It's a little bit of a large gain versus what typically I think for Watsco is kind of very stable gross margin performance. With I would say the rate of change, you know, needs continued price increases, you know, to, you know, to see the same kind of results. You're right. It, it's outsized increase in gross profit because of price increases. There's more to come this year, next year, which seems to be in the cards. You know, I would hope there would be improvement. That flattens out and, you know, as price increases work their way through the inventory cycle. Got it. Maybe just lastly for me, a question on cash flow and expectations for the year, in particular, just how you've been managing inventory levels. I think you've been maybe holding a little more inventory through the season than is typical. Any color there would be great. Yeah. We have Our technology is geared towards improving turns, which would contribute to cash flow. Pricing, of course, the increases in pricing that you've mentioned and we are aware of, does increase the value of our inventories so that the turns don't show up because there's more investment inventory. Every year, we sometimes do pre-buys, but that's consistent, so I'm not sure that's part of it. Our inventory turns this year did not show much of an improvement. However, it's not adopted across the board yet, particularly at Carrier Enterprise, which is our big player. We expect that as the technology is adopted there, I'm talking about the inventory software that we've adopted at Gemaire, and that's really producing some great inventory turns. More importantly, it's improving the ability to provide a contractor customer that comes in whatever he wants. Our I think our ratio is like 98% of the time when a contractor comes into our location, we have what he needs at that moment. That software is particularly designed to do that as well as to let us plan the inventory levels better. All right. Thank you. I'll pass it on. You bet. Next question comes from the line of Chris Dankert with Longbow Research. Please go ahead. Hello. Good morning. Hey, morning, Al. Thanks for taking the questions. I guess I should kind of move the conversation to AJ here. You know, the Alert Labs acquisition, interesting technology. I guess, is there any kind of plan or timing on the rollout, getting that to actual customers? Any SG&A impact? Anything else that you really point to as far as app adoption, contractor feedback? Just, you know, kind of update on technology here. Sure. Specifically on Alert Labs, it's very exciting. As we mentioned, they are just a bunch of really smart entrepreneurs. Their culture is unique and impressive, and their skill sets are complementary to ours. As far as the products, they have two products in market today that measure water flow and seek out flood and leak detection and help mitigate those costs. The device that we are developing together, which is Sentree, which is the air conditioning measuring and monitoring device, is in beta today, and we expect to launch in full force in Q1. It will be a sort of a surgical launch. It won't be available to everybody at the same time. As far as we do talk, show it to contractors all the time, and I think just about every contractor who sees it, his jaw drops with excitement because there's a lot of potential here. It's very early days, though, so I don't wanna get too ahead of ourselves in speculating what it might mean in terms of dollars or in a business plan. We're excited about it. I think we've got the right team now both to design it, manufacture it, and continue to enhance it over time. As far as the other technologies, we showed that the e-commerce continues to tick up in usage as far as a percentage of our sales. The early results of people using our technology, e-commerce and the mobile apps and some of the Watsco Ventures technologies, and it is early results still, but it's very positive for our customer base. The customers like it. They continue to use it. Attrition rate of those customers is very low, and the growth rate of those customers that are using it is very high relative to customers that aren't using it as heavily. That's why we are very encouraged by the long-term prospects of these technology investments. Like was said earlier, it's a matter of doing this at scale, which is just gonna take time because it's new and it's different, and we're introducing enhanced tools into an industry that's been doing things very much the same way for a very long time and like was said, and very profitably. It's a matter of scale now. Got it. I guess the initial reaction I have to the product would be, is there also kind of a cross usage of this product to, you know, add preventative maintenance information, analytics, that type of thing, you know, even further down the road? Yes. That is the intention of the Sentree device, is that we designed it as a pro product, meaning that we'll sell it to contractors, not directly to homeowners. Contractors, they can choose how to sell it onto their customer base, which are homeowners and building owners. What we hear a lot from them is that they would embed this in service plans that they have with homeowners as sort of a connected service plan or enhanced service plan. What the device does is real-time measuring and monitoring, but also predictive diagnostics using machine learning algorithms. Got it. Well, you guys really hit everything else. Well, I'll leave it there. Thanks again. I would add that that's why we keep saying long-term adoption. That's why we have a very young president to see it long-term, see it through. I was gonna say something for. That's a little funny. That's supposed to be a joke there. No, no, I said, I'm just gonna have some fun and add to that. You know, the 55-year-old guy on the phone here is the customer engagement that's going on really, you know, over the next six months is, seems to be very powerful stuff, you know. About 9 feet from where we're speaking this morning is about 15, 20 folks from the Northeast getting the full treatment on everything. Contractors, yeah. -that we're up to and. Contractors. Contractors and really listening and learning and this is, you know, we're all gaining 10 pounds 'cause we've had mountains of food out here while customers are doing this over the last several weeks. We're trying to resist that temptation. It's delicious human food. The customer engagement going on is really extraordinary right now. Yeah. Yeah, glad to hear it, guys. Sorry, just one more. It's because they see the value in it for their business. Our message to them is that we wanna help you grow because when you win, we win, right? If you grow, you're gonna pull along us with you guys. That's our mission, and that's how we say it to these contractors is, "We're in business to help you guys grow. Next- Any other questions? Comes from the line of Stephen Tusa with J.P. Morgan. Hello, Stephen. Hey, guys. Good morning. Good morning. Morning. Glad to hear you're chipper. There's nobody out there that's, you know, that's as excited as you are. It's good to hear. It's good to hear. Yeah. Everybody's so depressed these days. we're We're absolutely not depressed. We're excited. Yeah. You got the life down there in Florida, no doubt about it. Beautiful place. Come visit, Steve, especially in January. I'll try. I'll try. All right. Just on the gross margins, I think, just remind me? You guys have some inventory, and I know there was this kind of unusual, you know, cadence of price increases from the OEMs. Are you guys able to kind of, you know, leverage that? For example, if you bought some product from Carrier, you know, in June or July or something, and they raised price, you know, in August, that you can kind of, you know, you get a little bit of a spread benefit on that? We do. Okay. Absolutely. Got it. Got it. What would you? I think at a high level, there's a lot of discussion around, you know, the consolidation potential in this industry. You know, Lennox talked about, you know, Carrier a bit on their call. What would be your take on kind of a Carrier and Lennox tie-up? They said they wouldn't wanna impact the front end of the business, but those guys like to control, you know, more of distribution. Have you guys thought kind of about the game theory on that at all? Well, let me ask you this, Stephen, related to that particular issue. Yeah. Is Lennox saying they're gonna acquire Carrier or be acquired? No. It was, you know, it was basically just consolidation. Would it be like, you know, Reverse Morris Trust or, you know, a merger of some sort? More of a combination. I mean, I think Carrier is obviously too big for Lennox to go out and kind of acquire specifically. You know, whether it's them or, you know. Yeah. Anybody else. YORK getting together. Yeah, anybody else kinda getting in. Well- What's your kinda take on that? You've been around for a while. From a distribution perspective, we think it's healthy. Okay. Because think about it. If two manufacturers get together, wherever they are, that removes a competitor. It's just one now. OEMs, whoever are the survivors, will be in the game of distribution because we have the largest distribution network actually in the world. Right. Certainly in North America. We can't control those kinds of things, as you know, the consolidation. Yep. If I were to guess, I would say that difficult because of the antitrust. Yep. On the other hand, I suggest that, you know, air conditioning is a global market now. I mean, there are Asian manufacturers already in the United States. If somebody were to say, "Why don't we merge?" The worry about antitrust wouldn't be so great because if they added all the other manufacturers that exist around the world. Right that are serving the U.S. market, then that may not be such an issue. That's my thesis. Right. Right. I'm not sure that is. No, that makes sense. Lastly, you know, Trane has actually talked about in their filings now that they're, you know, kind of going out and acquiring independent distributors. It's unclear whether it's, you know, whether it's commercial or residential. I think it kinda sounds as though it's residential. Have you kind of seen them get a little more aggressive strategically and around stuff that maybe you guys have been, you know, kind of trying to go after? Well, let Barry answer that 'cause he's in the market constantly for that sort of thing. Got it. Got it. Stephen, you broke up for a second. Who did you say? In Ingersoll-Rand's filing, they mentioned that they, you know, kind of, acquire distributors. It's not even, they didn't even say from time to time, it was kind of seemed like more of a consistent run rate. I don't recall. I know they churn their distribution a little bit, but it's, I don't recall them kind of, you know, talking about it that specifically. Just wondering if there's any kind of change in the marketplace for these types of assets and that whether they're kind of more involved or not? Well, just in, again, I'm not them, but in my experience on the commercial industrial side, commercial applied side. Yeah. commercial service side. They've been very active for most of my career. Yep. Yep. Bringing those types of services and relationships in-house. Yep you know, essentially accumulating those assets. Yep. On the residential light commercial side, we've seen very little acquisitions in really a 20-year period. In the recent period. Yeah I can't think of any. As with all OEMs, they're active in making distribution decisions that within local markets. That's not new. I would say they have been more active than they had been maybe 5 or 10 years ago, but certainly not competing for M&A type activities in our neck of the woods. Yeah. See, you have to remember from the OEM perspective, Once you acquire, then you have to carry the inventory and the receivables. You need the cash first to acquire and then the cash second to support it. Right. The independent distributor takes over all that, you know. Right. Right. If they operate through independent distributors, that investment all goes to the independent distributor, not only the acquisitions price, but as well as the working capital that follows. These are significant invest. Well, you know our record. We've invested billions of dollars in acquisitions. Yeah. Of course, we believe in the independent distributor model, for many reasons. I hope that we have continued opportunity, and we see no lack of opportunity. Right. Right, right We'll see what happens. One last quick one for you. Are you seeing any signs of, there's a lot of debate around the housing market and direction of the housing markets. Obviously, you guys are more, you know, replacement and stuff like that. Any kind of signs that things are, you know, turning down when it comes to your, you know, your more kind of direct read into the new home building kind of sector? Paul? across your footprint? Yeah. As you know, that's not a big piece of our business. It's fairly small on the residential side. You know, this year has been great, you know, and it continues to be great through the third quarter as far as increase. Looking at the permits through September, you know, it came out yesterday, it appears at least from a permitting standpoint, they continue to grow. Right. You know, if new construction for us is, like I say, more on the supply side than it is on the equipment side. Yeah To date, we've been able to hang on to that. No, he's referring to the industry in general. Yeah. Yeah. Does he have any knowledge about the industry in general? I really wouldn't. I mean, like, I can give you some specifics to Watsco, not just the whole market, but Watsco. Yeah. I mean, really, there's three things that kind of are important in gauging that. One is, you know, margin. You know, passing through price increases at a higher margin is a good indication of the health of the end market. Yeah. The other is bad debts. You know, we float customers $500 million in accounts receivable every month. It gives us a lot of insight into how they are doing if they pay us. Year to date, I mean, year to date, our bad debt write-offs are around 3 basis points. Yep. I've done this job when it's, you know, 20 basis points. Right. Very healthy credit market, so to speak, within our customer group. The third is mix. If contractors have the faith and confidence to walk into a homeowner and say, "Here, spend 10% more on a higher efficiency system," and they're accomplishing that, mix is a good indicator of health. Again, we saw an increase in mix this quarter. What you're saying is our contractors, the same ones that served in new construction, you don't see our contractors- Yep financial condition getting any weaker. Got it. Great call, guys. Really appreciate it. Thanks, Steve. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks. Are you going to be our operator from this point on? The gentleman, is he all right, the one that was here before? This is to you, operator. All right. Emma didn't hear me. She tuned me off. All right. She's back, actually. Many thanks for your interest in our company. I hope you stay with us long term. That's our methodology always. What benefits we accrue to all the stakeholders here long term. I hope you'll be with us long term. Thanks for your attention today. Bye. Ladies and gentlemen, the conference has ended. Thank you for attending today's presentation. You may now disconnect.