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spk06: Good morning and welcome to the Wattsco First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Albert Namad, CEO and Chairman. Please go ahead. Albert Namad, CEO and Chairman.
spk03: Good morning, everyone. Welcome to our first quarter earnings call. And as she said, this is Al Namad, Chairman and CEO. With me is A.J. Namad, who is the President, and Paul Johnson, Barry Logan, and Rick Gomez. Now, before we start, our cautionary statement as usual. 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. Well, now that that's over, let me report that we had another exceptional quarter New records were set on virtually every measurement of performance. Earnings per share jumped 109% to a record $2.90 per share. Sales grew 34% to a record $1.52 billion. And operating income increased 109% to a record $171 million. Gross margins expanded. And that, along with improved operating efficiencies, led to record operating profit as well as operating margins, which expanded 400 basis points to a record 11.2%. Now, this is important. The sales growth was strong and consistent across all markets and product groups. Also noted is that companies that we acquired during the past year also performed significantly at record levels. The reason we like that is that we believe that shows, once again, that Wattsco is a great home for family-owned businesses. We sustain their culture, invest in people, and provide technology to secure and build upon their very great legends. Also, please note that the quarter's results are all the more impressive, giving the strong comparison from a year ago. A year ago was very strong, and this year is even stronger. While it's early in the year, we are encouraged by this terrific start and by current demand trends. Let me say that again. We are encouraged by terrific start and by current demand trends. And we think that 2002-2022 should be another record year for Wattsco. Looking beyond sales and profits, it is important to highlight some of the important catalysts going on, both in the short term and the long term. and we emphasize, as we always do, the long term. The industry is still experiencing inflationary pressures, and OEMs have recently announced additional price increases. As you can see from our results, we are capturing price in the marketplace, given the reliance and necessity of HVAC products in homes and businesses. Looking forward to next year, Energy efficiency mandates enacted a few years ago are now in effect, and they will raise the minimum standard for base efficiency systems beginning in 2023. So the government is very involved in raising efficiency mandates or efficiency ratings through mandates. Now, we're working closely with our OEM partners to transition inventory ahead of next year. Historically, energy efficiency mandates provide us the opportunity for a richer sales mix of higher efficiency systems, and importantly, our customers have greater value to offer to end users in replacing and upgrading older systems. We have the same expectations going forward. Federal mandates are also in place that would ultimately phase out the current high GWP refrigerant used in millions of systems throughout the country. 10% reduction in these refrigerants is in effect now. That's mandated by the government. A 30% reduction is scheduled for 2025 with a further reduction in 2030, a further 30% reduction in 2030. OEMs are actively developing new products to incorporate the lower GWP refrigerants, and those products are expected to be launched in the next couple of years. But as a result of that, today's cost of refrigerant used to repair older systems has risen sharply, and so too has the cost of repairing and maintaining older systems. Forgive my slight cold here, please. Working with our contractor customers, we see the opportunity for homeowners and businesses to upgrade systems that will cover over time more efficient. I should say that over time will be both more efficient and environmentally friendly. That's a nice thing that's coming to our industry. In terms of our commercial markets, we believe there's potential for greater infrastructure upgrades and climate change capital spending along with an increased focus on indoor air quality. Although it is likely that this trend will take years to play out, Wattsco's organic sales growth rate for commercial products accelerated during the first quarter to 29%. That's 29% growth in commercial products in the first quarter. Longer term, there are other potential catalysts. Expansion of federal, state, or local programs to help fund the purchase of high-efficiency systems. We see that happening. The trend towards electrification and the adoption of heat pump systems to replace fossil fuel powered heating systems, like gas furnaces. And the second phase out to even lower GWP refrigerants is on the books in 2029. This information emphasizes Wattsco's significant role in the drive to lower CO2 emissions. According to the Department of Energy, heating and air conditioning accounts for roughly half of U.S. household energy consumption. As such, replacing HPA systems at a higher efficiency is a meaningful action that a homeowner can take to reduce energy consumption and carbon footprint over time. We offer a broad variety of systems that go well beyond the minimum standards that can exceed 20 SEER. First quarter sales of high efficiency systems, those above the minimum standards, grew 31%, outpacing the 26% growth rate for the residential equipment. Based on estimates validated by independent sources, averted 11.4 million metric tons of CO2 emissions since January 1, 2020, through the sale of high-efficiency HVAC systems. This kind of information and more information is available on our website, including sources and assumptions used to support the estimate. Simply put, there's a lot going on, and we love our industry. Better yet, we believe entrepreneurial culture, custom-focused technology, scale, access to capital, and leadership positions provide unique advantages in our industry. We are fortunate to serve a large and growing population of contractors and technicians with the industry's most innovative technology. Our annual run rate for e-commerce sales now exceeds $2 billion. and we can see that our active technology users continue to grow at a faster rate. Let me say that again. E-commerce users of Watsco technology, at least the e-commerce platform, are growing at a faster rate than those that do not do e-commerce with us. On-call air, that's one of our tech developments. A Watsco digital sales platform used by contractors and credit for comfort, which extends credit to the end user, continues to expand. Contractors presented quotes to approximately 45,000 households during the quarter, a 40% increase and generated $160 million worth of sales for our customers, a 59% increase over last year. the information presented today is only some of what is going on in terms of technology initiatives. As we said before, if you have any interest on learning more, let us know. We will schedule time with AJ and his team. We believe we are transforming the industry, and we are always happy to share more about our progress. With that, let's now go on to Q&A.
spk06: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question will come from Tommy Moll of Stevens. Please go ahead.
spk14: Morning, Tom.
spk10: Morning, Alan. Thanks for taking my questions. Of course. So an 18% increase in residential average unit selling prices, you called out that's a combination of pure price plus beneficial mix. And I think on both those points, there's a nexus to some of the technology investments you've made. Can you help us understand that nexus?
spk03: Well, that's a very good question.
spk15: Barry? AJ? Good morning, Tony. Well, first, the pricing actions are always built on the cost that's coming in the door. As we receive a higher cost, we pass on higher prices. And that's elementary school stuff that's gone on for 25 years, of course, cause and effect. The technology discussion is a pricing system that's been in place now for a couple of years and is more mature today than two years ago and more useful today than two years ago when you start to see the pricing actions play out. with all the movement that's going on across really all product lines, not just equipment. 18% is just equipment. This has been a discussion across 150 product lines, 600 vendors, and the administration of pricing is much different today than again it was two years ago. So I'm not quite answering your question maybe, but just get a sense that this is not business as usual with this added layer of pricing technology that we have in place.
spk14: Sorry, go ahead.
spk05: Was that you, Rick? No, it's AJ. I'll say it slightly differently. You have to think about the scale of what we're talking about with these price increases and the number of customers we deal with and the number of products it touches and the number of geographies. we have received hundreds of different pricing actions from our 1,000-plus manufacturers. And we sell those products to 100,000 contractors across 671 locations. The administration of those changes, and nearly every contractor, by the way, buys products from us at different prices, the administration of that can be overwhelming. And what we have now with our technology tools allows us not only to administer that quickly, efficiently, and accurately, but it also provides – we can get that done so quickly that it gives us time to put intelligence and analytics to work to optimize pricing by customer, by geography, by product, et cetera, so that we can really make a difference in the market as well.
spk10: Thank you. That's all helpful context. I guess to consider the other side here – Demand destruction, I'm curious for any insight on. So in an environment where you have realized substantial price, and looking at your numbers, I don't think there's any sign today of significant or any demand destruction on the end user side. But it's got to be something that's on everyone's minds. And so I'm just curious for any insight or opinions you might offer there.
spk15: Barry? Yeah. Sure. Well, again, this is not unprecedented. Several years ago, when products went from 10 SEER to 13 SEER, there were probably 15, 20% price increases then just because of the products. We didn't see the demand destruction then. As you suggest, I don't think we're seeing it now. I think the fundamentals are simple to understand. which is people don't live without our products. They won't live without our products. There's a health quotient. There's a comfort. If it's a business, it has to be in business. So I think the necessity of our products has always been a great fundamental for the industry. The other is that it's really a product with a 10, 15, 20-year life. You don't buy these things twice a week. You buy them once every 10 or 15 years. And when you do... you're upgrading the efficiency of your dinosaur that you do own in your home. And contractor collaboration and contractor skill, I think, has improved to a point where the recommendation and the installation and really the overall aptitude for high efficiency is playing out. Obviously, we're helping that with some of our technology as well. But I think that's the life cycle that has been in place now for a long time and And I think if your real question is at what point does consumer sensitivity matter on price, you'll notice in the press release we talked about selling 29 different brands of equipment. So the diversity and the price points and the features and benefits and the waterfront that we cover is very comforting because that's ultimately part of an equation, right, is how well the consumer spends money on these things. and I'm glad we're the most diverse player in the industry to be in that position.
spk03: And as an ROI, the consumer that buys high-efficiency equipment saves electricity costs 10 to 15 years. There is a return on that investment.
spk10: Thanks a lot. I appreciate it, and we'll turn it back.
spk06: The next question comes from Jeff Sprague of Vertical Research Partners. Please go ahead.
spk16: Good morning, Jeff. Thank you. Hey, good morning, everyone. In addition to the revenues, the margins pop out here. I wonder if we could just kind of dig into that a little bit more, and obviously you get leverage on the year-over-year growth. kind of looking at the sequentials, right? You know, your revenue in Q1 is similar to Q4 as it usually is. And really, prior to last year, you know, we tended to see gross margins in Q4 and Q1 being quite similar. But we've got to have the step function change happening here. So, maybe you could just unpack that for us. I'm guessing it's price on top of price would be my My initial guess, but maybe you could provide a little bit of perspective on how to think about the gross margins here in the quarter and what it pretends for the year.
spk08: Paul?
spk13: Well, yes, it is a little bit of price upon price increase. We had price increases at the end of the fourth quarter that ranged from 8% to 12%. And then we've had a secondary announcement of price increases that are coming in April and May. So I think the prices have continued to move up, and as the prices continue to move up, obviously our gross margin goes up with it.
spk16: And can we just touch on inventories a little bit here? Obviously there's a lot of price and mix, I would assume, going on in the inventories as you report them. A, is there any particular disconnect there in inventories relative to what you see playing out in Q2? And there was a comment about transitioning inventory with the OEMs. I just wonder if you could elaborate on what you meant there and how you see that playing out over the balance of the year.
spk13: Okay. If you take the first question, obviously the inventory dollars are up, and that's We look at a reflection of how many units do we have and are we set for the season? And the answer to that right now is we're in very good shape on inventory to be able to carry us through the second quarter and obviously the stronger third quarter. What we're facing is a transition of pretty much all of our SKUs as they relate to outdoor heating or outdoor heat pumps and cooling products that will go into effect January 1, 2023, as we indicated. However, we're going to be doing a transition earlier than that. We're going to try to start moving the new products in in late third quarter, early fourth quarter, so that we will have a smooth transition into 2023. Obviously, when that occurs, we're going to see another step up in cost and price because the price of the new products at the higher efficiency ratings is going to be higher.
spk16: But you're anticipating selling the newer equipment also in the back half of the year, not just stocking it in preparation for 23? We definitely look forward to selling it in the back half of the year.
spk14: Great. Thank you.
spk06: The next question comes from Jeff Hammond of KeyBank Capital Markets. Please go ahead.
spk09: Morning, Jeff. Hey, good morning. Good morning. So I just wanted to get back on gross margins. I mean, you guys have had a huge step up from kind of three, four years in the 24 and a half. And then we step up again. And I'm just wondering, any anomalies in this one queue? And if we start to see this inflation kind of normalize, which doesn't seem to be, but you know, where you think you ultimately fall out, you know, given the combination of kind of price-cost arbitrage versus, you know, your structural changes?
spk03: That's a very good question.
spk15: I think both Barry and Paul should answer that. Thanks, Jeff. Good morning. Jeff, yeah, I mean, first, there were price increases in the first quarter, effective in the first quarter, as Paul mentioned. There is a benefit. as we turn that inventory in what is a relatively small quarter. So just to balance the discussions, if we look back sequentially in the fourth quarter, 27.3 I think was the margin, and this quarter, you know, 29 and change. So there is a benefit that showed up this quarter, really, and what is a slight quarter for the benefit of that. It doesn't account for the entire increase, but I would say a good part of it. So that's something that is, I wouldn't call it an anomaly. It's not the right word. That is something that is more material in an early first quarter. And as Paul mentioned, there are more price increases on the horizon. They won't have the same level of benefit in basis points, but they will have a benefit. That trend will continue, we think, for the rest of the year. but again, don't just fall in love with the algebra of it. This is a structural change in how we manage pricing. First of all, you've heard that story. Second of all, we absolutely work with our OEMs to invest in our business, and when we invest in our business, the economics between us and the OEM is something that improves, and you can see that in the SG&A, by the way. Part of that Part of the counterbalance to higher gross profit is sitting in our SG&A expenses through investments we're making to grow the business long term. And our parts and supplies business, which we don't talk a lot about, we're not asked about it very much, that is where we see the disproportionate level of gross profit improvement along the lines of the technology gains that we're seeing with pricing.
spk09: Okay, that's real helpful.
spk13: Oh, go ahead. Yeah, and as we said, we've got a price increase dropping into this quarter, and I'm reasonably assured that we're going to have another price increase with the introduction of the new product in Q4. And some of the products that we sell that Barry mentioned when we get into the supply side and all the accessories, some of those have got some long-term price advantages which are going to continue to repeat. refrigerant is going to become short. As the government has restricted the amount of GWP type refrigerants that can be produced, it's created a supply issue which is going to be long term, at least for the next 10 years. So there's a lot of things out there, a lot of pieces, as Barry always puts it, a lot of moving parts out there. But I think from a price standpoint, I think it's going to be pretty much sustainable for the rest of the year.
spk03: Then I think a direct consequence to gross profit margin is product mix. As we move to higher efficiency, that does bring a higher gross profit margin. As we expand our parts and supplies business, that does increase our gross profit margin, in addition to what Paul and Barry's already said.
spk09: Okay, very helpful, guys. Just kind of housekeeping. One, I'll ask on non-equipment what price was relative to what you said on equipment. And then just any color on growth rates in the international and commercial piece.
spk13: Well, on the non-equipment side, yes, we've seen price increases. Less on the parts side. than we have on some of the supplies. Some of the supplies, as I indicated with the refrigerant, refrigerant is moving rapidly upwards. However, on the parts side, what we're seeing is we're seeing a strong demand at the same time as we're seeing a strong demand for the equipment side, and pricing actions there are lower than they are on the equipment side.
spk15: And, Jeffrey, to answer your question, I've said this now for a few quarters, I think the overall same-store growth rate of 25% is within 1%, be it commercial or, I'm sorry, be it domestic or international. The geographic markets are very consistent.
spk09: And how about commercial growth?
spk15: Yeah, we mentioned that on a call, 29%. Okay, sorry about that.
spk09: Okay, thanks, guys.
spk06: The next question comes from Nigel Coe of Wolf Research. Please go ahead.
spk01: Morning, Nigel. Thanks. Good morning. I hope you're feeling, you feel better soon. Sounds like you're suffering under the cold. I don't know. It comes with age. I'm sorry if I missed the... I know that feeling. On the mixed side, I'm not sure you called out the, you know, broke out the 18% on residential between, you know, pure price and mixed. So just wondering if you just maybe just flesh that out a little bit. And really, the context of the question is, you know, consumers get hit with a lot of inflationary pressures across the board. And at these times, you sometimes see a mix down towards more value brands, value products, and then maybe a bit more repair. It doesn't seem like that's happened at all. But I'm just wondering, number one, what was mixed in the quarter? And secondly, are you seeing any signs of that kind of behavior coming through?
spk13: Not really. This is Paul. Not really. We're not really seeing any real change in the way the brands are reacting to it. All of the brands, all the OEMs that we represent are experiencing up sales, up sales which pretty much are normal across the board. As Barry indicated when we started the call, most consumers only make this purchase every 10 to 15 years, so there isn't really a recognition on their part as far as what is what is the manufacturer-suggested list price of a carrier versus a Goodman versus a train? So it really hasn't impacted that at all.
spk01: Okay. And then what would you say is the mixed component of that 18%?
spk15: Yeah, Nigel, it's not something we break out in that sense.
spk01: Okay. Okay, that's fair. And then on the inventory side, I think the message from Jeff's question was that there is a bit of the 14th year kind of stocking up perhaps, you know, ahead of the deadline. Would you expect to continue to build inventory, you know, kind of ahead of seasonality into the mid part of the year and then sell it through? I mean, how should we think about that?
spk03: Well, first let me say that the OEMs are still supply challenged. And we do have more orders because the demand is still very high.
spk13: Yeah, we're not going to build up inventory. This is not a traditional changeover that we had when we went from 10 to 12s here and then to 14s here. So we're going to be tailing off very quickly on the straight cool units. We're going to be bringing those down, focusing once again on what is environmentally good and also can be sold through and his grandfather, and that is the heat pumps. So this is not going to be a situation where the industry will be building up low efficiency or standard efficiency 14 SEER products in anticipation of some sort of a bridge where they can undercut the price of the new product when it's introduced in the fourth quarter and first quarter of next year.
spk14: Okay, great. I'll leave it there. Thanks.
spk06: The next question comes from Ryan Merkel of William Blair. Please go ahead.
spk07: Morning, Ryan. Morning, guys. Great quarter. I was hoping we could start high level. What is the outlook that you guys have for resi unit growth in 22? I know the guys over at Hardy are thinking flattish, but, you know, after this quarter, it feels like that might be a little conservative. Go ahead, Paul.
spk13: You know, it's... We normally don't get into what we forecast for the marketplace, but the marketplace obviously right now is very strong, and we're adapting to that. New construction, which is a small piece of our business, but it's still an important piece of our business, continues to be very, very strong. Don't see that tailing off. But the replacement demand... You know, we feel pretty good about it right now, but a lot of the elements of trying to predict replacement demand are tied to things that we don't control, you know, the weather and all those things.
spk03: Yeah, but we're still seeing very strong demand. Yeah. Yeah. We haven't seen a change yet in the demand equation.
spk15: I was going to say, some of this, if you look through it, we disclosed in a press release a bit of a discussion on ductless systems, for example, both residential and commercial. The growth rate of that product group was up 45% in a quarter. And if I strung together three or four years, the compound growth rate is well in excess of any overall industry growth rate. So what's the story of ductless, for example? And part of it is our own investment and skill and capability of growing those product lines. A big part of it also is the acceptance of those products in homes and businesses. So we're competing today with DRF products in a way that we didn't probably even three or four years ago, not to mention 10 years ago. So there's always more going on than just what's the market doing, and that would be an example of something that's becoming more material that's important and interesting and gets beyond just what is the market doing. Yep. Got it.
spk07: Okay. As a follow-up, I'm getting asked about inflation and rising interest rates and how that might impact replacement rates. what's been the history there during a period of rising rates? Should we be thinking about replacement rates falling at some point in the coming quarters, or is that not in the... You're not pretty sure just quite yet.
spk14: Again, Barry... Yeah, I think Barry says it best. Yeah.
spk15: Yeah. Yeah, well, first, I think, again, it's... You have... consumers that won't live without the product. So then the question is, what do they spend when they're faced with a replacement? And the contractor relationship is what matters most in that regard, right? So again, having access to the brands and the products and the efficiencies that may solve any equation is what we're after. If you were a factory-operated location with a single brand in your warehouse, you have a different feeling that day than I think what we have where we're servicing a broad group of price points and contractor types and so on. This is my pitch for independent distribution. But I think at the end of the day, the consumer is going to figure it out. Our job is to help them figure it out. And contractor relationships are integral to that. Financing becomes integral to that. That's something that we're investing in and ramping up long-term will have the most elegant solution, we believe, in the industry for financing. And again, in past events, past recessions, let's say if we saw a trade between a 20-seer unit and a 16-seer unit, yes, there's price sensitivity, but it's really not material at the end of the day. These are not... discretionary purchases.
spk14: Very helpful, guys. I'll pass it on. Thanks for the color.
spk06: The next question comes from David Manthe of Baird. Please go ahead.
spk03: Morning, David.
spk02: Hey, good morning, everyone. Question on the price differential as it relates to SEER ratings. I think in the past it's been fairly linear with efficiency. Is the price differential between a 14 and a 15 SEER or something in that mid-single-digit range today?
spk13: Paul? Actually, the 15 SEER is a product line but is not a material seller in the industry. So it actually jumps from a 14 to a 16 SEER. So the 14 SEER and 16 SEER would be the largest segments of the market today. And it's a double digit difference between a 14 to a 16.
spk02: Yep.
spk13: Okay.
spk02: That's helpful. And then, um, I know we've talked about this on past calls, um, the, the success that you're having in, in selling other HVAC products, that segment used to lag equipment and lately, You've been seeing similar or even better growth in a lot of cases. Are you ready at this point to talk about what's driving that? Is it incentives? Is it training, technology? What are the key drivers behind the better results you've seen there lately?
spk13: Paul? I guess I'm not understanding exactly what products you're talking about.
spk02: Well, I'm talking about – so you've got – you report equipment, and then there's other HVAC products. And I'm saying other as a segment historically used to lag the equipment because you sort of swung between the new construction-related stuff, the duct work and the thermostats and things, and then the repair parts. So it used to always lag equipment. Lately, it's been – growing much better, and I'm just trying to understand what the driver is there. Is it something you're doing, or is it just consumer demand? What's the issue there?
spk13: I would say it's a combination of two things. One, yes, we are driving that business. That has been a business which has, to your point, lagged. And now we're driving that business with better availability, better arrays of products in the branches so we have the right availability at the right spot, And that's been a technology drive that we've had with our inventory management systems. Secondly, we've actually put people in place who are in that supply type business or in that non-equipment business who know it and have done it successfully for other people and they're doing it for us now. So I think we're gaining our fair share of that. We're looking at attachment rates as far as how many units, how many pieces of equipment we sell. And with that, how much of the other products should be going with them? So I think it's a great effort and something that we're very focused on.
spk05: I would add getting the pricing right, too. That's another extension of our pricing optimization is that in many cases, we were so focused on selling equipment to our customers that selling non-equipment was not their thought. Well, now with the tools, we can get the pricing right and pricing profiles right for the customer's and then market digitally through our e-commerce and e-mails and mobile push notifications, making customers aware that we sell these products, they're well-priced competitively. And also, we have a private label offering in non-equipment parts and supplies that is also an effective tool to take some share in the market of those products.
spk04: Dave, this is Rick. I would add just a fourth or fifth layer to that, which is that You know, three years ago, if you want to use that as a benchmark, we did not have the number of users today on our mobile apps and our e-commerce platform that we do today. And we've said for a long time that line items per order through that channel are higher. The incremental line items are not equipment. They tend not to be, you know, big-ticket stuff. They tend to be accessories. So, for instance, this quarter we could supply is 34%. And the more contractors we aggregate on our mobile apps and through our e-commerce channel, the more we kind of buttress that going forward.
spk02: Good point. All right. Thanks, everyone. Appreciate the detail.
spk06: The next question comes from Josh Pogzwinski of Morgan Stanley. Please go ahead.
spk12: Hi, Josh. Close enough. We all know what that means.
spk08: It must be useful, Josh.
spk12: Yeah, it never gets old. Morning, guys. So just on the gross margin commentary, I understand there's kind of a lot of factors there, but I guess conversely also an awful lot of daylight between 24% and I guess nearly 30%. Maybe to ask it a little differently, Josh, If you guys were in this kind of like 26, you know, to 27 type range where you were at last year, you know, if I said you were there two years from now, would you be happy with that? Would you be disappointed because it didn't go up further and, you know, like 1Q was a little bit more anomalous? Like how would that sit with you?
spk03: I don't understand the question.
spk12: What do we think about the rise of our gross profit margin?
spk03: Well, we hope to do better than that. We haven't expressed that before, but what we think is with the investments that we're making, we should be able to do considerably better than what we've done in the past with the gross profit margin. Considerably better. And for all the reasons you're starting to hear. You know... The wave of high efficiency, the government's stimulating it. We had a peek at some bill. I don't know if it's going to actually pass, but they're going to incentivize consumers to buy high-efficiency systems. Our own ability to merchandise parts and supplies is growing by the time. Our e-commerce is booming. I mean, there are a lot of things that we're doing in order to raise that gross profit margin. Okay. I am not stuck to the 24% of the past. I am stuck to something that's going up. Absolutely.
spk05: I completely agree. And Josh, if you know us, we are never satisfied, right? The whole, the whole mission of the company is to always continuously improve on everything we do and all of our results. So there, there is no level at which we're satisfied. We're always shooting for more.
spk12: Okay. And then just thinking about, you know, one Q I think seasonally has, a lot of things that can move around and maybe not, you know, massive barometer for the year, but yeah, the levels of activity that contractors are seeing today, is that an early start to the season? Is it catch up on stuff that couldn't get done last year because either, you know, labor or, you know, equipment itself was less available. Like, you know, how, how should we think about, you know, what's going on today? You know, relative to kind of, you know, when you get into the, you know, the real bulk of the season, like, is this, 21 kind of deferral activity that you've made up here?
spk15: I don't think there's any real way of knowing, Josh. I would say this. No one tends to replace their system ahead of time. They think it's going to break in April, so let's go ahead and get it done in February. I just don't think that's ever a consequence. I think, in our experience, the shoulder season is is a very good indicator of how the consumer is behaving. It's a time where there is maybe more discretion going on instead of an emergency situation like in July. So if price and margin and yield in terms of gross profit has improved over the last six months, and they have. Let's look at things over six months in the shoulder season. I think that speaks well to what the consumer is doing.
spk13: Yeah, I agree with that, Barry. I don't think we have any way of knowing what motivates the consumer at this time. Historically, what we've looked at is about 80% of the units are replaced because of an emergency situation. The unit's down and I need hot or cold air. About 20% of the consumers buy because they plan the purchase ahead of time to what Barry's talking about. And I don't I really can't foresee if there's been a real major change in that dynamic.
spk14: Great. Helpful detail, guys.
spk06: The next question comes from Steve Tusa of JP Morgan. Please go ahead.
spk00: Morning, Steve. Hey, good morning. Sorry, what did you mean when you said the heat pumps are grandfathered in?
spk13: The heat pumps, you can continue selling the current heat pump into next year.
spk00: And that doesn't change going forward, or is that just you can sell them, you can take them in inventory and sell them out, that there's still a step-up required on the heat pumps?
spk13: There will be a step-up required on the heat pumps, but any inventory that you have is grandfathered and can continue to be sold for the next year.
spk00: Got it.
spk13: Even in the south? Yes. even in the South.
spk03: Yeah, that's pretty cool. The government is very interested in moving away from gas furnaces. Right. Because of the emissions. So heat pumps solves, the electrification through heat pumps solves a lot of those issues.
spk00: Right. I feel, I recall in the past you guys talking about, you know, targeting a 10% operating margin at one point. I don't know if you ever kind of put it in print, but you had talked about that. Yeah. Obviously, you're kind of, you know, blowing through that today. I mean, is this, you know, is there a time where you'll say you guys can do, you know, low double digit, you know, 15%? I mean, is that kind of, you know, what this trajectory looks like for the next couple of years?
spk03: Well, that's our goal, to increase the even margin, for sure. Okay. We work tirelessly at that, our profitability. And yes, I think those numbers are possible.
spk00: Okay. And then just one last one. What was total price capture for the total company for the quarter?
spk15: We only report on the equipment, so at the 18%.
spk00: Okay. I had to try. Thanks, guys. Appreciate it.
spk06: Once again, if you would like to ask a question, please press star, then 1. And our next question will come from Chris Dankert of Loop Capital. Please go ahead.
spk11: Morning. Hey, morning, guys. Again, to circle back to gross margin, because it was just kind of such an impressive number here, I guess it would be fair to characterize you guys finally hitting, whether it's critical mass in kind of the adoption of the business intelligence tools and the operational efficiency tools. Is that part of what's really driving this uptake? Obviously, price on price goes a long way, but It sounds like your commentary really is pointing to, hey, these efficiency tools have finally hit a point where it is at least a substantial driver of that gross margin improvement and thus is durable. Is that the fair way to characterize it?
spk03: All right. Who's going to volunteer for that one?
spk05: Barry?
spk03: Paul? AJ? Yeah, let's go with AJ.
spk05: I mean, Barry said it early in the call is that some portion of this is structural. You know, there is price on price, like you said, but there is structural as well. And business intelligence and moving our customers purchasing to online and all the other things that are happening in terms of our analytics and our process improvements and so forth, those are structural. And again, we're never satisfied. We are always seeking to continuously improve on these dimensions and they should result in higher gross margins and higher even margins over time. that's been the plan. And, and yeah, I think we are, we are absolutely seeing some of that today.
spk13: And you'd have to say, Jay, we still have a lot of runway on, on being able to implement these all the way through.
spk05: So that's, that's where I get excited. Maybe we're in the second inning now out of the first.
spk11: Okay. Does that make sense? Again, like I said, it seems like it has been, you know, Since 2017 for a lot of these programs, it seems like all of a sudden you're certainly hitting a stride on some of them. So, I mean, maybe you said there's a lot of runway. Where do you see the most runway going forward? Is there a particular program? Is it just integration? Is it just driving adoption? How do we think about these tools going forward and what they can do?
spk03: You mean to quantify that?
spk00: I mean, if you want to, that'd be great. I was more thinking quality.
spk05: We always invite you and others to spend some time with us and really understand or start to understand the scope and the scale of what we're talking about with all these programs. We'll spend three hours together and maybe scratch the surface and you can understand the breadth of it. That might be a way to answer your question, though. That's a very good answer.
spk15: I would say that the tease of that is this, that the e-commerce is meant to fit any customer anywhere, period. Not large or small, not north or south, but any customer we believe should be on the platform. To the extent we have, let's say, a $100,000 customer that's somebody else's million-dollar customer, how do we get access to that book of business through the technology? How do we get that adoption going. How do we make a material dent and what is a smaller customer and make them larger customers? So that's my tease is, is if you, if you spend the two or three hours with AJ and team, you'll understand how that's being developed and how it's being done.
spk13: And I got to add one more thing. And that is with all the labor shortages that everybody's experiencing, including in the HVAC industry. We also forget that our technology improves the efficiency of the mechanic in the field. improves his productivity so that he can perform more jobs, so it becomes more and more relevant that we're able to improve the performance of our customer. That's a benefit that you can't just get from any location except for a Wattsco location.
spk11: And that's an excellent segue, I guess, to my follow-up here. I mean, adding 600 heads in the past year, I guess, you know, How do we think about hiring going forward? Are you finding decent availability of labor? Any comments on kind of how we think about headcount from here would be great.
spk03: Well, we're very decentralized and very entrepreneurial. Those decisions are made locally. Of course, if we open a new branch, which we are constantly doing, we'll add to the headcount. So that's something that's always in motion. We can't quantify to you whether we're going to have 50 new employees because we don't decide that at the corporate level. We let the people that know what's going on in the field decide that. But we certainly are growing branches and employees.
spk11: But it's not something that your regional managers have been saying, hey, this is really an impediment to growth at this point, clearly. You're finding the people you need.
spk03: No, I wouldn't go that far. We do have issues with sufficient help. But as I said, we're very decentralized, and local leaders do what they have to do with compensation. We have a pretty good corporate program for health insurance and retirement, we think. Those are things that we can do at our level. But at the local level, that's done because they understand what they need to do, and they do it. We do have people leave, but it's not yet become, as you can tell by the performance, you know, something that's hurting us.
spk11: Yeah, absolutely.
spk03: Would we like that? Yeah.
spk11: Clearly not that big an issue, but glad to hear that. I mean, it sounds like the guys in the field are making the choices they need to. So we'll listen. Thanks so much for the color, guys, and really congrats on the quarter. Thanks. Thanks.
spk05: Come visit us.
spk03: I mean, just imagine, just to finish that thought, can you imagine what a factory branch does in order to beat the question that you've just raised? How are they going to decide what to pay and how are they going to decide who to hire and how many to hire? That's coming from somebody in corporate. What's a better model?
spk14: Without question. Thanks again, guys. Yeah.
spk06: This concludes our question and answer session. I would like to turn the conference back over to Albert Named for any closing remarks.
spk03: Well, thanks, guys. I really appreciate your interest in our company. I think I've shown you that we can perform well, and we believe very strongly we're going to continue to perform well. So I'll see you at the next conference call. Bye now.
spk06: The conference has now concluded. Thank you for attending today's presentation and you may now
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