Watsco, Inc.

Good day and welcome to the WattsCo Third Quarter 2024 earnings conference call. Please note that today's event is being recorded and all participants will be in a listen only mode. Should you need any assistance on today's call, 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. If you'd like to ask a question, you may press star then one on your telephone keypad. And to withdraw a question, please press star then two. Also please be aware that today's call is being recorded. I would now like to turn the call over to Albert Namid, CEO of WattsCo. Please go ahead, sir. Good morning. Welcome to our Third Quarter

earnings call. And this is Albert Namid, Chairman and CEO. And with me is AJ Namid, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start our 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. WattsCo produced record sales and net income for the quarter. Our markets have shown signs of stability and the fourth quarter is off to a good start with October sales up mid-single digits driven by meaningful unit growth. Let me say that again. October sales are up mid-single digits and driven by meaningful unit growth. We also believe we have gained share based on industry data and shipment trends. We have also generated record cash flow this year and our balance sheet remains in pristine condition to enable investments in growth. As communicated in our press release, we are in recovery mode with one of our primary OEMs, a fairly large supplier of equipment to us. We are collaborating with them and co-involving to make the needed investments to regain business and all new customers. Moving on. We continue to make investments in the industry's most innovative technology platforms for HBHC contractors. Greater adoption and use of our platforms by a growing number of contractors has helped produce market share gains. Annualized e-commerce sales now exceed 2.5 billion dollars and our active users continue to grow faster than non-users. On-call air, which is Watsco's digital sales platform, continue to expand and generate growth for our contractor customers. Thus far in 2024, on-call air contractors presented quotes to approximately 258,000 households, a 17% increase and generated 1.2 billion dollars of sales for our contractors. That's a 22% increase over last year. We are also leveraging our technology platforms to optimize the launch of the new federally mandated AQL systems beginning in 2025. Historically, regulatory changes is good for our industry and good for our business. In 2023, energy efficiency mandates went into effect, providing contractors the ability to upgrade older systems with higher efficiency systems. The trend to electrification of fossil fuel heating has driven increased sales of heat pump systems, which are both sold at higher average unit prices than conventional -of-systems. The growing penetration of ductless HTA systems has also been a catalyst for growth as they provide homeowners and businesses a more energy-efficient alternative to conventional. And now, the AQL transition is upon us and we look forward to the after-debting. Turning to our balance sheet, we have a strong cash position, no debt to support, and that supports most of our investment we choose to make. Although we have produced record cash flow this year, we are still not satisfied with the current situation. We are not satisfied with our inventory turns. We are working with our OEM community and continuously improving our methodology to improve our inventory turns. We have also made progress improving operating efficiency across our network, as evidenced by the modest change in SGMA year over year. But there is more to do. In summary, we operate in a great industry and in attractive geographical markets. We have a proven entrepreneurial culture that empowers local leaders. We possess the industry's most innovative technology platforms for HVAC contractors. We have leading scale in product diversity, particularly in high-growth market. And finally, our balance sheet and access to capital enables future investments in a highly fragmented industry. As always, if you have an interest in learning more, please visit Miami and see us. We are transforming an industry and we'll enjoy telling you about it. With that, let's now go on to Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then one, on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, you may press star, then two. At this time, we will take our first question, which will come from David Manthe with Baird. Please go ahead. Morning, Dave.

Hey, Al, good morning, everyone. First question I have to ask is about the hurricanes, particularly Helene, which hit us pretty hard here in Tampa. Could you talk about the negatives and potential unwinding positives you might see from Helene and or Milton?

Well, let's see if we can get one of us to tell you at least what he thinks. You want to take that call?

Sure, I can get it started. And then somebody else can pick up. But yeah, we had our branch shut down for a couple days for Helene, and then we also had them shut down for another couple of days with Milton. Most everything is back to normal now. And obviously we're seeing an initial rush, at least, of repair components that are going out the door in October. Milton came through so quickly, it really didn't impact us as severely as the other storm. However, when you get up into the North Carolina, Georgia area, a lot more severe damage was done. And it slowed us down, but it didn't really impact our sales that dramatically.

No more or less. Yeah, just to add to that, I've said for many years, growing up in Florida, being in Watsco for 32 years, that hurricanes typically disrupt local markets and may not have an impact on the whole market. And the reverse is true, if there's business opportunity, it's good for those markets and not necessarily material for the national scale. I think the most obvious question and thought is that, when they talk about 10, 20, $30 billion of insurance investment that follows these things, a portion of that always is our industry, be it equipment or non-equipment. But the materiality of that needs to play out sometime this year, next year, obviously. But that's how I've characterized it, at least, over time.

Okay, so, but even though Florida is clearly your biggest market, and Helene in particular ripped up the whole coast, you're saying it's fairly immaterial and we shouldn't view the -single-digit growth in October as just a temporary snapback from storm activities, is what you're saying?

Absolutely not, no. Nothing is that material relative to Helene. And either disruption in the last week of the quarter or to a benefit for the first part of October.

And it's very indicated, when the insurance kick, the insurance is gonna kick in within the next, let's say, 30 to 90 days. So we really don't see equipment sold. What we see is the motors sold, the compressors, that type of thing to start with.

Got it, okay, thanks. And then- Not material

to watch go.

Great, yeah, yeah, thanks for that. And then on the gross margin, came in a little bit light. I know you had a reason for that here that you discussed with your, one of your major OEMs, but just medium term, you still feel good about 27%.

Well, again. This is AJ, I'll jump

in.

The

answer is yes, in the short term, and the ambition is much higher than that. I think we've talked about publicly, one day we'd like to achieve 30%. Our engines are revved up, and we very much have a focus on gross margin, and we're investing there and have high expectations.

Yeah, I think in the analysis, in the analysis, Dave, there's obviously the magic words are price and mix, and price overall was pretty consistent this quarter, so that's not really a discussion item. Mix is where variations are so far this year and for this quarter. And the word mix is a broad term, really. There's customer mix, there's geographic mix, there's product mix, there's end market mix, there's brand mix. So a little bit of weight in those factors if I spent 20 minutes explaining to you what I just said. A little bit of weight on margin this quarter, but those are short term conversations. And I think if you consider the A2L transition in front of us, if I look forward, it's really an opportunity to basically reprice and go to market with what will essentially be 60% new products over the next 12 months. So our OEMs who listened to this call along with all of you, this is a very critical stage to where we're making tremendous investments. Inventory is gonna completely cycle a year over the next 12 months. And pricing, marketing, futures and benefits, mix, overall mix is gonna be critical over the next 12 months to drive margin. I think one of the messages we tried to convey in the press release and I'll convey now is, and somebody will ask this question is, where are we in terms of unit volumes and stability and things like that? And year to date, unit volumes are positive and a quarter they're overall positive for our selling season, overall positive. And positive to the extent that it's kind of conventional growth rates in units. I look at longer term average. So if I try to consider stability as well as the opportunity in front of us, that's where we have some optimism in what we're doing.

Great, thanks Barry, appreciate it all, thank you.

And our next question will come from Tommy Moll with Stevens, please go ahead.

Good morning. Yes sir, and thank you for taking my questions. I wanted to start on some of the co-investment you described in the press release this morning alongside one of your OEM partners. And it's a two part question here. First part is where you did call it out this morning with substantial detail, did something change since last quarter that prompted the enhanced discussion on this item? And then as you look forward, is there anything you can do to calibrate our expectations about how this progress and ultimately fade? Thank you. Terrific question.

Who

wants

to answer, Paul, Barry, AJ? Rick? Rick, didn't mean to leave you out Rick.

Yeah, I think I'll go first and just add to it because it's an important point. And in our collaborative spirit, you'll get insight into how we look at these discussions internally. I wouldn't say anything critically changed in the third quarter as an isolated event. We felt it's needed to kind of reconcile where we are year to date. A year ago, we talked about disruptions and whatever the range of revenue was, $150, $200 million of revenue at the time. You have to go back and look at the disclosures. But a year later, the idea of recovering that business, growing volume, growing market share, reestablishing market share. These are markets like Florida, Texas, California, that are huge markets, Carolinas as well. And there is a collaboration, there is a co-investment, we use that term intentionally in the press release. Where we work with our OEM partner and try to figure this out. And this is the scorecard year to date. Business and unit growth has outpaced overall growth rates for sure for that particular product group, it better. And when we talk about pricing, if there's more to it than just the price on the product, there's again, the mix of those products. And I'm not going to get too much competitive detail in this discussion in answering you. And the other is incentives that we chose to put on the street to not just get somebody back buying more from us, but getting new customers at the same time. In other words, play offense with this opportunity and that is a shared cost and a shared experience with our OEM. But we thought it was important to go ahead and kind of reconcile that scorecard year to date and that's what we've done. Now, as far as lingering impact, which is the second part of your question, there's some lingering impact, needless to say in the fourth quarter. And that dissipates, I would believe more so next year, when again, all the new ATL products will come in and we are kind of truly working on today, a complete set of economics for those new products with all of our OEMs. And it's a chance to kind of recalibrate those economics looking forward.

Yeah, I'll just stress that our OEM partner here is truly a partner. It's their long time relationship. I think it's a successful partnership now. It has been, it will be, it's absolutely a collaboration with them

and

it's nice to have

such a wonderful partner. Anyone else before

we move on here?

Yeah.

All right. I also wanted to ask about inventory and any pre-buy dynamics we may be seeing. Ali, you talked about hoping to improve inventory turns and I did note that inventory dollars were up versus the second quarter, which is atypical. But is some of that just the 410A pre-buy that we're seeing and what's the view there at this point? Yeah, it is.

Yep. Go ahead. Yeah, it is the inventory pre-buy on the 410. As each one of the OEMs has come up with a program to at least fill in for the 410 that they have to be able to manufacture and be completed by the end of the year. And so some of them have asked if they could move the inventory quickly into our inventory so that we can be ready for at least the first quarter, selling the 410A. That should taper down. At the same time that's tapering down, we're gonna be bringing in the A2L inventory. So I don't see much of a fluctuation in the next quarter with our inventory.

Yeah, Tommy, I would just add to that, that when we, most OEMs have had their last call and those products are starting to get received. And so I think as you look forward, to Paul's point about the next quarter or two, the seasonality around inventory probably looks different over the next quarter or two as we go through this transition. And then it probably picks up its normal seasonal cadence sometime middle of next year. Once 410A diminishes as a percentage of shipments and sell through really, and A2L becomes just a greater proportion of sales and our balance sheet as well.

Makes sense and I appreciate the insight. Thanks all.

And our next question will come from Ryan Merkel with William Blair. Please go ahead.

Morning. Hey everyone, good morning. Just wanted to ask on October to start, you said meaningful unit growth improvement and then mid single digit growth. Can you just clarify what pricing is? Cause my assumption was pricing is still kind of running up maybe three, four. So how do we bridge the mid single digits if volumes are popping back positive?

I'll cover that. So let's be careful. Let's be careful. I'll give it to you in a sped way cause this is like critical data. I'm not gonna comment as much on specifics for October other than to say what we've said, which is it's meaningful unit growth. But let's just be analytical about it and we can talk to business side of it. So for the quarter, overall units are up 4%. And that includes both ducted products, which actually declined 1% and ductless products, which were up double digits. So it's a year to date trend. It's probably an 18 month trend where our investments in ductless is paying off very well. Mitsubishi and Gris and Carriers brands and other brands that we sell in ductless have been doing very well, both domestic and international. So there's a bit of a story inside of that number. That's our investment. That's our business units doing well with ductless products. If I stick to what is more curious maybe for the group is the ducted product and we're interested in all of it. The ducted product volumes were down 1% and price was down 1% in ducted products. And again, that has nothing to do with deflation or average selling prices in terms of price risk that is mixed. That's what I'm alluding to earlier in the call where if I look at brand mix, customer mix and market mix, there's a little bit of a weight in price this quarter. For the year, for year to date, units are up 5% and unitary pricing is up 1% ductless products. Pricing is up 1%. And that's kind of like makes sense to me because the ILLIOMs launched pricing earlier in the year. I think they've all kind of said about the same thing about it. And this is a year where price has not contributed really anything to the equation. And honestly, I'm quite glad our gross margins kind of look the way they look in the absence of any price. And we know that's gonna change. We know that's kind of all from here

and I welcome anybody else's color. Okay, well, yeah, that's

helpful. That explains it then. And then just back to gross margins, can we bridge 3Q back to 27%? It sounds like parts and supplies were down so there's a mixed element to it. There's a mixed element that's occurring and then you also, you didn't quantify for the quarter, but this co-investment. So just can we get back to 27% or what are the pieces?

Go ahead, Rick.

I think you heard AJ say the answer is yes. And I think there's an upward bias to that over time. But let me try and start with, I think the most important layer of margin, which we haven't talked about and has been consistent is our transactional margin, our invoice margin, which is the most basic form of margin that any distributor can have before you get to mix. And to Barry's point earlier, that transactional margin is constant versus last year in a year where there's been relatively no contribution to price at all in our gross margin. That is a testament to some of the pricing technology that's been deployed and it's a testament to the work that our field leaders are doing on this subject. So then, so what do we bridge if transactional margin is constant and consistent with last year? And it's those four basic elements of mix that we've talked about. It's firstly, a difference in growth rates between equipment and non-equipment that will always weigh on your overall margin to some extent. Secondly, within equipment, it is a difference in growth rates between residential and commercial. Residential has been in that low single, mid single digit type environment and commercial has been higher. We like that because we have profit dollars to account for that higher growth rate, but it does weigh and influence your overall mix. Thirdly, and particularly in the third quarter, in a seasonal period, you tend to have a little bit more residential new construction than you have add-on replacement. It's a time where the builder channel gets a lot of things done and that tends to weigh a little bit and it has been true that for the last year or two, the residential new construction end market has been outpacing add-on replacement. You can look at the housing completion data to tell you that. And then lastly is this element of customer mix, which is the hardest one to untangle in some ways, but if you just simply segment your customer base, you do see differences in growth rates. And what we see in our data is that larger, more progressive, more tech enabled customer is growing faster than his or her counterpart that is smaller and less sophisticated. So not to write the whole paragraph about it, but those are the three or four elements of mix that explain and help contextualize a year date margin profile that looks different. I go back to where I started, which is the key point in all of this is that that transactional margin, same customer, same product, is very consistent with last year.

That's a great answer, Rick. Thanks for that. I'll pass it on.

And our next question will come from Jeff Hammond with KeyBank Capital Market. Please go ahead. Hey, good morning,

everyone.

Good morning.

Just on the A2L new product introductions, just what kind of pricing are you seeing relative to kind of this 10 to 15%? And as you talk with your major OEM partners, just address kind of their readiness, so there's no kind of hiccups as you transition.

Yeah, I can cover part of that. And that is that among all of the OEMs that we talked to, everybody is ready. As a matter of fact, one OEM has started their launch in the fourth quarter and we've actually taken equipment in and started selling A2L. When it comes to the pricing, the pricing has been consistently in the double digit, low double digit range. It's been around 8% to 10%. Some pricing a little bit higher, but we're going to have to wait until probably the second quarter for that to be adjusted to find out exactly where that price settles. It's an unusual situation for each of the OEMs because it's a total new product line that's going to be offered. And it's an unusual situation also that the consumer is going to have to buy a system now as opposed to in the past when we've sold the 410 product, they could just install the outdoor unit. And now you're not going to be able to do that technically. You're supposed to replace the indoor and the outdoor unit both. So it's not just the raising of the price. It's also the idea that we're going to be selling more systems and less single unit replacements once the A2L becomes firmly lodged. And that's going to be spread out over all 120 million units that are installed out there right now will at some point have to be replaced all at various times. But it seems to us that it's a wonderful opportunity not only for the price increase, but also for the system. So.

Okay. And then just a quick follow on that. Can you just remind us that the multiplier effect as you do the matched versus the standard and then just maybe just touch on M&A environment? It seems like, you know, the PE has gotten more crowded in this space and just what you're seeing in general.

I can tackle the M&A piece here. I mean, it's looked after. There's always more M&A to do. There's no way to predict it or to think about a cadence of it. And I would say that, you know, private equity was a lot more prevalent in the space the last two years. I, that has subdued a little bit of late. And, you know, this is still bigger picture and longer term a very fragmented industry. And, you know, I think there's the, what a lot of you all from the outside don't see as it relates to M&A is two things. One is that we're very focused on partnering with the right entrepreneurs. And that's different from, you know, consolidating an industry. We, that cultural element of M&A is very, very important. We want the right entrepreneurs who will embrace our technology, embrace our growth spirit and our equity culture to help transform their business. So, you know, it's very much a cultural discussion, oftentimes more so than a financial discussion. And then the second thing that I would point to that, you know, and I hope leads to incremental opportunity going forward is, today, you know, our technology platform and our M&A discussions are essentially one and the same. You know, we've always had access to capital, we've always had scale, we've always had great vendor relationships, we've always had an equity culture. Those things have been constants for 35 years since we've been in distribution. What's different today and what has been different over the last five years is, we've invested in this technology platform that I think now is well, better understood, if not well understood out in the market, and it's leading to more and more discussions with long-term prospects. So, I, you know, my job is to help lead some of that and so I, you know, can speak to it with some pride and we want more of it, absolutely. But I will also point out that as a $7.5 billion company now, we have a whole lot of internal levers at our disposal too to grow and we're not dependent on M&A to grow profitably in the future.

Rick, this is Asia. I think what you said about these being cultural discussions, more than financial discussions, is so true and it runs both ways where it really has to be a good fit for the family. These are often multi-family, I'm sorry, multi-generational family businesses that we're saying, can be a part of our multi-generational family business and you be you guys with your leadership team and your branding and your customers and your team, but do it under umbrella and use all of our resources and those resources are capital, it's equity to recruit and retain great people and these technologies which are all about helping you grow and helping your customers grow because that's what we're all about, is long-term sustainable growth for the business. And those families and the leaders of those families that have joined our business over the last five, 10 years are really going back forever, they're thriving in that environment. They're happy, they're still running the business, they're motivated and they're growing and in many cases faster than our, if you would call legacy businesses, if you will. So it has to be a fit and when it is a fit, they seem to be home runs, which is what we're going for.

Well

said, Mr.

President.

Okay,

thanks. Again, if you have a question, you may press star then one to join the queue. Our next question will come from Patrick Bauman with JP Morgan, please go ahead.

Hi Patrick.

Morning Al, how are you?

It's hot and humid.

Yeah, it's actually warmer up here than it is usually for this time of year. Just wanted to maybe quickly go back to something Barry said on units. I think he said year to date up 5%. Was that a total unit comment or was that, I assume ducted is not up that much, right? Just maybe clarify that if you could.

Yeah, I should clarify that. So ducted is flat and units year to date and overall is up 5%, which would suggest that was a double digits.

That's helpful.

And just to be like even more refined, we mentioned this in the press release. If I look at our selling season, so I'm really looking at joint performance of our seasonal business. Let's join together second, third quarter so there's no push and pull aspect to the analysis. So for the season, second, third quarter combined, ducted units are up 3% and overall up 5%. So when we talk about stability, that's the frame of mind.

Okay, helpful. And then, have you guys been, I think we talked about inventory earlier, you expect it to be stable through the end of the year. Is your view that is the channel restocking currently in terms of inventory? Yeah, the

channel right now is picking up 410A equipment, which they'll pick up in November, December and January. And so yes, it's not restocking. It's kind of a pull forward, if you will, into its first quarter sales. Fourth quarter shipments, it'll turn into first quarter, second quarter sales.

Right, right, yeah, I think the industry and us included are bringing into our barns, we're a large part, bringing into our barns what we'll sell, 410A products we'll sell through the first quarter. And as that is being sold through, we can't replenish them with the 410A units, so we'll replenish them with the 820L units.

Helpful. And then one for you on margin, on the gross margin side. Normally there's like a lift, I think, from seasonality in the fourth quarter, because the mix, which I guess hurt you in the third quarter, typically improves somewhat. Is that reasonable to assume this year, or are there factors like that OEM investment collaboration that holds that back in the year end?

I think we should see some lift with the mix as we get into the colder season. We start seeing more furnaces, more heat pumps, which have obviously higher margins to them and higher volumes. So without knowing what the weather's gonna be in the fourth quarter, I would say yes.

Okay, that makes sense. Thanks a lot, appreciate the time.

Dad. And our next question will come from Nigel Coe with Wolf Research. Please go ahead.

Morning, Ily. Good morning, guys. Thanks for the time. I think it's meant to be a cold winter, according to the Pharma Salmon Act, so if that's true, then it should be a little bit of help for you guys. That'd be great. I know you've cut a lot of ground. I don't wanna retread the ground we've already taken. Just on the gross margin, seems like there was a bit of a lapping of price from earlier this year, and you talked about mix and some OEM support. Is there more discounting going on, especially at the higher tier levels? Is that a factor at all in some of the gross margin pinch here?

I think, you know, if you listen to Rick's comments of the composite, we look at the most important metric, which is the transactional margin. We didn't have any material changed here. The answer was no. So I don't think, you know, I'm not saying neutral is exactly what we want, but it means there's not been a risk factor relative to deflation, let's say, at really any level of product group. So I think it's more subtle in the mix of it. I think, again, Paul, you have a good insight into this, but the higher tier systems, the 16, 18, 20 plus tier systems really only came into existence in our inventory sometime late last year, and has not really been a factor, if you will, in the sales process this year. I think the movement of energy efficiency mandates that happened in last year kind of condensed, you know, the base layer into a much more broad part of our business now, and Paul, maybe you have some perspective. Yeah,

it happens every time we've gone through a change in standards with the federal government, and that is there's a compression where a greater percentage of the industry moves towards standard efficiency, and with this last energy efficiency change, they basically increased the efficiency to roughly 15 seer from 14 seer, and so when they did that, we definitely saw a compression where the high efficiency equipment shrunk as far as a meaningful size in the marketplace.

Okay, that's helpful, thanks, Gus. And then just a couple of quick ones here. Just on the H2L transition, obviously you've been through many of these transitions before. When you compare this to the 10 seer, 13 seer, you know, 22 to 410A, 13 to 14, do you think the contractors, the end customers, are ready for this transition? And obviously you're very close to those guys, you provide a lot of training support, et cetera. Are they ready for this?

I think the consumer is probably not ready for this. They don't really understand what's gonna be coming at them. As we indicated earlier, it's going to be a system change out, not just an outdoor change out, and that's gonna be a bit of a sticker shock, I think, for some of the consumers once they see what the pricing's gonna look like. So it's more than just the 10% price increase, it's also the entire system. The contractors themselves, I think they're gonna pretty easily go through the transition. The only real change in the units is going to be on the inside. You're gonna have a detector that's gonna detect any sort of leak in the refrigerant into the home, and then if it detects that there is a leak, it's gonna turn the blower motor off, so it's not gonna contaminate all the indoor air. That's the biggest change. Outside of that, the refrigerant itself is going to have a different component in it than the old refrigerant did, but it's still the base component in both refrigerants. The 454 as well as the 32A is still 32A. It's gonna be the same refrigerant that we've had with the 410A, basically. Okay, okay. It sounds like it's not gonna be a big deal.

Yeah, I'll just add that it's our job to help them get ready from a technology perspective, product perspective, from a business and selling perspective, and then support them with helping them figure out what products they need and getting technical support, et cetera, et cetera. We do that at a scale, and with the technology background that I think is unparalleled on the space, and sets us apart, and I think is a big reason why customers or contractors choose to do business with a watch company.

Okay, okay. And then just a quick one, if I may. Obviously, great news about October up mid-singles, and I know you said no more details on that, but I gotta say, I'm a little bit surprised with the hurricanes' impact in Florida and the Southeast. I know you've got some extra days selling in October, so is there some benefit from selling days in October offsetting some of the hurricane impacts, or am I off base then?

Yeah, again, Nigel, it's something we track down to, dollars and cents in terms of hurricane impact, and we had the last two or three days of the quarter, and we had three or four days for Milton this quarter, so I think if we had any pickup, it's been offset by disruption with Milton, and again, in relative terms, not that material of an event. I think with the destruction that is obvious in these markets, there's a business opportunity that will flow once insurance money flows. Nothing is immediate, but the word destruction I'm using purposely because that's what has gone on in those markets. There will be that opportunity once dollars flow.

Right, okay, thanks, Mark. I also just wanted to report quickly, just an important point. We have a lot of employees that are, we're in the path of these storms, and I'm very happy to say that everybody is safe and accounted for, and those who have destruction in their homes or problems that we could help with, we are helping to the best of our ability. We care very much about our team members, and we're very thankful everybody came out on stage relatively speaking.

Amen, I agree with that, thanks. Well said.

And our next question will come from Steve Tusa with JP Morgan, please go ahead. Senor Tusa, how are you?

Hey, good morning, sorry, just to follow up to Pat's question, got a little bit late on the call here. Do you have complete visibility into all the OEMs pricing for a 2L product at this stage? Is there anybody that's playing a little more close to the vest than others? Not just your suppliers, but kind of across the industry?

Yeah, we have visibility into every manufacturer's pricing. There's only one or two that right now have not really fully released their pricing. I think it's not that they're trying to be coy or sly about how they release their pricing, I just think that their timing is probably just a little bit off. But for the most part, we've got most of the pricing in. And the big question, Steve, is that pricing gonna hold throughout this entire transition? That's the question we ask.

And do you think customers are kind of looking at it as, a bit of similar to a list price increase where, I mean, I think most of the OEMs are pitching it as, cost push, which is just inevitable, versus like, hey, here's the new price, and then let the negotiations begin? Or how are most of them looking at it?

I think most of them are very serious about this price, because they are adding costs, or adding two new components to the system itself. So due to that, I think that, I think the pricing will probably be closer to the, the eight to 10% range than the 15, but I think it's gonna hold around 10%.

That's

why it's-

Right, so the, yeah, so the eight to 10 is kind of a bit of a discount to what they had previously said.

I think a little bit, but not that much. We'll have to wait and see and find out. All I got is opinion right now, you know? Yeah. Steve,

I wanna remind you, I mean, maybe you're asking that question from an OEM perspective, but from our perspective, if we buy, let's say, $25 million of one skew from an OEM, and the price is close to us, we're reselling that, that $25 million at maybe a thousand different prices, depending on the customer, the market, the end market, those variations, obviously, on our selling price, and more ironically, there's variations on our buy price, depending on the intended, either, again, customer or end market. So this is an art form, more so than district analysis, and when we allude to technology that's helping us do that, and raising margin over the last four or five years, that's where technology's played its role is, in that snowflake management, if you will, we have a much more gifted capability than we had three or four years ago, and in this transition, it's another chance to accomplish the same thing, and if we need to react to a market condition, and we have our early ends react to our costs, so that fluidity is why this is hard to predict, but I can tell you why it's benefited us in the last three or four years.

Right, and I guess your point is that to take 10% or whatever and stick it into a model on a spreadsheet, it's a lot more complicated than that.

A lot more complicated than that. That's very elusive. All the variable price, I wish it was as simple as that, you probably, but it's not as simple as that, because you have the different market segments, and you've got originality to the pricing.

Got it, one last one for you, just on the light commercial side, everybody's had a pretty good three-queue, one of your peers said it's a little bit slower in the fourth quarter. Any signs of weakening there on the back of fundamentals in the next year for light commercial?

I think as the availability of the commercial product improved, I think we saw some reduction in some of the pricing, but as far as the demand, the demand has remained fairly strong. We're still up double digit.

Yep, great, all right, thanks guys, as usual. Thanks for the details.

All right, guys.

And this concludes our question and answer session. I'd like to turn the conference back over to Albert Nauman for any closing remarks.

Once again, it's always good to communicate for all of you, and we hope you'll be here for the next quarter, numbers and performance. So thank you for your interest in our company, and as we said earlier, it's winter, why don't you come down to Miami and see us for yourself?

Bye-bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.