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 Namad, CEO of Wattsco. Please go ahead, sir. Good morning.

Welcome to our third quarter earnings call. And this is Albert Namad, Chairman and CEO. And with me is A.J. Namad, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start our usual cautionary statement, this conference call has four 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 states. 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 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're collaborating with them and co-investing to make the needed investments to regain business and add new customers. Moving on. We continue to make investments in the industry's most innovative technology platforms for HVAC 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. And our active users continue to grow faster than non-users. On-Call Air, which is Wattsco's digital sales platform, continued to expand and generate growth for our contractor customers. Thus far, in 2024, On-Call Air contractors presented close to approximately 258,000 households, a 17% increase, and generated $1.2 billion of sales for our contractors. That's a 22 percent increase over last year. We are also leveraging our technology platforms to optimize the launch of the new federally mandated A2L systems beginning in 2025. Historically, regulatory changes have been 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 alternative systems. The growing penetration of ductless HPA systems has also been a catalyst for growth as they provide homeowners and businesses a more energy-efficient alternative to conventional systems. And now, the A2L transition is upon us, and we look forward to the opportunity. 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 our inventory returns. We are working with our OEM community and continuously improving our methodology to improve our inventory returns. We have also made progress improving operating efficiency across our network. as evidenced by the modest change in SG&A 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 and product diversity, particularly in high-growth markets. And finally, our balance sheet and access to capital enables future investments in our 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 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 1 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 2. 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 branches shut down for a couple days for Helene, and then we also had them shut down for another couple 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.

More or less. Yeah. Yeah, just to add to that, I've said for many years growing up in Florida and being in Wasco 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 You know, 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 or 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 mid-single-digit growth in October as just a temporary snapback from storm activity, 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 kicks in, the insurance is going to 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. Not material to watch go.

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

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%. So our engines are revved up and we very much have a focus on gross margin and we're investing there and have high expectations.

I think in the analysis, in the analysis, Dave, you know, there's, there's obviously the magic, 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 ROEMs who listen to this call along with all of you, you know, this is a very critical stage to where we're making tremendous investments. Inventory is going to completely cycle a year, you know, over the next 12 months. And pricing, marketing, futures and benefits, mix, overall mix, you know, is going to be critical over the next 12 months to drive margins. 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. In the 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, you know, a longer-term average. So if I try to consider stability as well as the opportunity in front of us, you know, 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 Mull with Stevens. Please go ahead.

Good morning. 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 ought to progress and ultimately fade? Thank you. Terrific question.

Who wants to answer? Paul, Barry, AJ? Rick, too. Rick. Didn't mean to leave you out, Rick.

Yeah, I think, I mean, 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 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 if 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, you know, 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. They're a 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?

All right. I also wanted to ask about inventory and any pre-buy dynamics we may be seeing. Al, 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. 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 going to 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, you know, 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 in 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.

Good 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? Because 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. I'll give it to you in a spoon-fed way because this is like critical data. I'm not going to comment as much on specifics for October other than to say – what we've said, which is it's, you know, meaningful unit growth. But let's just be analytical about it and we can talk the business side of it. So for the quarter, overall units were 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 a an 18-month trend where our investments in ductless is paying off very well. Mitsubishi and Gree and Carrier's 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 investments, our business units doing well with ductless products. If I stick to what is ductless, More curious maybe for the group is deducted product, and we're interested in all of it. But deducted 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%. Duct tape pricing is up 1%. And that's kind of like makes sense to me because the OEMs 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 going to change. We know that's going to evolve 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, you know, parts and supplies were down, so there's a mixed element that's occurring, and then you also 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.

Yeah, Ryan, 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, you know, 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 unequipment. 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, you know, in a seasonal period, you tend to have a little bit more residential new construction than you have add-on replacement, right? 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 a 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 Markets. Please go ahead.

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

Good question. Yeah, I can, you know, cover part of that, and that is that, you know, 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, you know, 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, you know, 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.

Okay. And then just a quick follow-on on that. Can you just remind us that the multiplier effect as you do the matched versus and then maybe just touch on M&A environment. It seems like 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, look, Jeff, there's always more M&A to do. There's no way to predict it or to think about a cadence of it. um and i would say that you know private equity was a lot more prevalent in the space um the last two years i i that has subdued a little bit um of late and um you know this is still bigger picture and longer term a very fragmented industry and you know i think there's 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 consolidating an industry. 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. Um, so, so, you know, it's very much a cultural discussion, uh, oftentimes more so than a financial discussion. Um, and then the second thing that I would point to that, you know, I hope leads to incremental opportunity going forward is today, you know, our technology platform and our MNA discussions are essentially one in the same. Um, 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 longterm prospects. Um, so I, I, you know, my job is to help lead some of that. And so I, I, I, you know, I can speak to it with some pride and, and, and we want more of it. Absolutely. But I will also point out that as a seven and a half billion dollar company, now we have a whole lot of internal levers at our disposal to, to grow. And we're not dependent on M&A to grow profitably in the future.

Rick, this is AJ. 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-generational family businesses that we're saying come be part of our multi-generational family business. And be you guys with your leadership team and your branding and your customers and your team, but do it under our umbrella. and use all of our resources. And those resources are capital, it's equity to recruit and retain great people, and it's these technologies which are all about helping you grow and helping your customers grow because that's what we're all about, a 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, ten 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 in many cases faster than our 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 Bellman with J.P. Morgan. Please go ahead.

Good morning, 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 in units year to date and overall is up 5%, which would suggest Atlas is up double digits.

That's helpful.

And just to be like, you know, 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 you know let's join together second third quarter so there's no push and pull you know aspect to it to the analysis so for the season second third quarter combined ducted units are up three percent and overall up five percent so so when we talk about stability that's that's the frame of mind okay helpful um

And then are you, 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, for the 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'll We can't replenish them with the 4th and 8th units, so we'll replenish them with the 8th to all 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 4th quarter because the mix, which I guess hurt you in the 3rd 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 is going to be in the fourth quarter, I would say yes.

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

You bet.

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

Good morning, guys. Thanks for the time. I think it's meant to be a cold winter, according to the Farmer's Almanac, so if that's true, then it should be a little bit healthy, guys. I know you've cut a lot of ground. I don't want to retread the ground we've already taken. Just on the gross margin, it seems like there was a bit of a lapping of price from earlier this year, and It's all 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 as a composite, we look at the most important metric, which is the transactional margin, have any material change to it? 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 and the mix of it. And 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 the base layer into a much more broad part of our business now. And, Paul, maybe you have some perspective on that.

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, guys. And then just a couple of quick ones here. Just on the A2L transition, obviously you've been through many of these transitions before. When you compare this to the 10-SEER, 13-SEER, 22-410A, 13-14, 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, etc., Are they ready for this?

I think the consumer is probably not ready for this. They don't really understand what's going to 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 going to be a bit of a sticker shock, I think, for some of the consumers once they see what the pricing is going to 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 going to pretty easily go through the transition. The only real change in the units is going to be on the inside. You're going to have a detector that's going to detect any sort of leak in the refrigerant into the home. And then if it detects that there is a leak, it's going to turn the blower motor off. So it's not going to 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. So it's going to be the same refrigerant that we've had with 410A, basically.

Okay.

Okay. It sounds like it's not going to be a big deal.

Yeah, I'll just add that it's our job to help them get ready from a technology perspective, a product technology perspective, from a business and selling perspective, and then support them with helping them figure out what products they need and getting technical support and et cetera, et cetera. And we do that at a scale and with a technology background that I think is unparalleled in 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've got to say I'm a little bit surprised with the hurricane's 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 impact, or am I off base there?

Yeah, all right. again, Nigel, it's something we, we tracked down to, you know, dollars and cents in terms of hurricane impact. And we had like the last two or three days of the quarter and we had, you know, 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, um, 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.

I also just want 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 destructions 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 unscathed, 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, you know, all the OEMs pricing for A2L product at this stage? Is there anybody that's, you know, 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. The big question, Steve, is that pricing, you know, going to hold, you know, throughout this entire transition? That's the question we ask.

And do you think customers are kind of looking at it as, you know, a bit of like similar to like a list price increase where, I mean, I think most of the OEMs are pitching it as, you know, 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, you know, because they are adding costs or adding two new components to the system itself. So due to that, I think that, you know, I think the pricing will probably be closer to the, you know, the 8% to 10% range than the 15%, but I think it's going to hold around 10%.

Right. So the... Yeah, so the 8 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.

Steve, I want to 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 skier from an OEM, and the price is quoted to us, we're reselling that $25 million at maybe 1,000 different prices depending on the customer, the market, the end market. There's variations, obviously, on our selling price. And more ironically, there's variations on our buy price depending on the intended, again, customer or end market. So this is an art form more so than just strict 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 has 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 OEMs 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 and a spreadsheet, it's a lot more complicated than that.

A lot more complicated than that, yeah. I wish it was as simple as that, but it's not as simple as that because you do 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 3Q. 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, like, commercial?

I think as the availability of the commercial product improved, I think we saw, you know, some reduction in some of the pricing. But as far as the demand, the demand has remained fairly strong.

Okay.

And 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 to all of you, and we hope you'll be here for the next quarter's 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.