Watsco (NYSE:WSO) Q1 2020 Earnings Call

0:00 Today, and welcome to the WASCO first quarter 2020 earnings conference call. All participants will be in a 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 touchtone phone. 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 Nahmad, CEO. Please go ahead.

0:33 Morning, everyone. Welcome to the first quarter earnings call. This is Al Nahmad, Chairman and CEO. With me is AJ Nahmad, President, Paul Johnston, Executive Vice President, and Barry Logan, Executive Vice President. Now, before we start our 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. Once again, good morning. I hope you and your families are healthy and getting through this period safely.

1:20 Today especially speaks to Wattsco's strength and innovative spirit. These are attributes that we believe will bring comfort and confidence to our employees, our customers, OEM partners, and our shareholders. As we highlight in our press release, Wattsco's financial strength is our most important attribute. Our philosophy of maintaining a strong balance sheet, low debt levels, and ongoing access to capital is a significant advantage for us as we work through the impact of the pandemic. We are well positioned to support our customers, employees, and OEM partners while actively looking to invest in expanded product offerings, new locations, and acquisitions to benefit our long-term.

2:11 Our ability to generate consistent cash flow also represents an important strength. Next week's scheduled dividends predict which reflects an 11% increase signals our confidence in our business. We also operate in a great industry as HVAC products are fundamental necessities in homes and businesses. Local authorities in our markets have deemed our industry as essential. Our branches are open, providing needed products and services to our contractor customers. Watsco's technology team has also accomplished a lot in recent weeks, and adoption of our tech platforms is rapidly expanding.

2:58 In terms of day-to-day activities, our leaders took immediate actions in response to the pandemic, in many cases in less than 48 hours. For example, branch locations were quickly transformed from retail walk-in showrooms to no-touch e-commerce curbside pickup centers. These changes have been well received and our customers are asking us to sustain these services going forward. As to growth and investment, we remain in touch with great companies, knowing it's an opportune time for them to join the Watsco family. Our resources can help them grow and develop scale and we can provide access to our great technology platforms.

3:45 In terms of results for the first quarter, sales growth was driven by strength in U.S. markets for residential HVAC equipment, which grew 5%. Sales and earnings in international markets declined due to softer market conditions and strong comparable results. Results also reflect 35 new locations, mostly from acquisitions completed in 2019. including Pierce Phelps, Dasco Supply, and NNS Supply. These companies come with great leaders who are now part of our culture and team and are responding to current events in their respective markets.

4:30 Further analysis of our financial results are provided in our press release. I will not recite these details in my prepared remarks, but we will be happy to provide more color during the Q&A. With that, AJ, Barry, Paul, and I are happy to answer your questions. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. The first question today comes from Josh Pokrowinski of Morgan Stanley.

5:15 Please go ahead.

5:16 Morning, Josh. Morning, Alan. How are you guys doing?

5:20 Well, it's sunny and pretty here, but we've got our heads down. Building to come.

5:25 Understood. But, you know, to be fair, just another day in Miami, so I hold that against you. I hear you. Not nearly as fantastic as being cooped up in Connecticut. Okay. So I appreciate that visibility is kind of tempered right now. But a couple questions that I just want to make sure that to the extent that you don't really have a ton of visibility, maybe you can still answer. I guess first, have you seen any change in consumer behavior vis-a-vis trading down in efficiency or more repair versus replace? Anything that would give you an indication of Hey, people are still spending money, but under the surface, there's a couple changes afoot. Has that shown up? Have you gotten that anecdotal feedback yet?

6:15 Well, our data expert, Paul Johnston.

6:19 Jesus. A little bit. In the first quarter, we really didn't see it. We had a pretty good balance between system sales as opposed to just an outdoor replacement. Perhaps, anecdotally, we'll see a little bit more of... of a repair or just replace the outdoor unit in the second quarter perhaps. Really, we're not at the consumer level, but what we hear from our contractors is regular checkups and service calls that don't require repair are pretty much being pushed out right now. Consumers aren't looking for someone to be in their home.

6:59 Got it, which would be more of a social distancing comment, not a like, hey, I ran out of money comment.

7:06 Correct. No, but they also have a very effective consumer finance program that would help with such a thing, if it should come to that.

7:15 Yeah. Got it. And then I guess, you know, I'll leave some of the other kind of, you know, near-term or, you know, macro questions to some of the other folks. But, you know, maybe to turn away from COVID for a second, you know, obviously one of your major equipment partners, you know, is now kind of liberated from, you their multi-industry owner. What have been kind of the early changes, observations, engagement, actions that you guys have seen with Carrier now?

7:50 Well, first, it was good news that they separated. They can be focused on our industry, and they are. They're very well-led. They're very responsive. I think I saw great news going forward. I couldn't be happier.

8:10 Anything, I guess, more specific on where they're saying, hey, we did this before, but now we've rethought that initiative? Anything, I guess, more tangible on an action?

8:23 Well, I keep saying the focus. They don't have to worry about dividends going up to the parent United Technologies. That can be more focused than they are. and they assure us in investing in their own industry, in their own company. It's all great news. There's nothing negative about what's occurred. And we very much like the leadership.

8:48 Okay. Thanks, Al. I'll leave it there. Okay. The next question today comes from Brett Lindsey of Vertical Research Partners. Please go ahead.

8:57 Morning. Hi. Good morning, guys. Hope you're well. Hey, just a question on pricing. I guess from your vantage point, are you seeing any signs of deflationary pressures across some of your markets as we've shifted in April here, be it on the equipment side or other products, which I think you typically do see it first in?

9:18 Paul? No, we're not seeing any deflation. In fact, we've had some of our commodity pricing actually starting to move back up again. So no, no deflation.

9:33 Okay. And I guess I'll ask the April question, maybe just an update on the trend so far. You did mention in the release it decelerated, but just any sense on the magnitude, and then if you could maybe just drill down into the regional or state-by-state view, you know, any particular regions that stand out, strong or weak. Thanks.

9:54 Well, in terms of April... and we don't like to get ahead of ourselves because once again the most important thing is that the first quarter is over. That's always the fourth and first quarter always don't tell you much. But April is the beginning of the second quarter and that's about the same time that people were asked to stay home or people were shut into their homes. Now that we sensed at the beginning of April some softness due to the that transition that was going on. People didn't want any strangers in their house or contractors they would know. They just didn't want much of that. However, I will say that we think since the beginning of April, it's stabilized. That was a quickie that happened in the beginning of the first couple of weeks of April, and we believe that everything is stabilized now.

10:59 Okay, I'll leave it there and pass along. Thanks. The next question today comes from Steven Volkman of Jefferies. Please go ahead.

11:09 Good morning. Good morning, gentlemen. Thanks for taking the question. A couple of sort of recession questions for you since we seem to be heading into one. I think you alluded earlier, maybe it was Paul, to the fact that you might see some mix shift toward parts and away from units. Is that something you've seen historically, and should we expect a little bit of margin improvement because of that?

11:37 Well, I can say this unequivocally, that last time there was a downturn, the product mix went a little bit more towards parts than equipment because consumers wanted to repair parts. and many more. Sure, it may slow sales, but from a perspective of cash flow, it'll be very strong.

12:29 Do we see any evidence of that now? I don't think so. It's too early. It's just beginning to get into an air conditioning season.

12:40 Okay, great. You sort of predicted my follow-on, Al. Are you guys planning to... reduce your inventories already, or is it too early to make that decision?

12:52 Well, we're going into the season now. I wouldn't say we're planning to reduce, but we're certainly, and I think the question is well asked if we're talking about how we're handling orders for the future. And we have great software that helps us with that. But basically, we're a decentralized organization and our regions, people that lead our regions, they influence that question. If they think they need to ramp up with inventory using our tools, they can do that. If they think they'd rather be more conservative, they'll do that. We don't try to determine inventory levels at the corporate level because we think that it's better to make those determinations in the markets that we're in.

13:45 I just want to add one layer of thought to what you asked earlier about the product mix. First, replacement parts themselves are under 10% of what we do, just to put that in perspective in terms of the understanding of that question. What we highlight in the press release is diversity of products. and so what what just like any other consumer product what what we see always is mix that can happen within the brands we sell within the price points we sell within the entire kind of array of products that we sell when it comes to equipment and contractors who are at the kitchen table or at least today using our our selling platform maybe not be at the kitchen table is offering that variety of price points. And that's what we like about our business a great deal is that diversity is there.

14:41 I would say our competitors in some cases have more concentration of fewer brands versus the wider array of more brands and those kind of circumstances. So again, when we use that term diversity in the press release, that's part of what we're talking about.

14:58 Great. Thanks, Barry. I'll pass it on. Thank you, guys. The next question comes from Ryan Merkle of William Blair & Company. Please go ahead.

15:08 Hi, Ryan. Hey, good morning all. So first off, just wanted to clarify the comment on April. So it sounded like you saw trends decelerate right at the beginning of April. Decelerate, yes. Yeah, decelerate. I think, Al, you said kind of stabilized here. Correct, yeah. Is that just in the last couple days, last week? and, you know, I know you never want to over-extrapolate a couple days of sales, but what makes you confident that maybe we could be stabilizing?

15:40 Daily sales numbers.

15:43 And I would say over the last few days. Okay. Okay. I guess we'll see. And then the 5% resi equipment growth, you know, that's what I would have expected, but then it was 2% for the total company, so it implies some big declines in some of the other areas. Can you just expand on that?

16:02 Well, let Barry add to it, but we said in our statements earlier, Canada, Mexico, and exports into Latin America, compared to the last year, were much softer. And it's been a soft business, the international business. And it's also the regions that you could, common sense is if the northeast of the United States is having All the problems that they have been having, it gets softer, at least temporarily. But the rest of our network has been stable throughout the period.

16:47 Yeah, I would not add much to that. It is the international markets. Revenues are down. Profits are down. There was dilution in the quarter for international business. Last year was particularly strong in those markets, so part of that is a comparison. Those things obviously stand out more in what would be the smallest part of our year, which is the first quarter, in terms of their impact on EPS and so on. As Al suggested, where the sun is out and the earth is warm as you go south, we're seeing, again, stability in the business.

17:29 Okay, got it. Thanks for that. I'll pass it on. The next question comes from David Manphy of Baird. Please go ahead.

17:38 Good morning, David. Hey, good morning, everyone. So first question, what part of your business goes away under social distancing? I'm thinking if my AC stopped working down here in, you know, mid-'80s Florida today and I knew for a fact that my contractor had COVID, I'd probably still take my chances. I hope you don't. Conceptually, how do you miss sales if air conditioners are doing what they're doing? Where's the gap in someone saying, I'm just going to wait or I'm not going to have that service?

18:18 Well, that's a very valid issue. I don't think that people will do that because you don't want to be uncomfortable when the heat comes, the hot weather. But if it's mild, you'll postpone. The weather's mild because you don't want a stranger in your home. I'm guessing these things. I don't have data to reflect that. But I think as the temperature warms up, the choice will be less and less. Consumers will have to get their systems working, either upgraded or fix the problem that they have. Right. It's a pretty necessary industry, as you know.

19:05 In fact, as you heard me say, we're considered an essential industry for good reasons. You've got to have the cooling and you've got to have the heating.

19:21 Right. Yeah, I definitely consider you essential industry. Second question, when we look back to 08, 09, it was obviously a housing-driven recession. That's probably not a good template, but if you go back to 01, 02, the housing market barely paused during that time frame, and your revenues, I think, were down 5% to 7% in that time frame. Is that not a reasonable expectation? Like you're saying here, Al, there's clearly, if an air conditioner goes out, someone's going to either repair or replace it. There's this trade-down effect. and I think that's what leads to those kind of declines is people repairing rather than replacing, lower ticket size and or trading to the good from the better and best. Can you talk a little bit about that as sort of an initial outlook just to say mid-single, is that kind of what we should be thinking about?

20:12 You mean in terms of revenue growth? Yes. Oh gosh, you don't want to do that. It's too early. Much too early. I I don't want to guess. I'd rather report something a little more certain of. But I do know that we are so strong financially that we have an edge over our competition, and our technology gives us an edge against our competition. So we're feeling pretty good about ourselves, and I certainly hope that the M&A program will be... The next question comes from Steve Tusa of JPMorgan. Please go ahead. Hi, Steve.

21:22 Hey, good morning. How are you? Are you in New York City? I'm in the great state of Connecticut.

21:28 Good for you. Okay.

21:30 We're good. Thanks. Maybe one of the few guys left here went all said and done with taxes, et cetera, but, you know, born and raised, so I'm not leaving. I hear you. So I guess you guys aren't going to comment really on your revenues, but, like, you know, Lennox was out talking about a 15% decline in the industry. I mean, any... any broad color on kind of, you know, what you think the industry is going to do this year, not really talking about you guys?

22:00 Gee, I'm not that smart. Paul, do you want to give it a shot?

22:03 Boy, Alex, you're not that smart. I'm certainly not that smart. You know, Steve, we represent so many different products and we represent so many different OEMs and constantly polling them for what their outlooks are and that type of thing and frankly, there's no consensus that I've been able to locate out there to guide us in our direction. So we're with the market. We think we can outpace the market and outgrow the market. So whatever that market is, we think we're going to outperform it. And that's about as close as I can come to a guess on what's going to happen.

22:43 Right, right. Okay, on the margin side, how are you guys thinking about gross margins kind of over the course, you know, assuming, I don't know, if you assume kind of trends that are in line with the first quarter, I guess, or like a flat kind of revenue dynamic? Like where would you, how do we think about gross margins going forward here?

23:04 I understand why you want to know that, but again, that's hard to predict. But nevertheless, let me tell Mr. Logan he should try to answer that.

23:12 Sure, sure. Well, again, with the concentration and equipment and the OEMs, you know, having, you know, fairly close watch over their own pricing and margin, I don't think there's any disruption or any real strangeness or weirdness that we would expect to come from that. The price increases of a couple of years ago obviously did disrupt what ended up being margins, and we're kind of climbing through that and working with our OEMs through that as well still. But, see, I don't expect any anything dramatic or epic or disruptive or necessarily helpful either as we're in this kind of arena. So I think you see some progress in terms of this quarter versus the sequential change of last quarter and the prior one.

24:03 Again, we'll get it this season and we'll know more, but I don't expect any disruption to price.

24:08 I guess you guys had guided for up gross margins last quarter. I mean, did we kind of read into that too much? Is that still kind of on the board or maybe misread that comment?

24:18 Oh, gosh, whatever we did last quarter, no pandemic was in view at the time.

24:27 That's a very, very, very fair comment. Just one last one. I know you guys don't touch commercial a ton, but what are you seeing there in the last several weeks on the commercial unitary front or VRF front? Paul?

24:47 Well, the Northeast for sure.

24:50 Yeah, it's very heavily skewed towards international and the Northeast for us on the VRF and the commercial applied products and All those projects and jobs have basically been stopped, so perhaps we'll have a little backlog there. On the unitary side, unitary has been weak, and it's going to probably be a little bit longer term before that comes up. Once again, when you take commercial in total, it's a small percent of our total business.

25:24 Okay, yep, yeah, they just, you guys always have a good window and, you know, hear what's going on out there, so I thought I'd ask. All right, thanks a lot, and best of luck to you guys executing through whatever comes the next couple months here. Thanks a lot.

25:36 That's very nice. Thanks, Keith. The next question comes from Jeff Hammond of KeyBank Capital Markets. Hi, Jeff.

25:45 Hey, good morning, guys. So just on, I guess, you know, maybe focusing on the 1Q margins, which were down, you know, I know it's a shoulder quarter. Can you just give some better color, you know, because I think you gave, you know, on the same store and extra investments, you know, margins were still down. I'm just trying to understand, you know, was it mixed? Was it some, you know, other added, you know, SG&A costs, et cetera?

26:11 I'm not sure I understood, but, Barry, you're the numbers guy. What do you got?

26:15 Sure. Well, on the gross margin, Jeff, again, we do operate with higher gross margins internationally and in the Northeast. So there's some algebra there that did impact the performance in the quarter. It accounts for some of the profitability dropping down to the EBIT line as well. On SG&A, there were investments made in the business to start the season as we get into the year, and that SG&A does stand out, again, in a shoulder quarter like this. some technology investments, as we highlighted, is in that number as well. And so it goes into the mix of how our leadership is managing their local markets, and SG&A will play out very differently and very sensitively to what's going on in local markets.

27:02 But to start the year, you know, just some of these numbers show up more materially in terms of their impact in the shoulder quarters.

27:12 But, you know, I keep trying to communicate a picture here that Financial strength that we have, little or no, very little debt, allows us to move with the market wherever it goes. If it gets softer, we use all the attributes that we have. We've talked about diversity of products. We've talked about technology that allows for speedier service. We've talked about our ability to finance the contractor and the homeowner. All these things come into place. I'm very, very happy in our position now. I'm so glad we have very little debt. I just think that wherever the markets go, we're just going to be probably the strongest distributor out there.

28:06 This is AJ. I have to say that in my own words. I appreciate the micro questions on this. Q1 and April and you know those are very hard to see forward but we have to remember the macro picture of Wasco this is a long-term company and we have tremendous leadership at the local and the regional level and in the face of this pandemic we're operating from a position of strength from financial strength from leadership strength from market strength and in the words we used earlier we've got our heads down every part of the business and everybody in the business is focused on not surviving this pandemic but how we're going to thrive and how we're going to be a better company and how we're going to take market share and the early results of what's in play and the expectations of how we'll operate and what we'll look like on the outside of this relative to our competitors is exciting and it makes me very proud.

28:57 So you've heard some examples with the contactless pickup. I mean, that happened in about 48 hours on a manual basis and the next week or so, that will be digitized throughout our apps facing the contractors and apps facing our warehouse guys and teams and that will transform how we operate and the customers love it and this is just one example. So, just there's a lot of exciting energy going on about processes, about leveraging our technology and our data in ways that we never even thought to explore before or put more focus, more heads down and we're going to thrive. This is awkward to say maybe, but it's sort of an exciting time from that perspective if you look at the long term.

29:46 Okay, great. And then just, you know, I guess if we get into it, I mean, it sounds like you're seeing some stabilization into April, but if we get into a period of, you know, 5% to 10% declines, you know, this settling season because, you know, the economy is taking a big hit and, you know, unemployment is high, etc., Do you guys anticipate just continuing to invest through that decline period? Absolutely.

30:10 No, absolutely. That's the nature of our thinking because our financial strength allows us to invest during downturns as well as steady markets. We are long-term orientated and we have the ability to invest and will continue to invest. We're relatively at $5 billion revenues in that size. It's a $40 billion market. We're very ambitious. In order to get some growth, you've got to continue investing, and you've got to continue improving the customer experience, things that we're really getting good at. So we're not going to stop the investing.

30:58 And Jeff, we reminded everyone in the press release that in 2009, that is when we made our largest investments in our careers. And it wasn't just buying a company or doing a joint venture. It was adding capital and adding branches, adding people, adding an entire renaissance to a business in the middle of the recession last time. And dividends were increasing and cash flow was increasing. So again, it's a script that we know and can play out.

31:30 Just a final one on the mobile. It looks like about 8% of your contractors use the mobile app, but like 36% of sales are e-commerce. Is that still a lion's share of the e-commerce is done through computer-based online ordering? I just want to understand the difference between mobile app usage and ordering on there versus just kind of the broader e-commerce comment.

31:58 Well, I don't know the data, where you got the data, but we've expressed that data in the press release. Pick it up from there.

32:07 No, no, I have it. That's what I'm pulling out of the press release.

32:10 Yeah, you're looking at weekly active users on the mobile app. I mean, if you look at monthly or quarterly, you know, it's a much larger portion of our customer base. Those numbers, you know, double. I mean, last year, for example, in 2019, which is a number I have off the top of my head, I think we had about 110,000 unique users of our mobile app, so... It's a much bigger portion than your reference. A mobile app, by the way, is focused on technicians in the field. The idea is that when a technician shows up at your home, he can very quickly understand what system you have, all the components in it, understand which part he needs, see the inventory and allocations, get every document ever written about that part and that piece of equipment, check warranty, process warranty, order the product, have it delivered.

32:55 That's very much a technician tool. and an extension of e-commerce, but it goes well beyond just the e-commerce capabilities.

33:06 Okay, so the mobile app usage is much higher than what you would have indicated in the press release. That's just a point in time number?

33:17 Well, it's just the period that you're looking at. So the number in the press release is weekly unique users, average weekly unique users. And the number I gave you before was unique users for an entire year in 2019, and that number is increased in 2020, or the run rate has increased in 2020.

33:35 Okay, great. Very helpful. Thanks, AJ. The next question comes from Chris Dankert of Longbow Research. Please go ahead.

33:46 Morning, Chris.

33:48 Hey, morning, Al. The credit for comfort numbers, utilization is up quite a bit there. Obviously, Watts goes in a very strong liquidity position, but how are your customers feeling right now? Is there any stress there?

34:05 That's a great question. Yes, they're feeling it naturally, but that's where we come in. We can help them. We can give them dating programs so that they can use our money to develop their business. We can help their consumers the same way. It gets rough for our contractors, but as we continue to say, that's when we shine. When things get tougher... We use our financial strength, which some of our competitors don't have to use.

34:56 Can you add to that, Barry, Paul, or AJ?

34:59 Yeah, I can. Let me take a stab, Barry. I mean, we have probably about 2,000 Watsco associates calling on contractors every day over the last several weeks with the first question being, how can we help you? Is it access to products? Is it access to... Is it longer credit terms? Is it whatever it is? And we are getting interaction with customers that we do business with often and customers that we don't do business with often. And there's a lot of follow-up activity. There's a lot of goodwill being earned. There's a lot of more exposure to some contractors in the market that we don't touch every day that are now understanding who we are, what we're capable of, and how interested we are in helping them grow their business.

35:48 and these contractors have a long memory. So even in periods, especially in periods when they might have some difficulty in their markets or with their customers, when we are there and we're providing a helping hand, it's not only helpful now, but I believe it will, again, potentially change the paradigm going forward. Go ahead, Brian. Yeah.

36:12 And Chris, you mentioned about... about Credit for Comfort, and just to be very specific about what that is. This year, there'll be about 7 million replacement systems sold in the U.S., and only a very small fraction of them can a contractor sit with someone and offer credit to help that homeowner acquire that system and install that system. So consumer credit really has been a laggard in this industry for most of my career. Credit for Comfort is our digital platform that takes all of our product information, takes all of our capabilities as a distributor into the contractor and into the home to help provide consumer credit through different credit companies. We don't provide the actual financing. This is all third-party financing, but bringing the actual technology into a digital platform that's easy to use and a contractor can use to grow its business, and that's the growth that we're seeing because inevitably, you know, two things can happen.

37:14 Innovation can help the entire equation, and then necessity helps the whole equation. And so part of that customer engagement over the last, you know, several weeks is engaging contractors in that potential of this financing platform. That's what credit for comfort is.

37:32 Got it, got it. Thanks so much for the call there. Certainly a market share opportunity to be had. I guess just one other thing from me, is there any way to quantify kind of any additional cost to operate some of the shorter-term costs, I assume, in terms of social distancing, additional PPE, that kind of thing, or can't you really break that out from the SG&A at the moment?

37:56 Oh, no. Those categories that you mentioned don't apply to us. We're not installing anything where our customers are. I don't see any additional information. Anybody else? Paul?

38:14 No. No, no. Really not. It really hasn't impacted us.

38:20 Yeah, that's the thing in the D.C. is trying to make sure everyone stays safe. But, yeah, obviously if it's a smaller impact, then not material. Well, thanks so much, guys. Good luck and take care. Thank you. Thank you. Thank you, Chris. The next question comes from Corey Fulton of Good Belly Fund. Please go ahead.

38:38 Hey, guys. How you doing?

38:40 Where are you from? What firm are you in?

38:43 I'm with Gabelli, Mario Gabelli. Oh, I know that guy. He's a good man. Yeah, yeah. He was sad to miss you when he was in Miami a few weeks ago.

38:54 But he met my better half, my son. Yeah, that was like the most fun 30 minutes of my month.

38:59 You know, that was great. He's fun. Yeah, he can ask some very straightforward questions. So, guys, just a quick question here. I know you guys made a flurry of acquisitions last year, and typically when you make those acquisitions, they're a little bit below the normal margin of the overall business. Can you just kind of give an update on where margins for those acquisitions are now and how COVID might impact or prolong them reaching the overall Watsco margin level?

39:34 Well, generally speaking, we don't order anything to do. We don't ask them to change their gross profit margin because that's not our business. They have to figure out. Boy, I just had a phone interruption. Is that just me? Hello? We can hear you. It's very difficult. In fact, we cannot answer that because those three companies are very independent. We want them to be very independent. We want them to continue to be very entrepreneurial. and now if they need us to improve their margins, they'll use us. So I cannot answer that question.

40:17 Okay, and I think that may be an answer to my second question, which is, I know it's obviously a decentralized business model. You allow your regional managers to make decisions at the market level, but anything in terms of what you're seeing or potentially seeing from maybe a cost-cutting perspective Barry Logan, Paul Johnston, Albert Nahmad, Aaron Nahmad,

40:57 As you said perfectly, it is a decentralized model, and that local knowledge and that local intimacy with the market is going to play out, and SG&A is going to be a component of that leader's daily life. But as AJ said, so is growth. How can we engage more customers? How can we grow our business? How can we add more technology? How can we do more training? All that is going on at the same time, so It is a dance. It's a short-term dance with managing the business and a long-term hustle to grow, share, and to invest and get more business out of this. And both are going on in the local markets. So there's no one answer. There's no big paintbrush here at all. It's all being dissected and led in local markets.

41:48 I'll give you just an anecdote to your first question as well. So those three businesses we acquired last year are in the Northeast. which is the epicenter of this pandemic. And the benefit that they are realizing, which I've paid witness to, is the ability to just communicate with each other. These are business leaders that have very successful businesses that have been doing what they do for a very long time, but they are connecting at least weekly and sharing ideas and hearing what each other are doing and seeing if there's ways to help each other or share each other's resources or or what have you. And, again, just being a fly on the wall in those conversations, I know how valuable those are for those guys and how helpful it is to be part of a bigger company like Losko to have that sort of resource.

42:37 Okay. Thanks, guys. I appreciate the color. That's it for me and Al and AJ. I'll make sure to tell Mario you guys said hello. Please do. Thank you. Again, if you have a question, please press star then 1. The next question comes from Blake Hirschman of Stevens. Please go ahead.

42:58 Good morning. Good morning, guys. First one for me, could you give us any rough sense as to, you know, what kind of top line declines or just really what kind of combination of different factors would have to occur for the dividend to be at any risk of potentially getting cut?

43:23 Oh, gosh. Barry, I haven't got a clue. Barry, go ahead. I mean, we're at such financial strength that if business slows down, our cash flow increases. It doesn't decrease.

43:41 I'll give you a textbook answer, then I'll give you some track record answer. I think both can be given the way that you wish it to. Al's right. This is a business where if revenues go down, working capital responds within a few days. We're placing orders with OEMs every day. We're collecting money every day. and our working capital essentially gets adjusted every day. In a short period of time, working capital gets produced and cash gets put in the bank and is available for use either in paying off debt. Today, for example, our debt is under $100 million.

44:29 It's $85 million. That's right. The idea of having a bit of an ATM machine in a softer environment is both, again, comforting, but also it helps answer the question of having cash available to sustain a dividend and keep people very involved and comfortable in the story. The track record is, in going back to 2008, 9, 10, again, we were seeing three things, epic knives falling in the market in terms of new construction coming out, and immense investment being made in the carrier joint venture, second thing. And third thing, our cash flow and dividend went up about 60% during those three years.

45:18 So those are pretty epic, you know, bullet points to answer your question. So what does it answer your question for the future? We'll see, but that's the track record. I think that's the good mechanics to what goes on in this kind of condition.

45:34 Got it. And then I know a lot's changed since last call, but I believe there was like some ongoing OEM price-cost negotiations. Did everything that's happened, you know, the pandemic and stuff, has that impacted, you know, those ongoing talks or is the margin outlook and stuff just more based on The uncertainty around what happens with the market.

46:08 Oh, our OEMs are very cooperative. We work as a team. And it's in their best interest also to keep us competitive. And I certainly feel they're doing that. And it's just a very strong relationship. We are generally everybody – I think we have 1,000 vendors globally. and I'm guessing, but I think we're the largest customer of a thousand vendors.

46:41 Yeah, I would have fun and say in the last 59 minutes since this call started, we've been, you know, pricing and competitiveness and reaction to marketplace dynamics has gone on in the last 59 minutes. So there's no end to that. And in this environment, again, we think we have more data, technology, insight for operating evidence across markets of what pricing and margins should be, and it's an every-minute-of-the-day grind.

47:13 Paul, we end up working with our vendors on a daily basis to make sure that we've got a steady flow of product coming in, that there aren't any interruptions on the product that we have. A change in the market conditions is reacted to almost immediately, so we have a whole team of people at the operating units who are working working those relationships not only at the OEM level but also at the vendor level.

47:40 All right. Got it. That makes sense. I'll leave it there. Thanks a lot.

47:47 Yep. Bye. Thank you. As there are no further questions, this concludes our question and answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks.

48:00 Yes, thank you very much. I want to say again that I'm sure hoping that all of you are safe and stay healthy and let's be together as Americans during this pandemic and come out stronger than when this started. I certainly hope so. Thank you again for your interest in our company. Bye now. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.