Watsco Inc
NYSE:WSO
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
377.91
568.78
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Watsco Inc
Earnings Call Analysis
Q3-2024 Analysis
Watsco Inc
Watsco reported outstanding results for the third quarter of 2024, achieving record sales and net income. This performance reflects a broader market stabilization, with October's sales indicating a mid-single-digit growth driven by significant unit growth. The company has indicated confidence in gaining market share, aided by compelling e-commerce trends, with annualized e-commerce sales reaching approximately $2.5 billion.
A notable aspect of the quarter was Watsco's co-investment efforts with a key OEM supplier to recover lost business and cultivate new customer relationships. This collaborative approach is not only aimed at restoring previous performance levels but also at expanding market share within strategic markets such as Florida and Texas. The executives projected a sales increase of 22% for contractors utilizing their OnCall Air digital platform, illustrating the potency of these partnerships.
The company continues to enhance its technological platforms, critical for HVAC contractors, which has resulted in increased adoption rates. Watsco's technology is expected to facilitate the launch of federally mandated AQL systems in 2025, reflecting a proactive stance toward regulatory changes that typically benefit the industry. With a robust cash flow and no debt, Watsco is well-positioned to continue making significant investments in innovation and technology.
Despite the positive sales figures, gross margin for the quarter was noted to be slightly below expectations, primarily impacted by a mix of customer and product categories. The executives expressed confidence in the potential to return gross margins to 27% over the medium term, with aspirations to reach 30% in the future. They also highlighted the importance of product mix and pricing strategies in driving future profitability.
Inventory management remains a focus area, as year-to-date inventory levels have increased. This situation is partly attributed to prebuy dynamics related to the transition to new refrigerant systems, with expectations that inventory turnover will improve within the next year. The executives are optimistic about the transitioning market dynamics and how they will impact sales volumes moving forward.
Looking ahead, the company is preparing for potential market fluctuations influenced by seasonal demand. Executives anticipate a higher demand for heating equipment, particularly as weather forecasts suggest a colder winter, which could enhance sales performance. As they navigate these changing conditions, Watsco is committed to leveraging their technological advantages and strong partnerships to ensure continuous growth.
You don't have any saved screeners yet
Good day, and welcome to the Watsco Third Quarter 2024 Earnings Conference Call. [Operator Instructions]
Also, please be aware that today's call is being recorded. I would now like to turn the call over to Albert Nahmad, CEO of Watsco. Please go ahead, sir.
Good morning. Welcome to our third quarter earnings call. And this is Albert Nahmad, Chairman and CEO. And with me is A.J. Nahmad, 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. Watsco 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. We said it 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're accelerating with them and coinvesting to make the needed investments to regaining business and 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 achieve [indiscernible] 2.5 billion, and our active users continues -- continue to grow faster than nonusers.
On [indiscernible], which is Watsco's digital sales platform, continue to expand and generate growth for our contractor customers. Thus far, in 2024, OnCall Air contractors presented close to approximately 58,000 households, a 17% increase and generated $1.2 billion 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 change has been good for our industry and good for our business.
In 2023, energy efficiency mandates went into effect, providing the contractors the ability to upgrade older systems with higher business system. The trend electrification of fossil fuel heating has driven increased sales of heat pump systems, which are both sold at higher average unit prices than conventional term assistance. The growing penetration of ductless HDA systems has also been the catalyst for growth as they provide homeowners and businesses or energy efficient alternative to conventional systems.
And now the 2 transition is upon us, and we look forward though 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 turns. We are working with our OEM community and continuously improving our methodology to improve our inventory [indiscernible].
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 market. And finally, our balance sheet and access to capital in [indiscernible] 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 will enjoy telling you about it. With that, let's now go on to Q&A.
[Operator Instructions] At this time, we will take our first question, which will come from David Manthey with Baird.
First question I have to ask is about the hurricanes, particularly Helen, which hit us pretty hard here in Tampa. Could you talk about the negatives and potential unwinding positives you might see from Helen and/or Milton?
Let's see if you can get one of us to tell you at least what do you think? Do you want to take that, Paul?
Sure, I can get it started, and then somebody else can pick up. But yes, we had our branch we shut down for a couple of 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 we've -- it slowed us down, but it didn't really impact our sales that dramatically.
Yes, just to add to that, I've said for many years growing up in Florida and 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 billion, $20 billion, $30 billion of insurance investment that follows these things, a portion of that always is our industry, be it equipment or nonequipment. The materiality of that needs to play out sometime this year and next year, obviously. But -- and that's how I've characterized it at least over time.
Okay. So -- but even though Florida is clearly your biggest market, -- and Helen, 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 activities, what you're saying?
Absolutely not. No. It's -- 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.
As Barry indicated, when the insurance -- 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 motor sold the compressors, that type of thing to start with. [indiscernible] to Watsco.
Great. Yes. 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%. .
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%. So our engines are revved up and we very much have a focus [indiscernible] and we're investing there and have high expectations.
Yes, I think 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 the 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 [indiscernible] 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 listen to this call, along with all of you, this is a very critical stage to where we're making tremendous investments.
Inventory is going to completely cycle year over the next 12 months and pricing, marketing, features and benefits mix -- overall mix is going to 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 on in terms of unit volumes and stability and things like that? And year-to-date, unit volumes are positive in the quarter, they are overall positive for our selling season or overall positive and positive to the extent that it's kind of conventional growth rates and units. I looked at a 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.
And our next question will come from Tommy Moll with Stephens.
I wanted to start on some of the co-investment you -- you described in the press release this morning alongside 1 of your OEM partners. And it's a 2-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 sort of progress and ultimately fade?
Terrific question. who wants to answer, Paul, Barry, A.J. [indiscernible].
Yes. 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 million, $200 million of revenue at the time if 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. And 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 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 give too much competitive detail in this discussion in answering you.
And the other is the incentives that we chose to put on the street to not just get somebody back buying more from us, but giving 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 [indiscernible] 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.
Yes. I'll just stress that our OEM partner here is truly a partner. They're a long time -- a long-time relationship. I think a successful partnership now has been. It will be absolutely a collaboration with them, and it's nice to have such a wonderful partner.
All right. I also wanted to ask about inventory and any prebuy dynamics we may be seeing. [indiscernible], you talked about hoping to improve inventory turns and note inventory dollars were up versus the second quarter, which is a typical, but is some of that just the 410A prebuy that we're seeing? And what's the view there at this point?
Yes, it is the inventory prebuy 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 going to be bringing in the [indiscernible] inventory. So I don't see much of a fluctuation in the next quarter with our inventory.
Yes. 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, [indiscernible] 410A diminishes as a percentage of shipments and sell-through really and ATL becomes just a greater proportion of sales in our balance sheet as well.
And our next question will come from Ryan Merkel with William Blair.
Just wanted to ask on October to start. You said meaningful unit growth improvement and the mid-single-digit growth. Can you just clarify what pricing is because my assumption was pricing is still kind of running up maybe 3%, 4%. 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 spin set 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 meaningful unit growth. But let's just see analytical about it, and we can talk to 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 there's -- it's a year-to-date trend. It's probably an 18-month trend where our investments in ductless are just paying off very well. [indiscernible] and Gree 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, our business units doing well with Ductless products.
If I stick to what is more curious maybe for the group is conducted 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 mix. 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%. [indiscernible] 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 kind of all from here, and welcome to anybody else's color.
Okay. Well, yes, 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 mix 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?
I think you heard A.J. 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 4 basic elements of mix that we've talked about. It's firstly a difference in growth rates between equipment and nonequipment 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 at 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 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 3 or 4 elements of mix that explain and help contextualize a year-to-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.
Our next question will come from Jeff Hammond with KeyBanc Capital Markets.
Just on the [indiscernible] 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?
Yes, I can cover part of that, and that is that among all of the OEMs that we talk to, everybody is ready. As a matter of fact, one OEM is started their launch in the fourth quarter, and we've actually taken equipment in and started selling [indiscernible]. 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, 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 are suppose 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 ATL becomes firmly large. And that's going to be spread out over all 120 million units that are installed out there right now, well, 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 [indiscernible].
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 the standard? And then just 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 it's -- 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. And I would say that private equity was more prevalent in the space the last 2 years. I -- that has subdued a little bit of late. And this is still bigger picture and longer term, a very fragmented industry. And I think there's what a lot of you all from the outside don't see as it relates to M&A is 2 things. One is that we're very focused on partnering with the right entrepreneurs. And that's different from consolidating an industry.
We -- that cultural element of M&A is very, very important. We want the right entrepreneurials who will embrace [indiscernible] growth spirit and our equity culture to help transform their business. So 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 I hope leads to incremental opportunity going forward is, today, our technology platform and our M&A discussions are essentially one of the same.
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 constant for 35 years since we've been in distribution. What's different today and what has been different over the last 5 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 -- my job is to help lead some of that. And so I 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 to to grow, and we're not dependent on M&A to grow profitably in the future.
Rick, this is A.J. I think what you said about these being cultural discussions [indiscernible] financial discussions is so true, and it runs both ways where it really has to be a good fit for the family. These are multi -- often multifamily multi- sorry, multigenerational family businesses that were saying, can be part of our multigenerational family business. And you be you guys with your leadership team and your branding and your customers and your team, but do it on our 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 long-term sustainable growth for the business. .
And those families and the leaders of those families that have joined our business over the last 5, 10 years are really going back forever, they're thriving in that environment. They're happy. They're still doing the business, motivated, and they're growing 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, it's -- they seem to be home runs, which is what we're going for.
[Operator Instructions] Our next question will come from Patrick Baumann with JPMorgan.
Yes. 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 you said year-to-date up 5%. Was that a total unit comment? Or is that I assume ducted [indiscernible] is not up that much, right? Just maybe clarify that, if you could.
Yes, I should clarify that. So ducted is flat in year-to-date and overall, is up 5%, which would suggest [indiscernible] is up 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 conducted units were up 3% and overall, up 5%. So when we talk about stability, that's the frame of mind.
Okay. Helpful. And then are you -- have you guys been -- I think you 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?
Yes, the channel right now is picking up 410 [indiscernible] 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 that will turn in the first quarter, second quarter sales.
Right. Yes, I think the industry has not included are bringing into our barns for a large part, bringing into our barns, what we'll sell -- 410 [indiscernible] products will sell through the first quarter. And as that is being sold through, we can't replenish them with the Fortuna unit, so we'll replenish some of the [indiscernible] unit.
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 improved 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 it's -- 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. .
And our next question will come from Nigel Coe with Wolfe Research.
I think this is meant to be a cold winter according to [indiscernible]. So it's -- if that's true, then it should be a little bit to help you guys. I know you've [indiscernible] a lot of grounds. I don't want to retread sort of ground we've already taken. Just on the gross margin, it seems like there was a bit of lapping of price from earlier this year, and you talked about mix and some OEM support. Is the -- is there more discounting going on, especially at the higher tier levels? Is that a factor at all in some of the gross margin [indiscernible].
I think if you listened to Rick's comments as a composite, we look at the most important metric, which is the transactional margin has any material change to it. The answer was no. So I don't think, I'm not saying neutral is exactly what we want, but it's -- 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 [indiscernible] 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 [indiscernible].
Yes. 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. 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, [indiscernible] 13,14, -- do you think the contractor, the end customers are ready for this transition. And obviously, you're very close to those guys, you do a lot of [indiscernible] 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 going to be coming at them. As we indicated earlier, it's going to be a system change out, not just an outdoor change [indiscernible] 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 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, [indiscernible] itself is going to have a different component in it and -- 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. But it sounds like [indiscernible].
Yes, I'll just add that it's our job to help them get ready from a technology perspective, a 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 and et cetera, et cetera. And we do that at a scale and with a technology backlog that I think is unparalleled in the space. And sets us apart. And I think is there a big reason why customers or contractors choose to do business with Watsco 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 got I'm a little bit surprised with the hurricanes impact in Florida and the Southeast. I know you've got some extra day selling in October. So is there some benefit from [indiscernible] October offsetting some of the hurricane impact from my off base there?
Again, Nigel, it's something we track down to dollars and cents in terms of hurricane impact. And we had like the last 2 or 3 days of the quarter, and we had 3 or 4 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 penny flows. Nothing is immediate and -- but the word destruction, I'm using purposely because that's what has gone 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 -- were in the path of these storms and very happy to say that everybody is safe and accounted for. And those who had 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 who came out on [indiscernible] relatively speaking.
And our next question will come from Steve Tusa with JPMorgan.
Just a follow-up to Pat's question. I got a little bit late on the call here. Do you have complete visibility into all the OEMs pricing for A2L product at this stage? Is there anybody that's playing a little more closer to the vest than others, not just your suppliers, but kind of across the industry?
Yes, we have visibility into every manufacturer's pricing. There's only 1 or 2 that right now have not really fully released their pricing. I think the -- it's not that they're trying to be [indiscernible] or sly about how they release the price. 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. [indiscernible] is that pricing going to hold throughout this entire transition. That's the question we ask.
And our -- and do you think customers are kind of looking at it as a bit of like -- similar to like 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 they -- how are most of them looking at it?
I think most of them are very serious about this price for because they are adding costs, we're adding 2 new components to the system itself. So due to that, I think that -- I think the pricing will probably be closer to the the 8% to 10% range [indiscernible] 15%, but I think it's going to hold around 10%.
Yes. 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 [indiscernible] opinion right now.
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 milllion of 1 SKU from an OEM and the price is closer to us, we're reselling that that $25 million, is that maybe 1,000 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 -- again, customer or end market. So this is an art form and more so than district analysis. And when we allude to technology that's helping us do that, and raising margin over the last 4 or 5 years. So 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 3 or 4 years ago. And this transition has another chance to accomplish the same thing.
And if we need to react to a market condition, then we have our OEMs react to our cost. So that fluidity is why this is hard to predict, but I can tell you why it's benefited us in the last 3 or 4 years.
Right. And I guess your point is that like to take 10% or whatever and like stick it into a model on the spreadsheet like it's a lot more complicated than that.
A lot more complicated than that. [indiscernible] to all the variable price. I wish it was as simple as that we probably -- but it's not as simple as that because you have the different market segments and [indiscernible] to the pricing.
Got it. One last one for you. Just on the light commercial side, everybody has 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 light commercial?
I think as the availability of the commercial product improved, I think we saw some some reduction in some of the pricing. But as far as the demand, the demand has remained fairly strong. And we are still up double digit.
And this concludes our question-and-answer session. I'd like to turn the conference back over to Albert Nahmad for any closing remarks.
Once again, it's always good to communicate to all of you, and we hope you will 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.