Watsco, Inc. (WSO) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Tommy Moll from Stephens. We appreciate your interest in our conference and specifically in Watsco. To my right, I'm joined by Watsco's Vice President for Corporate Development, Rick Gomez, whom I want to welcome to the stage and also say thanks, Rick, for your time and traveling to Nashville to come meet with our investor clients. We all appreciate it.

Thank you. Happy to be here. It's always a great conference, and I appreciate the invitation.

You bet. We always like to start with some very high-level questions. As you know, Rick, this conference attracts both a specialist and a generalist investor audience. And so for the benefit more of the generalists in the audience, I want to give you an opportunity to introduce Watsco. There may be some folks in the audience who know your ticker, know the company name, but have really never stopped to read up on the company. So I want to make sure we just spend a few minutes talking about what it is the company does on a day-to-day. So let's just unpack that in a few different aspects here. First, on scale. So you're the largest distributor in the U.S. of HVAC products, nearly 700 locations. Walk us through what that means in terms of your geographic footprint, what it means for your relevance to the OEM community, and in particular there, with respect to Carrier given your joint venture relationship.

Yes. Great question, great place to start. If I could, I'm going to start with a little bit of history because I think that that history is relevant to the present and the future. We have been at HVAC/R distribution now for about 35 years, and it's been a terrific track record of growth and profitability during that period of time. We were -- not a lot of people know this, we were, at one point, a manufacturer in our industry. And something happened in 1989 that convinced us we should be in distribution and that it would be easier to scale distribution than to scale manufacturing. And so 1989 marked the pivot to distribution, 70 acquisitions later, Watsco today is a $7.5 billion business with those 700 locations and 7,500 associates and multiple OEM partners. And what that scale means, to answer your question directly, is several things. First, we operate in a very, very localized end market in terms of the contractors. Our customer is the contractor that you call on when there is something wrong with your system at home. And response time is usually not days or weeks, it's hours. And so the urgency of that is important. The urgency of that means it's important to have a scale, a density, an investment in products and investment in technology to go help those contractors solve your need that day. I'll wager that if a contractor says to you, "Mr. or Mrs., I can -- I will have this done for you by the end of next week. And if it's August or July, you're going to go call another contractor." So generally speaking, demand is immediate. Demand is -- there is something that has broken or needs to be repaired on an emergency basis. And that's 80% to 90% of what we do is that emergency replacement. So density matters and supporting contractors there. Branch locations matter, if you're on one side of the town or the other side of the town, it makes a critical difference. So think of that hyperlocal need being fulfilled by a distributor upscale and in tandem with very strategic OEM partners. And so Watsco, I think everyone -- obviously, the importance of the Carrier joint venture and the relationship with Carrier is critical. We do business with all but one of the domestic OEMs in the U.S., and we do business with virtually all of the international OEMs that comprise our industry, primarily on the ductless side. And we do business with another 1,000 or 1,500 vendors on the non-equipment side, which is a critically important aspect of our business and of the industry. And so that's what scale means is that you can partner with key OEMs at scale across many different geographies and support that contractor solving your homeowner need that day. And that scale has grown, I mentioned earlier, by virtue of a lot of acquisitions over a long period of time and a lot of organic investment in the business over that period of time. The most recent of which is, and the most important of which, I think, is the investments we've made in our technology platform to help contractors be more efficient. I'm sure we'll talk about that at some point. But scale for the sake of scale, it's nice to say what we're really doing is helping a contractor solve a local need that day and hours. And that's why we think our customers have an advantage when they're trying to replace and install systems.

Rick, I also want to start with a conversation on culture, in particular, the ownership culture at Watsco. Just walk us through a few elements of that, starting with the Nahmad family's longtime involvement and ownership in the company, some of the unique employee incentive plans that you have, and then how a lot of that feeds into the approach to capital allocation, in particular, with a conservative balance sheet and a steadily growing dividend.

Sure. Yes, I think it's probably the biggest differentiator of Watsco relative to our peers and distribution and in HVAC is that ownership culture that has existed and will remain in place. We've had one Chairman and CEO for the last 52 years, and he is still 7 days a week. And it is -- and he has firmly believed over the years that sharing equity in the business is key to long-term outperformance and key to long-term -- and sustaining cultures long term. And so today, I mentioned earlier, we have about 7,500 employees within Watsco, almost 5,000 of those employees are shareholders at any given point. We have 4 mechanisms of sharing equity with employees. And we have truck drivers, we have branch managers, we have counter folks. So we're not just talking about leadership, we're talking about people that really drive the business in the markets and that touch customers all day long. That is how far down that equity culture permeates in our company. And so the crown jewel of that is really our long-term restricted stock program. And unique is an overused word many times. This is unique, and it is unique in the following way. One's career is really -- or one's wealth creation over a career is really defined at cliff vesting at age 62. We have 160 people that are part of this program, myself included, and it is life changing. And it also means that I really care about where the company is 20 years from now when I reach my theoretical retirement age. No one has to retire, but obviously -- and we have many people that are still with the company that have vested. But the goal is that I can only realize that potential and the 160 other leaders in the company that are a part of this program can only realize the fullness of that potential if you're willing to make a career out of it. And so there's a saying by A.J. Nahmad, our President and our Chairman's, son, quarters are important, quarter centuries are mission-critical. And sustaining that generational feel to the business is what that equity culture, I think, enables. And it enables a lot of long-term thinking. It enables a lot of investments today that we think are important and most companies, maybe other companies would not make. But if they're important to sustaining the long-term culture, the long-term vision, the long-term growth that we've achieved, then we will make those investments. It also informs our approach to the balance sheet of the company. We have a rather pristine balance sheet with lots of cash and no debt, and that enables a couple of things. It enables -- most importantly, what it enables is that we have the ability to go invest in any sized opportunity that we choose to undertake, be it organic or inorganic. Some of the -- the periods of highest growth at Watsco have come in choppy industry markets. And that's because we've had the balance sheet to act when others perhaps couldn't. And so yes, that ownership culture influences a lot. It influences how we think about the business, how we operate the business, how we invest in the business, and the balance sheet is there to go support growth regardless of the climate, regardless of who's President, regardless of what rates are doing. And again, all informed by this view that things matter over a long term. And while the short term is important, you never sacrifice it, you never sacrifice the long term for the short term.

Well, you mentioned some of those shorter term impacts that we're, I would say, obligated to discuss while we're on stage together today, Rick. In particular, the election results in the U.S. What would you say is the biggest potential impact on Watsco's business as far as you can tell today?

Yes. I think everyone's trying to process what it means and there's a lot of policy to flesh through here. And so I think at this point, there's no obvious impact up or down. One of the things that I think is important to understand about how demand is created in our industry is there's an installed base of 110 million systems out there. And each one of those systems has a useful life. Each one of those systems will need to be repaired or replaced at some point. The systems don't know what the economy is doing. The systems don't know who's President, who controls Congress. The systems don't know, they're oblivious to that. You use them every day at home. They're going to break at some point, demand is created. And so there is a comfort and a stability to that demand creation every year. And if there's an installed base of 110 million of these and the useful life is x or y, then one can reasonably predict and take some comfort level in what demand next year and the following year is going to be. Again, absent all the other exogenous factors that we might talk about. So that's the first thing I would communicate is even as there's all this policy nuance to work through, that demand structure is very much in place and there's no reason for it to differ next year. Where it could differ and where things do manifest themselves in terms of some variability is, what does the consumer do when they have to act? If your system needs to be repaired or replaced, what do you do? Do you upgrade? Do you replace with something that's -- with a similar system to what you have? Do you do neither? And do you repair? That's where consumer influence -- that's where the macro state of things, the political state of things can manifest itself in some sort of consumer choice and that relative weighting of good, better, best and the difference between repair versus replace and equipment, non-equipment. So that is our band of uncertainty. I would argue a much narrower band of uncertainty that I think most industries can claim. And then lastly, I'll say that we are in the midst of a regulatory transition that is going to happen regardless of the policy stances and what else might happen afterwards. So I think the near-term demand structure and industry structure remains very much intact regardless of what policy evolves from here.

Only one follow-up from me for now there, Rick, is on tariffs. How much of your cost of goods is tied to China? And to the extent that a new tariff regime were imposed early next year, how quickly can you react in terms of pricing to pass through the increased expense?

Sure. Yes. In terms of -- I'd say there's 2 layers of impact to potential tariffs. The first is, well, what do we import directly from China? And the answer is, it's very, very little as a percentage of COGS, low single digits, if not basis points in terms of COGS. And it would be primarily the ductless product that we directly import from China. Not just China, by the way, but all of Asia. I think the real -- so there, it would be, I would say, almost inconsequential. And pricing in our industry is a very, very fluid thing. And if it changes today, then it can change tomorrow and the next day. And so one has the ability to react to those nuances in the market. Where I would say the bigger impact could happen is really downstream from our OEM partners. When you think about the equipment systems that are sold and that comprise of the industry, those systems have components, and those components are sourced from all over the world. And so our OEMs will contend with this if there is, and to the extent that there is a higher cost, it simply manifests itself in a higher cost to the channel. The OEMs will experience higher cost. We will buy the products at a higher cost. We will sell the products at higher cost. And generally speaking, the consumer will ultimately bear the burden of that higher cost. But the reaction time, the ability to maneuver quickly in a scenario like that is there, and pricing is very much a real time, almost day-to-day. There is that much fluidity to how price works in our market and in our channel. So one has the ability to react if needed.

Let's move on Rick to some of the recent trends in the residential HVAC market. Year-to-date, the volumes sold into the channel have been solidly up. In fact, if we just look at Watsco specifically in terms of inventory dollars, there was a sequential increase in the third quarter, which bucks the typical trend where you would reduce your inventory a bit seasonally there. So how much of this that we're seeing is prebuy versus what other factors might be in play here?

Sure. First, I would suggest and urge everyone to focus more on sell-through than sell-in because there are a lot of channel and inventory dynamics that are always at play and more so right now, given that we're going through a large-scale product transition that will impact certainly the majority of what's in inventory and the majority of the revenue base. So it is not business as usual as it relates to a period of time in which we should evaluate inventory. And so the focus in our minds is always on sell-through because that is the better read on what the underlying market is doing. And if I look at our year-to-date sell-through trends, they're precisely the 30-year average. It's remarkable. So compounded over 30 years, unit growth trends are in the 3% to 4% range, that's population growth, that's people moving from different parts of the country and creating a new home construction. And so 3% to 4% is the long-term average of unit growth in the residential space. And that's precisely where we sit year-to-date. So the point there is things, feel pretty normal from a sell-through perspective. They feel pretty historical, and we're right in that zone of historical unit growth right now. So the question then is, what explains the sell-in dynamic as opposed to the sell-through dynamic? And I think there, the nuance is -- there are many nuances to it. First, the notion of a prebuy, I think, is different this year than it is in most years. Prebuy implies that one is taking a bet on inventory and has a view on what next year will be. That's not exactly how we go about it, and that's not exactly how I would characterize it. For us, this exercise is very much a bottoms-up market by market, business unit by business unit, and our business unit leaders across the company are informing all of this. And it aggregates up to, okay, we're going to have some amount of 410A inventory next year, and that's going to be not too dissimilar from what it would normally be. What is different today that explains that sell-in dynamic is that we're having to order in longer increments than we normally do, and that is primarily to help the OEMs plan the transition effectively. And so most OEMs sometime in the summer, every OEM asked every distributor that they work with to look ahead a little bit longer than they normally do and to place orders that extend deeper into the year. Also that the channel can effectively manage the transition from the current generation of products to the next generation of products. And so that's what I think is going on, is in August, September, October, we are ordering for inventory in December, January and February. And normally, you don't do that. Normally, you order to much lower lead times. And so I think it's mostly as a result of this product transition. It is not a bet on inventory on our part. It is simply saying, what do we think 410A demand is going to be and let's place those orders with our OEM partners in advance so that they have the ability to cut over production most effectively. And that way, the channel can begin to receive the new product, the A2L product later this year and early next. And that's how I would characterize it.

Let's talk about the A2L product, Rick. In particular, the price mix impacts. Last quarter, Watsco indicated something in the high single-digit to low double-digit range, which is roughly consistent with what others in the industry have signaled recently. But not much volume, maybe not any material volume has actually moved through the channel at these higher prices yet. And so a lot of this is talking about what may happen into 2025. So that's really where my question is, how much risk is there that the yield actually ends up being substantially lower than what a lot of the industry participants expect or hope will happen currently?

Yes. I think in a normal year, you can expect there to be -- you can expect a yield that's close to what's announced in a normal year. What I think makes this a different occasion is that there have been investments. I mean the OEMs have made investments into the products to comply with new regulations, their sensor technology. There have been -- the OEMs have invested capital in these systems. And so it's not an ordinary course price increase. These are actual costs that have to be defended and passed through a channel. And generally, in those situations, you end up with, I would say, a higher degree of discipline than what would be an ordinary course price increase. And so I think that high single digit, low double digit is a reasonable consensus to underwrite. And in our case, it will apply to somewhere around 50% to 60% of the products we sell. And it will blend into that throughout the course of next year. You don't start January 1 with that because you're still selling the legacy products at that point. And so I would argue that whether it's 7% or 8% or 9% or whatever it ends up being or 10% or higher, whatever it ends up being, it is a reason to invest in our industry and a reason to invest in Watsco because every 10 or 15 years, you have these moments of regulatory transitions that create inflation, that create new discussions at the kitchen table between contractor and homeowner about what to do and what products should be installed and why do this versus that. And what we usually debate is the magnitude of the benefit, not the direction of the benefit. The direction is up and to the right. And so whatever it ends up being, it ends up being, and it will be good and better than what I think most industries would experience next year. And again, it's a reason every 10 or 15 years, you have these episodes and you have these moments in time that are -- that are great for business, great for contractors and great for the OEM community. It's great for the entire channel. So I can't predict what it will be, but I have a feeling it will be a positive result no matter what.

So let's talk about competition for a minute, Rick. Year-to-date, I think it's fair to say there have been some share shifts in favor of those, such as yourselves, who had more of the 410A product available during the peak selling season. There have been others in the market who have lost a little bit of share, largely because they didn't have that product available. They tried to bring the new A2L to the product, to the market ahead of schedule and just the demand wasn't there. So if you scroll this forward into next year, how much competitive risk is there that some of those who maybe have more of this product on their balance sheet than they expected now and presumably will into next year are perhaps less disciplined from a pricing standpoint?

Yes. It's a good question. I'll answer it slightly differently. We measure market share, and we measure changes in market share. And usually, when we're measuring changes in market share, the result is in basis points, not percentage points, basis points, which is to say that share moves very slowly in this industry. Contractors in our space have an affinity to the products that are -- to the products and to the distributors that sell those products. And so that's why there is an inherent stability in the market share of the industry at the OEM level. And our job as a distributor then is to sell as much of this as we can across as many OEMs as we can in our network and have whatever the contractor needs or wants to sell that day. And so that as a precursor, whatever share shifts have gone on, I don't think have been uber consequential at the end of the day. And whatever view one has about next year and 410A versus A2L, whatever view that is, I think it expresses itself over a 3-, 4-, maybe 6-month period. And the question is, are there larger market share implications beyond that? Probably not. So today, that OEM that started -- that came to market early with the A2L product. I don't doubt their ability to compete and sustain market share going forward. Will it move? Will it gyrate a little bit here in the near term? Yes. Does it fundamentally change the stability of what has been market share in our industry for many years? It doesn't. It probably doesn't. And so what that means is that to the extent that there is, again, gyrations because one has more x product and one has less y product, I don't know that it fundamentally changes what is a very rational industry picture of 4 to 6 key OEMs commanding the preponderance of the market share and competing very effectively and distributors who are very rational throughout that process and contractors that act very rationally through that process. So those near-term gyrations will come and they'll go. I don't think it, again, fundamentally alters the market share dynamic at the OEM level.

So I have some questions prepared on technology investment, which is important for Watsco, but I did want to pause just for a moment in case there's anyone in the audience who wants to shoot up a hand and ask a question. Feel free to now, or if something comes to mind in the next 15 minutes, just jump in. So let's talk about technology, Rick. Watsco has been at this for some time now with a pretty sizable annual spend there on the research and development side. So maybe just to start, for those who have not been introduced to the Watsco technology platform, when you reference that, what is it?

Sure. What does technology mean in the daily life of a contractor? What does it mean in the life of a distributor? It's a great question. And it's the same question we asked ourselves 10 years ago when we started this journey. Where does one start, right? And the premise is we operate in a wonderful industry. We operate in a very stable industry, as I've described. And 10 years ago, it had not a whole lot of technology infused in it, and we've done a great deal over that 10-year period. So it all starts with data. And I think in our industry, the technical requirements of what a contractor does means that the data is critically important. And so the first thing we did was we invested in what is -- what today is the industry's leading largest and most content-rich product information management database. That's our PIM database. We have 1.5 million SKUs thereabouts digitized. That is the biggest asset that is nowhere on our balance sheet. It is the critical ingredient to helping contractors do what they do in the home, it's having a product data. We've expanded that sphere of data to now include customer data and vendor data and transaction data and competitive data and more data that you can possibly imagine. Just get the sense that that content can now be put to work. It can be put to work for the benefit of contractors. It can be put to work for benefit of OEM partners. It can be shared across an organization of our scale, and there's value to that. So data is kind of that foundational element that then powers everything else I'm about to talk about. So where does one go access that data? So let's think about a contractor. What are they doing? Well, they're in a truck or a van. They're in an attic or a basement. They're in your backyard. They're in a branch. They're not behind a desk. And so mobile had to be the way. Mobile had to be the path in which this data gets disseminated to our customers at least. And so what we started developing, again, 8 to 10 years ago now was, can we develop a digital ecosystem where a contractor and a technician can do what they do every day in the market in your home, right? So what does that mean? Well, today, it means that we have about 60,000 active users of our technology. It means that we have 60,000 people interfacing with us every day on their mobile phones, on iPads and they're doing more than just procuring product. They're troubleshooting and solving and doing the work of what a contractor does. They're processing warranties. They're checking bill materials and wiring diagrams. They're receiving technical support. They're matching systems based on dimensions and specifications. They're generating HRI certificates that they need to take to local municipalities for permitting purposes. They're doing a host of different things and that underscore the word ecosystem there. They're doing a host of different things that makes their day-to-day life easier, better, faster. Historically, these have all been manual touch points with our businesses. Manual touch points with sales professionals, with branch managers, with counter associates, you name it. And so what we've done is we've -- that digital ecosystem is now helping 60,000 active users do what they do more efficiently faster and better. And it has led to -- notice I left the e-commerce to the end, and it has resulted in what is now a $2.5 billion e-commerce channel. That e-commerce is the output. The input is the data and all the feature and functionality that the contractor sees and uses every day in that mobile ecosystem. So 60,000 active users, $2.5 billion e-commerce business. It's about 30% -- excuse me, 35%. If you look at our total business, it's in the 45% to 50% of our -- what would be our residential business where this would apply to the most. And we have business units and regions that are achieving 60% penetration through this e-commerce penetration through the mobile app. Why is that important? Well, the data indicates a couple of things that are important about that digital adoption. The first is that customers have become active users of the technology. They start growing faster than their counterparts. And so that means they're doing more, and they're doing more with us as a result. And the second is that attrition is reduced by about 60% once you are digitally enabled. So I'm in a room of investment managers. How much more profitable would your firms be if I could reduce your outflows and your attrition by 60%? I'm guessing you'd all have a lot more smiles on your face and you'd all run more profitable operations. Well, that's what we have done with the subset of customers that are digitally enabled and actively using that technology as we've achieved a 60% reduction in attrition. That means we have substantially less business to go replace every year. And that means that, again, all else equal, there's less volatility about our growth and less volatility around revenue every year. So digital adoption, 60,000 users, $2.5 billion of e-commerce, higher growth rates, less attrition. And then the third important element to all of that is, over time, there should be a lower cost to serve that customer. The predictability of that ordering. Anyways, that should have implications for warehouse productivity and branch productivity in the long run, which we're also working on. So all right, data is the foundation. We deploy that to our customers via a digital ecosystem that I've just described. And the way I think of it is, if we have this best-in-class industry-leading front-end experience, we also need to have a best-in-class industry-leading internal technology to help us fulfill those orders and meet customer demand and delight customers at the end of the day. So what does that mean? Well, it means warehouse management technology to help us process 10 million orders a year. It means more sophisticated inventory planning and demand planning inventory optimization. It means improving fill rates. It means having the right inventory at the right locations at the right time. It means having pricing technology to help us optimize that opportunity. It means logistics and on and on and on, logistics technology and transportation technology. So those are all the things that we're working on as it relates to technology within our 4 walls as an organization. And we are younger in that journey as it relates to deploying that technology internally. So I'll give you an example. The pricing technology that we've deployed, which has helped us achieve a higher gross margin and defend a higher gross margin, that pricing technology has only been in the hands of field leaders over the last 2 to 3 years at scale. And there is more work to do there. And so the benefit of that is largely still ahead of us. And that's why there's a certain optimism around gross margin is because we've deployed that technology. We see what it has done in the early innings of deployment and there's confidence that the later innings now that we're in or as we get into the later innings of that deployment, we'll continue to see margin benefits to come. So data, digital ecosystem, internal technology or just technology to help us be a better distributor and a better supply chain business at the end of the day. The fourth quadrant, the fourth leg of that stool is, what if we invested in technology to help our customers grow faster? So we've made their lives easier. They can order digitally or through e-commerce and we're investing in fulfilling all that more efficiently and more effectively. But what if we could invest in their growth somehow? And that is what we have done through something like OnCallAir. OnCallAir is a digital selling platform that takes a contractor's current selling process and current selling culture and transforms it for the better. And so today, that product is still in its infancy. It's being deployed. But the results are fantastic. The results are over $1 billion of gross merchandise value sold through OnCallAir. And some of which -- a lot of which is our content, but that's ultimately the contractors sale price and installation price to you. So it's not all our industry TAM. It's really the contractors industry value creation at the end of the day. And so we're very encouraged by what we see there. Again, higher growth rates. We also see a richer mix of high-efficiency systems when customers sell an OnCallAir. So now our job is to go scale that as great as we can or as fast as we can because the outcomes that we're seeing from it are that good. So those are the 4 technology tools. It is probably the most important organic investment being made in the company. And it is -- going back to where we started culturally, it's -- not only do we think this helps us grow, I think it builds a broader moat around our business that already exists today.

So Rick, we're now 40 minutes in. We haven't discussed gross margins. So we should be able to hammer this out in the remaining 5. I'll go straight to it because I do want to at least touch on this topic. You know well by now that guessing the Watsco gross margin is among the great parlor games on Wall Street ahead of any earnings season. So I just want to unpack this a little bit, multipart question here. If you wanted to provide guidance on this line, would you even be able to? Second part of the question, for those of us on the outside, where we do every 90 days have to have something to underwrite, what should we be paying attention to? Even if just directionally, qualitatively, what are, I don't know, the top 3 factors that you would point us to just to consider?

Sure. Yes, I think -- I mean, look, when we look at our business, there's nothing in Watsco called Watsco. We have 10 different business units. They operate in different markets with slightly different niches and slightly different customer bases and slightly different OEM partners. And so we have a fairly good cross-section and a fairly good sample of businesses to look at and use as our guide to help us think through this topic. And we do have businesses. We have businesses, and we have markets that operate today at or above 30%. So we don't think this is -- so it's not something that doesn't exist today that we're trying to create, it's something that exists today that we're trying to scale and cross-pollinate really across the organization. So those businesses have certain things in common. And so what would you -- what would I'd point you to, I would say, first, back to -- and the pricing technology that's been deployed and that we're now, I think, taking more advantage of has structural margin benefits that we've realized and that we have yet to realize. And so that is a key item of confidence in our minds that lends credence to the notion that 30% is achievable. We have businesses today achieving it, and they're early in their journey on some of that pricing technology. We have businesses that are not close to 30% that are also in the infancy with that pricing technology. So it will help no matter what and no matter what the composition of the businesses look like. This pricing technology is probably the most important thing we can do at scale to bring about that structurally higher margin going forward in that 30% target. A couple of other things we can do. And again, we're looking internally in our businesses, and these aren't just random thoughts that we think help us, these are things that are actually being done today that are yielding results that we want to scale. Most of the businesses today within Watsco that operate at or above that 30% margin have a very balanced picture of equipment versus non-equipment. I think most of you know that when we sell a piece of equipment, we sell it at a great margin. And if we can accessorize that order, if we can sell the 4, 6, 8 things that should accompany every install, we will do better from a gross margin perspective. And we have businesses that thrive on that. We have businesses that absolutely thrive on that. So how do we scale that? There's a lot of collaboration happening around that topic. The digital adoption by the way is sort of a built-in benefit there because the e-commerce order, the digital order has 20% to 25% higher line items than does the analog order. So the more digital adoption we have, the more users will buy 20% to 25% more per order. And so we want to continue growing that non-equipment business. Equipment has ruled the day here for the last year or 2. And we just want that to be a balanced picture where if Watsco could -- if 70% of our business today is equipment, we want that to continue growing. We want non-equipment to continue growing faster, and that will be good for margin. There are many other levers. There's a customer mix component to margin. There is an end market mix component to margin, add-on replacement versus new construction, et cetera. So those are all levers, and those are all themes that were -- that our business unit leaders are collaborating on. And the goal is, over time, we will achieve a 30% gross margin. And it will happen via that collaboration. It will happen via scaling those ideas. And it will happen via the pricing technology and the non-equipment composition within our business.

Rick, we'll end it there, and I want to thank you again for your time. And thanks, all in the audience for your interest. We appreciate it.

Thank you very much, Tommy.