Watsco (WSO) Q4 2018 Earnings Conference Call Transcript

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Watsco (NYSE:WSO) Q4 2018 Earnings Conference CallFeb. 14, 2019 10:00 a.m. ET

Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:

Operator

Good morning. Welcome to the Watsco fourth-quarter 2018 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr.

Al Nahmad, CEO. Please go ahead.

Al Nahmad -- Chief Executive Officer

Good morning, everyone. Welcome to our first quarter conference call. This is Al Nahmad, chairman and CEO, and with me is A.J. Nahmad, president; Paul Johnston, executive vice president; and Barry Logan, senior vice president.

As we always do, before we start, the 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. 2018 was another record performance year with sales, operating profit, net income and EPS, all reaching new highs.

2018 also represents a milestone, marking Watsco's 30-year anniversary in distribution of HVAC. If we reflect for a moment on our distribution history, we have accomplished much as evidenced by gaining the industry leadership position, while generating a 30-year compounded total shareholder return of 18%. I'd like to repeat that, we've gained the industry leadership position and we've been producing 18% compounded returns for our shareholders for those 30 years. While that is a heck of an accomplishment, we passionately believe Watsco is still very much a work in process.

Substantial room to grow exists, given our moderate share in the $35 billion North American market. Great family businesses exist in this industry, many of which were found more than 20 years ago. It'd be very satisfied to associate with more of them and sustain the legacy as part of Watsco. We also have strong OEM relationships and in many cases, I would say, in most cases, Watsco is the OEM's largest customers.

We also believe that we still are far from reaching our full potential and scale with our OEM partners. Furthermore, in recent years, we have developed a culture of innovation and have launched a number of technologies for the benefit of our customers. In terms of adoption and scale of these technologies, we are only partly there and have yet to realize long-term benefits that we believe are possible. Our leadership team is filled with pounded ambitious people that have long-term equity to drive performance over the span of their careers.

And I consider this most important, our balance sheet remains pristine and allows for almost any sized investment. On to the year, 2018, it was a record year with success in many markets and challenges in many other markets. On balance, it was another solid year of growth, while continuing to invest in technology as well as in our organization. Our first release -- I'm sorry, our press release provides important details about Watsco's 2018 performance, including a summary of important technology metrics that might highlight our progress.

I really would encourage reading that press release. It's a very thorough report on much that's going on in the company. I will not recite these details in my prepared remarks, but we will be happy to provide more color during Q&A. One last thing I will add is an invitation to visit Miami and spend time with us to learn more.

We want to be accessible and informative to those that are interested, not to mention the fact that Miami is a great place to visit. With that, A.J., Paul, Barry and I are happy to answer your questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Robert Barry with Buckingham Research. Please go ahead.

Al Nahmad -- Chief Executive Officer

Good morning, Robert.

Robert Barry -- Buckingham Research -- Analyst

Hey, guys. Good morning. Congrats on the 30-year anniversary.

Al Nahmad -- Chief Executive Officer

Thank you. Feels good.

Robert Barry -- Buckingham Research -- Analyst

So I'm just trying to think about the growth rate going forward here, I mean, given what's happening in Florida and, I guess, Latin America too. Do you think this 3% growth you posted in the quarter is kind of how we should think about where the business will be growing, at least in the kind of near to medium term?

Al Nahmad -- Chief Executive Officer

See I hope not, and we certainly don't think that way.

Robert Barry -- Buckingham Research -- Analyst

I mean, it sounds like...

Al Nahmad -- Chief Executive Officer

I mean, these markets change from time to time, and the only thing we've found over the last 30 years is that we're steady. Sometimes we grow at a faster rate than in other times, but we always grow. But I wouldn't be happy with 3% growth rate in revenue.

Robert Barry -- Buckingham Research -- Analyst

Yes. I mean, is there any release insight on the pressures that you're facing in Florida?

Al Nahmad -- Chief Executive Officer

Mr. Johnston?

Paul Johnston -- Executive Vice President

I don't. The pressures we feel in Florida is just -- there was a slight slowdown last year toward the second half of the year. Obviously, 6 months does not make a trend for Florida. It's going to be hot in Florida this summer, and our full expectation is that we're going to recover what -- Florida will recover, and our sales will grow again.

Robert Barry -- Buckingham Research -- Analyst

Yes. In 2019, I mean, what do you think would cause it to improve? It seems like it was down double digits in the quarter.

Paul Johnston -- Executive Vice President

In which quarter, Robert? Absolutely not, no way.

Al Nahmad -- Chief Executive Officer

No.

Robert Barry -- Buckingham Research -- Analyst

Yes. I was just -- rough math, it seems like the business grew three or seven times Florida. I don't know exactly what percent it is of the business, but I mean, big picture, I guess. It's causing some real pressure, and I'm just curious what you think would cause the pressure to alleviate.

Al Nahmad -- Chief Executive Officer

I don't know, I think we've asked it there.

Paul Johnston -- Executive Vice President

Yes, I just think it's going to -- we went into a slight downturn in the state of Florida in the second half of 2018, and it's our expectation that we think it will try to normalize again in 2019, and we'll grow our market share again, as we always have in Florida. For us, it wasn't a market share issue. It was a market issue.

Al Nahmad -- Chief Executive Officer

Not only that. When we first started, we were primarily a Florida business, and we knew there were risks in focusing on one geographic area. In order to produce steady results, we decided and very actively extended our distribution throughout the nation. So sometimes, you'll have soft markets in part of the nation.

Sometimes you'll have strong markets, that's what happened to us this time. So I feel very confident that because we are diversified in geography, that we'll just be a steady grower in a steady strong market.

Robert Barry -- Buckingham Research -- Analyst

Got it, got it. I guess, my other question...

Barry Logan -- Senior Vice President

Robert, I just want to -- Robert, it's Barry. I just want to clean this up, so we're clear. There certainly was growth in Florida in 2018, and as Paul suggested, the second half then equaled the first half in terms of growth rates and that slowness affected earnings because the infrastructure is built at a higher level and that can be addressed. Latin American markets are the one that had sales declines in 2018 and an earnings decline after really 4, 5 years of pretty incredible growth.

And so that team has the same task, reacting and -- to market conditions, reacting with SG&A and reacting with market share and moving forward. But -- so I'll make it very clear about growth in Florida this year.

Robert Barry -- Buckingham Research -- Analyst

OK, OK. I guess, my other question is really just on the SG&A performance, seeing that grow above the rate of sales are close to it. Just curious what the goal is there? I know you had spoken about 250 excess headcount that you're going to try and work down. Curious where that stands and just what the expectation is around the SG&A growth going forward.

Al Nahmad -- Chief Executive Officer

Barry?

Barry Logan -- Senior Vice President

Well, again, Robert, the concept was during this technology phase over the last few years was to have our team in the field, prepare and do and execute and prosecute all the stuff as they saw fit, and they did add headcount throughout that period of time and -- the technology headcount plus the 250 people you're talking about. So now the challenge is make something of it. It's not cutting headcount, it's not reducing the workforce. It's asking our leadership to go back out in our 2019 execution and plans to make hay out of those investments as well as be wise about growth versus SG&A growth.

So we've done that. We've asked for that. They've produced plans. We're comfortable going into 2019.

That'll be a better spread between sales and SG&A. In February, we're not going to project that out for a full year because the market really shook for us, shows up in spring and summer, but those plans have been laid for 2019.

Robert Barry -- Buckingham Research -- Analyst

Got it. Thank you.

Barry Logan -- Senior Vice President

Sure.

Operator

The next question comes from Brett Linzey with Vertical Research Partners. Please go ahead.

Al Nahmad -- Chief Executive Officer

Good morning, Brett.

Brett Linzey -- Vertical Research Partners -- Analyst

Good morning, guys. Just wanted to follow back up with the Florida and Latin America. So just to be clear, so Florida did not decline in Q4. It was all just a Latin America issue.

Is that correct?

Al Nahmad -- Chief Executive Officer

That's correct. Yes, that's correct.

Brett Linzey -- Vertical Research Partners -- Analyst

OK. And could you maybe size how large Florida and Latin America are as a percent of sales? And then, I guess, the follow on to that is, what really is the root cause there? Are you seeing increased bridge coverage from competitors in those particular regions? And then any sense as to what the markets did in the quarter?

Al Nahmad -- Chief Executive Officer

Barry?

Barry Logan -- Senior Vice President

Well, there's a lot there in the question. So we'll focus on Florida. About 20% of our locations are in Florida. So if you want to impute something, you can probably use that as a baseline, number one, which would make it approaching $1 billion business.

And obviously, if you look at any competitor in our market in Florida, there's nothing that's closed that I think is going to irritate market share to the extent that anyone might wish. And as Paul just said, a point blank, we did gain share in Florida, we can see the industry data, we know our unit data and are comfortable of saying that. So it is a market issue. In the second half, that simply needs to be reacted to.

And Latin American markets, again, I think our 10-K breaks out some of our foreign operations as percentages. It's in probably the 4% to 5% range. You can look at the 10-K and verify that and validate that. It is a profitable market and, again, has been growing exceptionally well over the last few years, and as it -- it's part Mexican politics in terms of the elections and I think now that, that's been settled, that's something that our team can move forward on with knowledge and what they're doing.

And we also have a weaker U.S. dollar in some of these markets, that makes our products more expensive in those markets. And again, that's a reaction that OEM and distributor and customer and our teams react to in those markets.

Brett Linzey -- Vertical Research Partners -- Analyst

OK. Yes, I appreciate that color. And then just in terms of the field-level incentive comp for 2018, a bit of a headwind here in Q4. What was the total spend for 2018? And does that continue into '19 as an incremental spending headwind?

Al Nahmad -- Chief Executive Officer

All yours, Barry.

Barry Logan -- Senior Vice President

All right. Well, again, it is a pay-for-performance culture, and when we talk about incentive pay, at the field level, it starts with 570 branch managers, it starts with their teams, their regional managers and their leaders in the markets. There's about 30 such divisions that operate P&Ls within Watsco. And many of those 30 had very good years versus last year, and many of those 30 have earned and been paid incentive compensation in excess of last year.

So that's really a scorecard on how well much of the company did this year versus last year, and we've given you some insight into the data behind that. So it's simply that pay-for-performance being better this year in many of those regions. And for next year, 2019, I hope all 30 hit their budget, I hope all 30 have incremental incentive pay, I hope all 30 reach those targets because it'll be good for Watsco. But obviously, in '18, you see a couple large penalties in two big markets for us, and -- but that doesn't mean the rest of the company didn't deserve and earn and get paid more incentive comp.

Brett Linzey -- Vertical Research Partners -- Analyst

OK. So all the catch-up was basically in 2018, and nothing else is expected in 2019 until you've kind of preferred out. Is that the right way to think about it?

Al Nahmad -- Chief Executive Officer

They must grow EBIT, they must generate cash flow to earn and the answer is yes.

Barry Logan -- Senior Vice President

Yes, the answer is yes.

Brett Linzey -- Vertical Research Partners -- Analyst

OK. Great. I appreciate it guys.

Al Nahmad -- Chief Executive Officer

You bet.

Operator

The next question is from Ryan Merkel with William Blair. Please go ahead.

Al Nahmad -- Chief Executive Officer

Good morning, Ryan.

Ryan Merkel -- William Blair -- Analyst

Hey, good morning, everyone. I'm sorry, to ask more Florida questions, but just want to be clear here, OK. It is your biggest market. So did trend sort of level out and stabilize in the fourth quarter? Is that the read here?

Al Nahmad -- Chief Executive Officer

Barry -- Paul?

Paul Johnston -- Executive Vice President

Yes, sure. Yes, in the fourth quarter, we did see a pickup in the quarter, which brought Florida overall as a market for the year, at about even to 2018. So yes.

Ryan Merkel -- William Blair -- Analyst

OK. So things are getting worse potentially stabilizing. Can you comment on, was the whole state of Florida week, because I'd heard it was mostly South Florida? Can you just comment there?

Paul Johnston -- Executive Vice President

While we don't have that level of expertise to be able to give you that, I don't think. It was a pretty much across the board in Florida, weakness that we saw in the fourth quarter, maybe a little bit stronger in the north, but not a big move. I mean, it was -- the downturn wasn't that severe. We just had a very small downtick, which we haven't experienced in several years.

Ryan Merkel -- William Blair -- Analyst

And you don't view this as a leading indicator for the rest of the HVAC industry at this time?

Paul Johnston -- Executive Vice President

For the rest of the HVAC industry at this time, I would say, no. I think, in most areas of the country, we're still seeing a buoyancy from the replacement market, that's going to continue to grow. We have good analytics, and we use our analytics internally for our strategy sessions, and we feel pretty good.

Ryan Merkel -- William Blair -- Analyst

OK. And just secondly, you mentioned growth initiatives, you're initiating with supplier health to take share. Can you just expand upon that a little bit?

Paul Johnston -- Executive Vice President

Those are -- really those are our best kept secrets until we launch them. And it's just not something that we want to present out. I'll be glad to talk about them at the end of the second quarter -- at the second quarter call because by that time, we'll have implemented them and they'll be out in the field.

Operator

The next question is from Stephen Volkmann with Jefferies LLC. Please go ahead.

Al Nahmad -- Chief Executive Officer

Hello?

Operator

My apologies. A slight technical error. If Stephen Volkmann would mind getting back in the queue. I will put you on next.

Right now, we do have David Manthey on the podium from Baird.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning.

Al Nahmad -- Chief Executive Officer

Hi, David Manthey. How you doing?

Operator

I apologize, Jeff Hammond is on the queue, KeyBanc Capital Markets.

Al Nahmad -- Chief Executive Officer

Good morning, Jeff. We'll get it right.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Good morning. So I guess, looking more broadly, away from just the Florida and Latin America or maybe that simply answers the question, you can see that the HR and HARDI data better, but it just seems like that the industry data has been much more robust. On a unit basis even than your total growth, I imagine, you'd had some price in there. So I'm just -- as you kind of analyze market share shifts, what's kind of driving the apparent share loss?

Al Nahmad -- Chief Executive Officer

Did you hear that Paul, apparent share loss.

Paul Johnston -- Executive Vice President

Yes, I did. Apparent share loss, I don't go with that, Jeff, but I do have good data, looking at the entire country and, frankly, what we saw was a more normal growth rate in a lot of our smile states in the Sunbelt. When you got up into the Midwest up around the Cleveland area and Detroit, Michigan, Illinois, those states were up strong double digit. In fact, we saw some states in the Midwest up by 25% to 30%.

So those states that had, had a -- have a weather impact to them, grew faster this year. We saw a very strong sales throughout our Northeast and New England, parts of the...

Al Nahmad -- Chief Executive Officer

They're very smaller part of our overall picture.

Paul Johnston -- Executive Vice President

Yes, they just don't represent enough to overcome what we have in the Sunbelt. We've always been a very, very strong player in the Sunbelt, as you know. So I would characterize it as a year where you had -- you didn't have a flat growth rate across the board. So when you see the entire industry up X percent, it could be up 20%, 25% in some states and flat to down some in other states.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. Just on free cash flow, it looks like working capital was pretty big use this year, inventories build. Can you just kind of speak to that around the inventory level?

Al Nahmad -- Chief Executive Officer

Barry?

Barry Logan -- Senior Vice President

Sure. There was just two things, Jeff. Obviously, the units that we own at the end of this year are at a high price, so that would drive some inventory investment. Also coming into this year, we would -- we did decide to use our balance sheet and bought some products at the closing bell, so to speak, in December that averts a price increase heading into 2019.

So that lets us have some either profit or competitiveness in our pocket going into 2019. And so that's the inventory story. There's also a tax story, which we explained in the press release of the timing of tax payments between last year and this year. That's about $100 million swing in working capital, if you compare year over year, and that's just really something that happened in 2017 from the hurricanes that didn't recur in 2018.

So moving forward, cash flow will not have any influence like that. And if we work inventory down from this point, which we expect to for the rest of the year, this is going to be a strong cash flow year.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. And then if I could can just fit, one last one. Barry, can you just kind of reexplain the nonvested restricted stock lifeline item, it seems like it kind of -- if you sum it for the fourth quarter, is it doesn't equal the year? And I know that kind of swings the kind of full-year EPS a little bit. If you could just help us understand that?

Barry Logan -- Senior Vice President

Yes. So, again, this is Barry, the accountant for a second, Jeff. So I appreciate it. I appreciate being able to do this for you.

Restricted stock, obviously, is a percentage of our outstanding common stock and the accounting for the restricted stock is really done through the EPS line. The numerator simply as a matter of -- for EPS is, it takes our income, subtracts what's allocable to restricted shares, and that's the numerator for net income and EPS. But if there is a quarter, where our cash dividend exceeds earnings, that is also accounted for in the numerator for EPS. So a quarter like we are just in, where our dividend rate exceeded our EPS rate, there's a small -- there's a $0.03 hit in that quarter for that impact.

It doesn't affect the year, it doesn't affect the first half of the year. It just affects quarters. That algebra affects quarters, where that's the case. So that doesn't make any sense to you at all.

I can explain it again, but what I want to say is this, in the first quarter of 2019, where our dividend rate is now $1.60 compared to, we feel like what consensus EPS is, for example, the dividend in the first quarter will exceed that and we'll have to do the algebra. And when you build a model, you'll have to do the algebra for that. Just for the quarter, it does not impact the full year. So again, feel free to call me back and we can go through it, but it's something that has to be carefully modeled in, in the first quarter, as we head into 2019.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK. Thanks, Barry.

Operator

The next question is from Stephen Volkmann with Jefferies LLC. Please go ahead.

Al Nahmad -- Chief Executive Officer

Hi, Steve.

Stephen Volkmann -- Jefferies LLC -- Analyst

Good morning. Good morning, guys. Can you hear me this time?

Al Nahmad -- Chief Executive Officer

Perfectly.

Stephen Volkmann -- Jefferies LLC -- Analyst

All right. Great. It's always fun to be speaking out into the ether with nobody there, but anyway, thanks for looping me back in. Couple of quick things.

Barry, I think, you mentioned a couple of times, I just want to make sure I understood this correctly that you have plans setup to sort of size the business sort of react accordingly relative to what you're seeing in places like Florida and Latin America. And I'm just curious if you can expand on that a little bit? I think you mentioned something about gaining share, but is there something to do on the cost side as well? And should we be modeling? Maybe some slight declines in SG&A or something as a result of this?

Barry Logan -- Senior Vice President

Well, again, let's talk about culture to answer it initially, and the answer is yes, though we expect that in these markets that our leadership react on the cost side because that's how you can help grow earnings. The more definite opportunity is to grow sales and then make hay during that type of a period. And really use these conditions to fire things up and gain share. So both are going on.

It's not one or the other, it's absolutely both. So in terms of materiality to the whole picture in 2019, I think, culturally, again, we're pushing for better SG&A performance, just in general, and in these specific markets, probably, the efforts will be that much more. But this is a really universal kind of leadership challenge we've put out across the 30 business units and having the culture react to the conditions and not to cease individual markets.

Stephen Volkmann -- Jefferies LLC -- Analyst

OK, great. And then maybe if I can just switch to some of your technology investments. I think you said in the release something like 30% of your business is going through your digital platforms. I think I heard that right, and I'm curious -- I'm sure that's a rounded number, but I'm curious how that sort of trended through 2018, and what type of curve you think we should think about going forward? And maybe as a quick follow on, I'm guessing it's probably a lesser number of your overall customers, who actually do more business with you.

So just, I guess, I'm trying to get to is, are you satisfied with the takeup at the customer level? Is there more you could be doing to shift people in this direction? And just any commentary around that?

Barry Logan -- Senior Vice President

Well, I'd say that there's no question. We're doing -- we're going to do more. The trend is certainly there, and we're going to -- it's such a great digital platform, we're going to be very focused on going to e-commerce. It's -- no one can do that much -- as much good as we do with it.

The information that we provide, when you -- along with e-commerce, what we call the PIM, Product Information Master. So it's a very valuable tool for our contractors, and that again we certainly expect further and further adoption. Wish I can say, it's all going to be adopted in next number of months or years, but it's just had to say. But I think, it's such a useful tool for contractors, and we are so passionate about helping our contractors that we're just going to continue to improve the technology they have and teach them how to use it and be their partners in the learning curve.

So the answer is, yes, expect growth to be under 30%.

Stephen Volkmann -- Jefferies LLC -- Analyst

Has your uptake been slower than you might have hoped for?

Barry Logan -- Senior Vice President

These are all new. I can make up a story, but I just don't do things like that. We don't know. We just went up and did this.

Nobody's done this in our industry to the scale, but we have. And we're very happy. I mean, we started this, what was it, A.J., 4 years ago.

Al Nahmad -- Chief Executive Officer

Right.

Barry Logan -- Senior Vice President

And now we're $1.2 billion, about $4.5 billion business. I mean, it's satisfying, it's gratifying. Do I think it's a great service to the contractor? We absolutely believe that. Do I think we're going to have much more adoption of it? Yes.

Again, I'm going to tell you when that's going to occur. You guys asked those questions and we try to answer them, but we really don't know. But if the trend is followed, it's going really good.

Stephen Volkmann -- Jefferies LLC -- Analyst

OK. I appreciate the color and maybe, Barry, is there any meaningful change in spending on these things going forward in 2019 versus '18?

Al Nahmad -- Chief Executive Officer

Well -- go ahead, Barry. Sorry.

Barry Logan -- Senior Vice President

Go ahead, A.J.

Al Nahmad -- Chief Executive Officer

Maybe I can give some context, since we're talking technology. So first, we've said from the beginning that we're a long-term company and this a long-term program to really modernize our business. It's not just technology. It's people, process, technology and being competitive in 2019 and for the next 20-plus years, 30-plus years.

So this has been a very deliberate and very important process for us. We've been very cautious in our approach. We've been risk-averse in how we do this. We're OK taking our time and trying to get it right.

And over the last 4 or 5 years, really what we've done is reestablished a foundation of who we are as a business and what our capabilities are, right? Business intelligence, data analytics, e-commerce that you mentioned, product information management, where we now have 800,000 or so SKUs and that's in our database, our contractor apps, our apps in our warehouses. These are all platforms that have all gone through a cycle of due diligence and design and development and essentially rollout and now adoption. And again, there's been serious adoption of some of these tools, right? We have 2,000 people using our business intelligence tools. We've got 30% of our sales online.

To your point earlier, that's about 15,000 contractors using this tool. We've got almost 100,000 contractors used our apps last year and over one million times. Even our ERPs are now on the latest version of software for the first time in a long time, and we've got a new web service API. I won't go down to technologies, but the point is that we've got this new foundation, that's kind of materialized that can put us in a position to do new things, right? Take our new technologies or modern technologies to modernize our core business processes to gain efficiencies, operations and warehouses, logistics, pricing, how we manage credit and payments, everything and along those lines and then it puts us in a position to take advantage of cutting edge, best-of-breed technologies to really help our customers and whether that's helped them gain efficiencies, bring them new products to sell, bring them new ways to sell products, new ways to grow their businesses.

But we've got these 15,000 customers buying online, 90,000 in total. These -- I guess, where we are in the life cycle of technology is we've now reestablished sort of our capabilities that and we're positioned to take advantage of more sales, more margins, lower cost-to-serve, all with a focus of helping our customers. And the customers feel that. And that's why they're buying more online, that's why the adoption rates are what they are and continue to tick up.

Stephen Volkmann -- Jefferies LLC -- Analyst

Great. Thank you. I will pass it on. I appreciate it.

Operator

If David Manthey still has a question for the speakers, please reenter the question queue. Next, we have Ronald Newman, a private investor. Please go ahead.

Al Nahmad -- Chief Executive Officer

A former employee?

Ronald Newman -- Private Investor -- Analyst

Al, Barry and A.J. I just -- I don't have a question. I'm just calling to congratulate you on the 30 years in the industry and the absolute amazing things you've done in it.

Al Nahmad -- Chief Executive Officer

Oh, that's nice, Ron. We miss you. How long you've been?

Ronald Newman -- Private Investor -- Analyst

Yes, it's been 20 years.

Al Nahmad -- Chief Executive Officer

20 years since you left, big changes. Yes.

Ronald Newman -- Private Investor -- Analyst

Yes. Anyway, I just wanted to -- I knew that I could get all of you at the same time on this call, that's why I joined in. I don't want to distract from the questions, but I just think it's great.

Al Nahmad -- Chief Executive Officer

Big hugs to your wife and your boy. He's not a boy now, he's a big man, I guess.

Ronald Newman -- Private Investor -- Analyst

45 years old. All right. Congratulations again. Bye bye.

Al Nahmad -- Chief Executive Officer

Thanks. Thank you very much.

Operator

The next question comes from Dave Manthey with Baird. Please go ahead.

Al Nahmad -- Chief Executive Officer

Hi, Dave.

Dave Manthey -- Robert W. Baird and Company -- Analyst

Hey, good morning. That's a tough act to follow there. But I'll bring it back to the questions about the quarter here. So first off, price mix has been very strong for you lately.

Can you give us an idea of what price mix contribution was in the fourth quarter? And then what your expectations would be for 2019, as you look at it right now?

Al Nahmad -- Chief Executive Officer

Who want that one, you Barry or Paul? Hello? Are you guys on the line? Are we blank again? No body is on? Hello?

Operator

It looks like everyone is still on.

Al Nahmad -- Chief Executive Officer

Yes, but they couldn't hear me. So I don't know what's going on. Barry, are you still on the phone?

Operator

They are still connected.

Al Nahmad -- Chief Executive Officer

No, madam, they are not connected. They're not hearing us.

Operator

Right.

Al Nahmad -- Chief Executive Officer

And we're not hearing them.

Operator

OK. Let me troubleshoot a moment.

Unknown Speaker

Well, while we're waiting, Al, let me add to the congratulations on 30 years.

Al Nahmad -- Chief Executive Officer

OK. Thanks very much. It's been a joy. But I'll tell you this, I'm more excited about the next 30 years than I am about the last 30 years.

This technology stuff is really a great way to embrace our customers in a way that very few can do. And I hope to be here another 30 years. How's that?

Unknown Speaker

That sounds good.

Al Nahmad -- Chief Executive Officer

I don't think we've ever had this kind of a technical breakdown before.

Operator

Right. We are rejoining Barry Logan to the conference and when he is back in, I'll let you know. We connected Barry Logan.

Al Nahmad -- Chief Executive Officer

Well, Barry, go ahead and answer his question, if you remember.

Barry Logan -- Senior Vice President

Yes, let's dial it back. And I think maybe I didn't hear the question.

Dave Manthey -- Robert W. Baird and Company -- Analyst

Yes, Barry, it's Dave Manthey here. My question was, price mix has clearly been very strong through lately. Any comments about what it was in the fourth quarter and then as you look to next year, would you still expect, I don't know, low to mid-single digit kind of positive contribution from price mix?

Barry Logan -- Senior Vice President

Yes, I think and I'd rather speak to the year than individual quarter, Dave, just to be a little careful about it, but it's been kind of in a mid-single digit price for most of the year. I think the fourth quarter is similar, and that's above average from any recent year or a normal year, I would say. So that would be a little more moderate heading into next year. And again, let me just say this also in the context of that.

If I take Florida out of the fourth quarter, our equipment business grew almost 9% in the quarter. So there are some real positives going on, part of that's units, part of its price for next year. I think it was something more normal based on what we're hearing and seeing so far. In February, it's still early, but that's what we see.

Dave Manthey -- Robert W. Baird and Company -- Analyst

Yes, it makes sense. And then second, about what percent was the international business down in the fourth quarter?

Barry Logan -- Senior Vice President

I'd rather not implicate that story anymore than we have, David. It's awesome. It's not a tsunami, it's just a business that has had great margin and in a short quarter like this, it has a bigger impact than normal.

Dave Manthey -- Robert W. Baird and Company -- Analyst

All right. You said it's about 4% to 5% of the annual sales and it's down double digits, maybe something like that.

Barry Logan -- Senior Vice President

You said it.

Dave Manthey -- Robert W. Baird and Company -- Analyst

All right. Well thanks very much for all the time guys.

Barry Logan -- Senior Vice President

Sure.

Al Nahmad -- Chief Executive Officer

Are you still there operator?

Operator

Yes. The next question comes from Blake Hirschman with Stephens Inc. Please go ahead.

Al Nahmad -- Chief Executive Officer

Hello, Blake.

Blake Hirschman -- Stephens Inc. -- Analyst

Hey, guys. First off, just on M&A. It's been kind of quiet, can you talk about the pipeline? I assume there's probably been a gap between buyer and seller expectations holding back deal flow, but with overall housing outlook having softened a bit, have you seen potential sellers returned to the table and become a little bit more or less when it comes to the market that they are asking for?

Al Nahmad -- Chief Executive Officer

Mr. Logan?

Barry Logan -- Senior Vice President

Yes, it's like I wish it was about money. It's usually not. It's really an emotional process and timing for a family and in terms of conversation. We would always try to meet what an owner's expectation might be in order to make them happy and reduce risk going into a deal and so then the real question is, is there anything for sale where our people's emotions and so on? And I can tell you two things.

We put much more effort into prying lose, prying open some of those discussions, and we're having some success. Secondly, we're using our technology story as an ingredient to that conversation, which, again, I think is helping bring some success to those discussions. So like the press release does intimate, we do like the conditions. There is some good activity.

I never want to jinx it by mentioning it or saying anything much about it, but we do like the conditions that we're in and there has been, I would say, better actions and reactions going on in that respect.

Blake Hirschman -- Stephens Inc. -- Analyst

Got it. And in the past, you've kind of talked about those three indicators of cycle health being margins, bed debt and mix. As of last quarter, sounded like all three were hanging in there all right. Is there any update to provide on those?

Barry Logan -- Senior Vice President

Well, mix, again, is an important one, and it's the -- I think the 25th straight quarter where we've seen improvement in mix and what that means, again, is the percentage growth rate of high-efficiency systems beyond the standards here. So that's a good benchmark what consumers are spending and investing in their products with our customer. From a bad debt point of view, past dues, and so on, again, one of the healthiest years we've had and certainly current trends are -- again, remain favorable. And then price and unit volume, if we're growing gross profit margin, which we did in the fourth quarter and the year, our equipment business even more so than optically what you can see in our financials, again, that speaks to the ability and capability of passing through price and gaining that.

So that is -- those are positives that remain.

Blake Hirschman -- Stephens Inc. -- Analyst

Got it. And then just lastly for me on the UTX split carrier, obviously, an important strategic partner of yours with the plan breakup now confirmed. Can you touch on some of the dynamics that play there and some of the more structural or bigger picture impact that would come as a result of them being a stand-alone entity?

Barry Logan -- Senior Vice President

Well, we listen very carefully to the UTX report to the public. Their CEO, Greg Hayes, I think, is very articulate why they're doing what they're doing and he also has gone further to say that a separate carrier means that there'll be more aggressive in pursuit of share market whereas as part of United Technologies, they were sustained -- they had sustain certain margins. He said such things. So I expect a much more aggressive carrier, and I think it's good for us, good for the industry, and we're going to be very strong partner of there's.

We're going to invest whatever is needed to continue to be the great partner. In terms of other stuff, like consolidation, it seems like that's proved out from what I know in terms of major OEMs emerging or being acquired by others.

Blake Hirschman -- Stephens Inc. -- Analyst

Got. I'll turn it over. Thanks.

Al Nahmad -- Chief Executive Officer

Operator, A.J. Nahmad is not connected.

Operator

OK. We will get him connected too. I apologize for that. It looks like -- he looks connected on already, so we'll disconnect him and reconnect him.

Al Nahmad -- Chief Executive Officer

OK. Next question, please?

Operator

The question comes from Jeff Hammond with KeyBanc Capital Markets.

Al Nahmad -- Chief Executive Officer

Hi, Jeff. Hello? Hello?

Operator

Jeff is on the podium. We have an operator who is working to get him back on.

Al Nahmad -- Chief Executive Officer

Barry, have you even seen something like this before. It's my first experience.

Barry Logan -- Senior Vice President

No.

Al Nahmad -- Chief Executive Officer

Are these new people?

Barry Logan -- Senior Vice President

No.

Operator

No. These are unusual circumstances. I do see that A.J. Nahmad is back in and Jeff...

Al Nahmad -- Chief Executive Officer

A.J., you on?

I am on, yes.

Yes. And Paul needs to be reconnected as well. Paul Johnston needs to be connected.

Operator

OK. He is being reconnected now. And, Jeff, can you hear the conference?

Al Nahmad -- Chief Executive Officer

Jeff Hammond?

Operator

OK. We'll get him reconnected as well. OK. Paul is back online with us.

And Jeff will be shortly.

Al Nahmad -- Chief Executive Officer

Jeff, are you on? He's not.

Operator

We are still reconnected him.

Al Nahmad -- Chief Executive Officer

Are there any other questions?

Operator

There are no other questions in the queue.

Al Nahmad -- Chief Executive Officer

Operator, are any others connected to this call?

Operator

I believe that everyone is connected still. No? Yes. Let's see. Everyone shows up on my end is in conference, except that Jeff Hammond is still idle.

And the operator is attempting to get him back on. We actually do have another person who has entered the queue. I'll put his question on the podium. This is Christopher Dankert with Longbow Research.

Please go ahead.

Unkown Speaker

Can you hear me?

Al Nahmad -- Chief Executive Officer

Yes. I'm sorry about all these problems. We've never had this happened in the past.

Unkown Speaker

Well, this is actually Carl on for Chris. So I could figure out, I just jumped in front of Jeff and you. I had a chance. So you kind of talked about gross margin improving in the fourth quarter, it sounded like.

Could you talk about maybe where price cost has started entering 2019?

Al Nahmad -- Chief Executive Officer

Barry?

Barry Logan -- Senior Vice President

Well, first, there were some fourth-quarter price increases that were implemented. And again, it speaks to how they pass through as gross profit did go up in the quarter. There are some first quarter price increases with some of our OEMs as well that play out more into February and March. Though again -- so maybe some moderate benefit and then our market test in April, May, June, but there is more price coming and not to the same extent, but I would say, a more normal pattern should happen this year and we'll know more when it plays out in the spring.

Unkown Speaker

Got it. Thanks. That's all I have.

Operator

OK. We do have Jeff Hammond. He is with KeyBanc Capital Markets.

Al Nahmad -- Chief Executive Officer

Jeff, hi. Are you there, Jeff? Hello?

Operator

Jeff, your line should be open. You are in talk and in the conference recording.

Al Nahmad -- Chief Executive Officer

Are there any other questions after this one?

Operator

There are no other questions at the...

Al Nahmad -- Chief Executive Officer

Barry, why don't you call Jeff? Jeff? Barry?

Barry Logan -- Senior Vice President

Yes. I'll call him.

Al Nahmad -- Chief Executive Officer

Call him, because who knows where this is going to end. And, operator, what can I say, this is probably the worst connectivity we've had in 40 years for our company calls.

Operator

I do apologize for this. I am not sure what...

Al Nahmad -- Chief Executive Officer

Well, it's not you who should apologize. It's the owner or the manager who has to know what this is going on. So, bye.

Operator

Right. And they will.

Al Nahmad -- Chief Executive Officer

Bye. Bye-bye.

Operator

[Operator signoff]

Duration: 51 minutes

Call Participants:

Al Nahmad -- Chief Executive Officer

Robert Barry -- Buckingham Research -- Analyst

Paul Johnston -- Executive Vice President

Barry Logan -- Senior Vice President

Brett Linzey -- Vertical Research Partners -- Analyst

Ryan Merkel -- William Blair -- Analyst

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Stephen Volkmann -- Jefferies LLC -- Analyst

Ronald Newman -- Private Investor -- Analyst

Dave Manthey -- Robert W. Baird and Company -- Analyst

Blake Hirschman -- Stephens Inc. -- Analyst

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