Please note, this event is being recorded. I would now like to turn the conference over to Albert Nahmad, CEO and Chairman. Please go ahead. Good morning, everyone. Welcome to the second quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President, and Paul Johnston, Barry Logan, and Rick Gomez. In this call, I have asked these executives to chime in any time they wish with their thoughts so that all of you can get views from multiple people in the company. Before we start, I will state our cautionary statement. This conference call is 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. Now, on to the call. Watsco delivered another strong quarter. We achieved record sales, reflecting strengths in both residential and commercial markets. Operating efficiency improved during the quarter, as evidenced by lower SG&A as a percentage of sales. We generated strong cash flow, and our balance sheet remains in pristine condition to enable most any size investment to grow our business. Simply put, Watsco's entrepreneurial culture, which empowers local leaders to make local decisions, continue to perform well. Technology continues to have an impact, and we are fortunate to have served such a large and growing number of contractors with the industry's most innovative technologies. Greater adoption and use of our platforms by a growing number of contractors has produced growth and market share gains. Annualized e-commerce sales now exceeds $2.5 billion, and our active users continue to grow faster than non-users. OnCall Air, Watsco's consumer-facing sales platform that helps contractors do business, continues to grow and expand. Thus far, in 2024, contractors presented quotes to approximately 160,000 households, an 18% increase, and generated $743 million of sales for our contractors, a 27% increase over last year. We are actively updating our technology platforms to optimize the launch of new low GWP A2L systems. This presents another important federal regulatory change, providing the opportunity for growth in the coming years. Other federal regulatory changes continue to influence growth. Energy efficiency mandates went into effect last year, providing contractors the ability to upgrade older systems with higher efficiency systems. The trend towards electrification of fossil fuel heating has driven increased sales of heat pumps, contributing to growth. We are fortunate to be in such a great industry and believe our proven culture, customer-focused technologies, scale, and access to capital provide unique advantages and opportunities. Finally, as always, if you have interest in learning more, please come to Miami and see us. We are transforming an industry, and we would enjoy telling you about it. With that, let's go on to Q&A. Hello? Hello? Did we lose the operator? Hello. Yeah, take the question. Take the question. Perfect. We'll now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing any keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble a roster. The first question comes from Jack Hummel from KeyBanc Capital Markets Inc. Please go ahead. Hi, Jack. Hey, good morning, guys. What's going on? Hi, Jack. Well, it's bright and sunny and happy to hear your voice. Okay, great. Can we just talk about the moving pieces in gross margin? I know, you know, you're kind of been level setting people around 27, but, looks like it was down 100 basis points year-on-year, and I know kind of the price timing, you know, with, with the price increases maybe was, was gonna be supportive in the quarter. Thanks. Paul or Barry or both, please answer. Sure, Jeff. Good morning. Again, you know, we look at things in little bites, little in a quarter. You know, I wanna just zoom out a bit and look at the first half of the year. You look at the first half of the year, at 27% plus, which has been our bogey. We've been asked about this now consistently for two and a half years and kind of said the same thing.... And there are, or is, the moving pieces are more obviously than just the timing or level of an OEM price increase. In fact, the only kind of real price increase that straddled the quarter that's material is the Carrier price increase that came in in March, helped the first quarter some and obviously came into the second quarter as well. But I just don't wanna get too obsessive about, you know, short-term discussions when the long term is working through. Having said that, in the quarter, you can see that our equipment business grew at, I think a pretty terrific growth rate, and our non-equipment business didn't. And obviously, there's a big disparity in gross margin in those two families of products, enough so to account for some of the year-over-year change in margin. Also, mix is a conversation when it comes to price and margin, and we're far more complex in that regard than an OEM. Watsco has brand mix. We sell multiple OEMs with multiple brands, and I'll... I won't, I won't discuss how much, but there is a, there is a, a variety of margins we make depending on what brands we sell and growth rates that pertain to those brands that can affect margin. There was some of that in the quarter in terms of mix, year-over-year, working against margin. It's again, in basis points. It's not a, a big material thing, but it's a component, as I mentioned. We also see less inventory being owned this quarter. That means purchases have been down and replenishment has been down. There's a little bit of a consequential impact year-over-year on rebates and discounts, things like that, that are earned in the period. And I could go- give you like, like, five more basis point conversations in that mixed conversation. But if I, again, dial it back, look at the big picture, year to date, you know, we're where we said we would be. We're never satisfied where we are, by the way. We still have certainly more potential, and as we've said, long term, much higher aspirations than this. And I'll let Paul talk, or Rick as well. Rick, you have a lot of insight, too. Rick? Okay, are you on? Wait a minute, Rick. I don't know what happened to Rick. Anybody know? I don't know. Can you all hear me? Now we can. Now we can. I guess I was muted on the other end. Sorry about that. Yeah, Jeff, good morning. And just to, I think Barry explained it very well. I'll just add two tidbits to it that I think are may be helpful. First is, you know, for that year-to-date period, we have also seen, again, just steady commercial strength. And, you know, that family of products relative to residential, also has, you know, some mixed implication as it relates to gross margin. Second thought I'd share is just, you know, again, if we look ahead a little bit and not backwards, you know, the... We've got a big product transition coming at the end of the year. You know, those periods of time are usually good opportunities to evaluate margin and act on opportunities. For us, I think what we're looking forward to is leaning in on some of the technology tools that are now maturing, that can be helpful to margin long term as we go about that regulatory transition. Okay, great. All, yeah, and okay. He's satisfied. Let's go. Go on. That's a good segue here because I wanted to jump in. It seems like a couple OEMs have kind of, you know, put out last calls for R-410A product. Just maybe, you know, your updated thoughts on, you know, how much R-410A you wanna exit with, and any kind of implications around pre-buy. And then just, you know, as you talk to your OEM partners, you know, how are you feeling about, you know, their readiness for the A2L transition and new products? Well, Pablo? Yeah, I think, you know, Jeff, everybody is pretty much ready to go with their A2 L product. In fact, we're seeing one manufacturer located in Texas that's already putting out, you know, their A2L product. So I'm not really concerned about a transition here. It's not much of a transition. It's putting in, you know, a different compressor into the unit, and it's also, you know, putting in a sensor that senses and smells if there's any leakage, and then a switch that basically will turn on and off the system. So there's not a big change in the product. When you get to the 410, you know, how much 410 are we gonna carry forward? We put in our final orders now, pretty much across the board. We think we're gonna have enough product to go perhaps into the first quarter, but, probably no further than that. Okay. Thanks, guys. The next question comes from Tommy Moll from Stephens Inc. Please go ahead. Morning, Tom. Good morning, Al. Thank you for taking my questions. Of course. I wanted to talk about some of the trends for the residential business. You called out 6% growth in ducted units year-over-year. ... Can you walk us through how the selling season progressed through second quarter? And are you able to give us an update on how July paced? All right. Well, Barry? Yeah, good morning, Tommy. Well, first, I mean, things did progress in terms of stronger growth rates during the quarter, and kind of a weird item, and just to speak in algebra for a second, is we had-actually had 2 more days in April and 2 less days in June. And in some weird way, I would have rather it been the reverse, 'cause our business is much bigger in June than in April. It was probably $20 million ahead win in the quarter, by the way, just to be a trivia-give you the trivia of that algebra. But if I look at average sales per day during the quarter, it progressed, and June certainly was the stronger of the three months. If I look at, again, average sales per day, certainly, certainly north of our overall growth rate for the quarter, up into, you know, high single digits on a same store basis. For July, the only thing strange in July is we have our largest market, probably in the country, in the Texas coast, getting influenced by some hurricane activity, some closed stores. If I look past that, there's the same kind of growth rate in July that you see for the quarter. But, it's early, and it's strange, and August is as big as July. And, so in terms of a trend, you know, I don't wanna get happy or sad on July. August is just as big, and we'll be at full all cylinders as we get through the summer, which wasn't the case throughout part of July. Thank you. As a follow-up, I wanted to ask about the, the OpEx leverage that you showed this quarter. It's been a theme that's come up for some time now, and I think you grew same store OpEx at about half the rate of sales, so showed up clearly leveraging that expense line this quarter. What are some of the drivers there that you can unpack for us, and how are you feeling about the initiative that's been in place for some time now to continue to drive leverage there? Thank you. Barry? So I think yeah, I think first, you know, going back in time some, then I'll do what Rick does, which is go forward in time. I go back in time, you know, in COVID, it was a circus act to get product, to get everyone served, and SG&A had to be built and incurred to serve businesses and to serve our customers in a difficult environment. So two years later, how do you evaluate that, look back and, you know, set expectations or communicate the data to our field to act on it? So I would say, beginning last fall, is it was a more aggressive campaign to act on SG&A. More of it, more actions occurred in the first quarter, and this is the first quarter where I think there's more evidence of everything I've just said, with more opportunities and more actions and more results to come. I looked at SG&A right before the call, actually. The only thing peculiar, for example, is healthcare is up $7 million year to date. That's the only outlier in the whole list of how we look at it. We improved our benefit plan, we improved our medical plan with intention, and there's some bottom line impact to that reality for our company, for our employees, which is a long-term perspective. But that's the only thing that stands out amongst a long list of things. And so I think the teams in the field have acted, have reacted, and have more to do, and I think you'll see the results of that. And it's all data-based. None of this is emotion or reactionary. It's all in the numbers and looking at the data. This is A.J. I was gonna go to the same place, Barry, where it's intentional. This is a continuous improvement culture that we have at Watsco. When we talk about technology, it's really become a buzzword, but really what it means, but it also means is looking at processes and systems and opportunities to be more efficient with our time and our people and getting orders processed and filled, et cetera, et cetera. So there's certainly been work to continually improve everything we do. Thank you both. I'll turn it back. The next question comes from Ryan Merkel, from William Blair. Please go ahead. Good morning. Hey, good morning, everyone. Thanks for taking the questions. Can we, can we talk about the other HVAC products, parts and supplies? Why was it a little bit weaker than equipment? Is there anything that stands out? Nothing I can- Go ahead, Paul. Yeah, there's nothing I can really think of that was, that was odd or unusual about other. You know, if it was down, it was down a bit, but there really isn't anything in there that was very strange. No. Okay. And then, I mean, just to be helpful with something we've talked about in the past, and because, Ryan, I think it's a good question, you know, if we say it's 21-25% of our business, then in a quarter, it was a $500 million business, right? And there's probably 60 different product groups. You know, 300-400 different vendors. It's a hodgepodge of a variety of stuff, right? We have talked about commodities, and we only have really three that we consider commodities. That's copper tubing, sheet metal products, and refrigerant. Again, that component of our revenue is closer to $100 million in a quarter, 100 out of the $500 million, and there we have seen stability in price and cost and margin. That's one of those more volatile variables we were seeing a year ago. A year later, it's much more the bandwidth of volatility is much less, but the dollars are less because the pricing is less. So a little bit of headwind still in revenue, but not on margin and not in general business conditions from a materiality point of view. Got it. Okay, that's helpful. And then as it relates to product mix, are you seeing the higher SEER stuff grow, or are you seeing people trade down to base systems? I think it's- Very generally trade- Yeah. Yeah. It's basically trending towards the basic product. You know, we've got a minimum efficiency now, which is at a point where the higher SEER product really doesn't have as much impact as it used to. So what we're seeing is, the industry is tracking at, I would say close to 90% at the standard efficiency level. So definitely you're seeing a trend down. Okay. Great. Thank you. I mean, the one trend I'll add to that, the one trend that is consistent and consistently, you know, good for business, good for the industry, is heat pumps. You know, heat pumps are certainly growing at a faster rate than underlying furnace demand, and that's in our numbers, and that's a, you know, a mixed benefit to selling price, needless to say. And also, I would say high efficiency heat pumps have grown at decent rates relative to the underlying. The heat pump would, I would carve out a little bit in that conversation and say, you know, there's some good trends there. Thanks, Barry. I think as Rick said, you know, A2L is going to basically the A2L products, if you think about it, it's gonna replace basically, probably 55% of what we sell, you know, company wide. It's all new equipment, all new efficiencies, all new opportunities, all new discussions, all new training, all new inventory. But it's a nice chance to kind of refresh the opportunity that's in front, and we kind of like those changes because it puts us in a position to do that. The next questioner comes from Brett Linzey from Mizuho. Please go ahead. Hey, guys. Hey, sorry- This is Peter Casa on for Brett Linzey. Hi. So I just wanted to ask around inventory levels in 2Q. You guys took them down sequentially, and historically, I think it tends to increase. Is there anything to read into there, or is that more of a function of the build in Q1? And then how would you characterize inventory levels just relative to what you're seeing in the market? Thanks. I'll make a brief statement on that. First of all, we're very focused, as we've been saying quarter after quarter, on the inventory asset, which is our largest asset, and we've been applying a considerable amount of technology and science to it. So we're getting more efficient on inventory terms. That and, Barry, you can follow that up with whatever you want. Yeah, I think, again, it's... A.J. mentioned the term continuous improvement, and heaven knows, after the COVID challenges, inventory remained high, you know, even post-COVID. Inventory turns, if you look at today, do the math today versus any historical period, we are looking to improve turns. We obviously must take care of customers in season, and we're doing that. That's evidenced in the growth rates. But I would say inventory is still a work in process also. It's still a matter of continuous improvement to really get the inventory turns in the, you know, back in the closer to five times instead of today, it's closer to four times. I think that process takes time because of the A2L transition coming in front of us, and there's another huge transition occurring. But if you talk to us two years from now or three years from now, I would expect inventory turns and to be more historical, at closer to five than today, closer to four. I wouldn't read into the... There's no science or message in the sequential change. Inventory was built in the first quarter. That was in order to be in a good position for growth, which occurred, and now we react to what's going on, you know, for the rest of the year. I wouldn't read into that, and there's certainly no message behind it. Thanks. And then could you just walk us through what you're seeing more broadly from the consumer affordability side? Are you guys worried about any sort of pushback or erosion there? We really, you know, when we look at, you know, what the, what the prices have gone up over the last, gosh, it's been five years now, that we've seen prices continue to move up. We've expected the consumer to start pushing back on price. We have not seen that as of yet. You know, as we indicated in the release, our residential sales were actually up in units. ... you know, for the quarter, which is a strong indication that the consumer's out there, and they're still buying the product at the price that we're offering it. Secondly, you know, we are seeing some moderate increase in the repair side, where we've been seeing, you know, high single-digit increases in compressors, motors, the type of things that you would repair a unit with. Those continue to remain strong. So it's kind of like we have the best of both worlds going right now, where we have a consumer that is willing to purchase it at the price that we offer, and at the same time, people are repairing. And I just to add to that, Paul, I think what we don't talk a lot about, the industry doesn't talk too much about, is the ductless side of it, the ductless side of the market. We represent multiple OEMs on the ductless side. Unit growth rates for ductless actually exceeded the ducted product this quarter and year to date. That's a solution that contractors are offering more often, they're comfortable offering, and that will work in cold, you know, cold climates now, where they're all high efficiency, they're all heat pumps, and it's both international and domestic. So that is a product that fits somewhere in that conversation of affordability. When you look at the you know the traditional ducted systems versus repaired ducted ductless does fit somewhere in that discussion, and we're certainly seeing growth rates in ductless and have for some time now. The next question comes from Patrick Baumann from J.P. Morgan. Please go ahead. Patrick, ¿cómo estás? As they say in Miami. Bien, bien. Thanks for taking my call. First question is on the Texas manufacturer that has made the decision to move to A2L, maybe quicker than others. Are you seeing any, or do you expect to see any short-term, you know, share impacts for the other OEMs that have, you know, maintained supply, you know, steady supply of their R-410A product? And then if so, what kind of impact would that have on your business? No, I really- Okay. I really don't see a big impact in market share coming from that one manufacturer that's introducing their A2L product. I think it's more of an availability issue on their part, you know, to be able to provide product that is going to be available in 2025. They decided to come out early. They've got a unique design to it, and hence they feel that they've got an opportunity to try to step in and at least lead the way on A2L. But I don't see it as a big change, you know, in the marketplace as far as share market for them. I'll just add one other note on A2L. This is A.J. again, as we got a question earlier about pre-buys, and I wanna make sure that it's clear. We're not speculating on pre-buys or how the transition will play out and try to make a special bet. What we're trying to do is have a functional, harmonious and seamless transition to the new brands. And we will have... Or not new brands, new products. And we will have new. I'm sorry, we'll have a year to sell through the old stuff as well. So we expect it to be pretty smooth. What type of initial pricing are you seeing for the new technology versus the current generation or the R-410A, I'm sorry? Yeah. What type of- We're seeing the 10%, you know, increases that were indicated by, I think, every OEM, probably a dozen times here in the last year. Yeah. Okay, just wanted to check that. And so we take basically 55% times the 10% is the way to think about your mix impact for next year from selling this new product? Maybe that's a Barry question. I don't know. Yeah. Yeah, Patrick. The only, reality, right, is it's not 100%, you know, new product, 0% old. There's a blend, there's a blend that's gonna play out into next year, too. So it's a, it's a, you know, a, a blend into next year. It's not all of next year. You know, plus, we have to wait for the Department of Energy. It still has not pronounced, you know, what represents a replacement unit. You know, the current write-up that we've been provided by the government indicates that you can sell a unit, a 410 unit, if it's repairing a system. It would be a component. And there's a lot of debate in the industry right now about whether or not that will really hold true, you know, going forward into 2025. So we really need to wait to find out, you know, what the DOE decides, which hopefully will happen soon. Yeah. No, we're waiting to hear that as well. Okay, then maybe one quick one for Barry, if I could, on gross margin, you know, normal seasonality or however you wanna talk to it through the rest of the year. Is there anything unusual we should think about versus normal seasonality for, you know, for gross margin for the rest of the year? No, I think we stick to the, you know, the big picture for the year at the 27% level. And, you know, third quarter will tell us the progress, and I would keep the, you know, I think we're keeping to the the goal and the notion of 27% for the year. And the seasonality- Thanks a lot. You know, the seasonality, you know, is what it is over the third and fourth quarter. You can look at the historical trend of that and make your own assumptions. Yep, makes sense. Will do. Thanks a lot. Once again, if you have a question, please press star and one. The next question comes from David Manthey from Baird. Please go ahead. Hi, Dave. Yeah, hi, good morning, everyone. First off, Barry, in the release, you mentioned that ducted residential units average selling price is up about 3%. I was hoping maybe you could zoom out and talk about the overall price mix impact on both equipment as well as other HVAC products in general. Sure. Well, the second part first. On other HVAC products, honestly, I don't count how many rolls of duct tape we sold and understand, you know, unit versus price on duct tape. And there's 80, you know, as I said, there's probably 80 product lines in that I'm not sure we have. I'm sure we have insight. I don't know the insight. What I did comment on the commodity side is stability and what had been, you know, volatile pricing on commodities has become very stable. And so from that perspective, from what I can tell on the HVAC, you know, not equipment, I don't think there's anything remarkable in price and units in that equation. On the equipment side, again, when we use the word average selling price, that's a composite of actual price, mix, and mix can be geographic mix, product mix, brand mix, vendor mix, customer mix. It starts to broaden out into snowflake. So, I couldn't give you the components of all that. I can tell you that the OEM pricing actions year to date flow through, and you don't see much variation in equipment margin for us, year to date, if you look at the full six months. I would say, you know, so far so good with the pricing actions. I think, as Paul suggested, if we look at mix within brands, within products, within markets, there is a conservatism in the market that I think is there. It still means we're replacing systems. I think it's an important, extremely important concept that every single Watsco location, all 700, have multiple brands of products, multiple price points, and if one market is tighter than another, we have brands to sell and sustain margins, sustain the replacement market. Not all competitors, in fact, very few competitors, sell more than one brand. And that would include the OEM, the OEM networks that sell single brands. And so we like the diversity. It's helpful to market share, it's helpful to margin, it's helpful competitively, and it lets us react to what's going on in individual markets in a very, very good way. Okay. Thanks, Barry. And just to clarify your statement on the commodity product, when you say it's stable, are you referring to it's stable today relative to what it was a month or two ago? Or are you talking about a year-over-year, we should be thinking that that's sort of a flatness today? Yeah, I would say, and if I look at the first quarter of 2024 and the second quarter of 2024, price, margin, and, you know, really the quality of gross profit is sound this year, where last year it was highly volatile. It would go up and down, you know, quarter to quarter, and it's much more stable and I would say in a very narrow range and acceptable margins for those products this year. Okay. All right, and then one more on acquisitions. Is there any update on the Gateway acquisition? And then given the timing of that, I think it was September of 2023, the rollover effect from acquisitions in the third quarter, I'm coming up with about $40 million in revenues. Does that sound right to you? Yeah, Rick, I can, I can speak to that a little bit. First, we are more than delighted with how Gateway is doing. It's a terrific team. It's a terrific market. We will be there actually, you know, pretty soon to have a powwow with those folks, and I would say that they are exceeding expectations up to this point when we look at the numbers relative to what we what we invested and what they were doing last year when we made that investment. So very pleased with how that is unfolding. You are in the ballpark as it relates to third quarter contribution, and I think September first is the anniversary of that. So it'll we will we will lap that here starting in the third quarter. All right. Thanks, Rick. Thanks, everyone. The next question comes from Nigel Coe from Wolfe Research. Please go ahead. ... Thanks, thanks, Al. Thanks, everyone. Just, you mentioned, I know, I know R-454B is not a- Sorry, is that me or you? Okay. Background noise, please. So listen, I, and I know the R-454B is not a huge factor, but I think you did mention that, there's a handful of distributors out there, so customers out there accepting products. I was just, I was just curious kind of what you're seeing in terms of the kind of customer acceptance, and, and whether, you know, the price on R-454B, is, is sticking. You know, are you seeing that sort of 10%-15% uplift on mix? Thanks. Well, it's way early to be able to give you any sort of prediction on how the customers are accepting it. We just, I think we just had our first, our first delivery of 100 units to a particular customer, so we'll find out quickly, you know, what the reaction has been. We obviously have done a tremendous amount of training, and we'll continue to add to that and add more training to it, to make sure that the customer understands, you know, what the tools are that they have to have and how they're going to install it. There are some variances that will occur, but way too early to be able to really gauge, you know, price and acceptance of the product. I have no doubt in my mind that it's going to be accepted. Yeah. No, I mean, it's actually earlier than I expected. So, Yeah. Sorry for the question. I thought maybe it was a bit simple and tackle on that. And then, you know, you mentioned share gains, and I'm just curious how the, how your view of the market in second quarter versus the 4% same store sales, so just if any color there? And then inventory, I know you built a fair amount of inventory in 1Q. You worked that down in 2Q. Normally, you'd work up inventory in the second quarter. And the spirit of the question is really that, you know, it feels like this is a year when inventory is moving higher, not lower. So just curious, your perspectives on inventory over the back half of the year. Paul, let me deal with the first last part. All right. Earlier, I've stated that we're very focused on using our tools to improve inventory turns, and we are succeeding. That we have certainly enough inventory to meet demand, and hopefully, the turns will increase, and we'll carry less inventory, and still meet demand. I would say, you know, as we go through the year, I see our inventory actually trailing downwards and continuing to move down as it does, because 1, seasonality, and 2, because of the transition to the new A2L refrigerants. And then we'll probably see in the first quarter, we'll probably see an overlap of inventory, where we're gonna have 410, and we're gonna have A2L, which perhaps will cause a bump in the inventory, which would be normal anyway, just based on the season. So it's gonna, it's gonna be, it's gonna be an unusual ride, I think, as we go through this transition to the new product. A lot of, a lot of the product information that we have right now indicates that it should go smoothly and, knock on wood, that it does. So what you're saying, loud and clear here is no pre-buy or no material pre-buy in fourth quarter? No material pre-buy, no. Okay. Thanks, guys. This concludes our question and answer session. I would like to turn the conference back over to Albert Nahmad for closing remarks. As always, thank you for your interest in our company. We very much appreciate it, and we're very sincere in asking you to come visit. If you want to learn more about what we do, especially in the technology field, you're always welcome. All it takes is a phone call, and to that end, we look forward to catching up with you in the next quarter. Thanks for your interest and for your support. Bye now. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.