Good day and welcome to the Watsco second quarter of 2025 earnings conference call. All participants will be in a listen only mode for the duration of the call and should you need any assistance today, please signal a conference specialist by pressing the Star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question you may press Star then one on a touchtone phone and to withdraw a question please press Star then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Albert Nahmad, CEO and Chairman. Please go ahead. Good morning everyone. Welcome to our second quarter earnings call. This is Albert Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President, Paul Johnston, Barry S. Logan, and Rick Gomez. Before we start our normal cautionary statement, this conference call has forward-looking statements as defined by FCC laws and regulations and are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. Watsco delivered healthy second quarter results in soft market conditions. I should say in soft market conditions. 2025 marks a year of significant product transition to next generation equipment containing A2L refrigerants. The transition affects roughly 55% of our historical product sales. This transition affects our inventories, our supply chain, staffing levels in our branches, and other aspects of our business. Regulatory changes have historically been good for our business and good for our customers. We expect that transition to be no different than has happened in the past. The changes are substantial and complete, and we will look forward to operations of simpler business in 2026. Let me turn to second quarter highlights. Sales declined 4% like the double-digit pricing gains for the new equipment offset by lower volumes. We had a late start to the summer season. Sales for residential, new construction, and international markets remained subdued. On the plus side, Watsco achieved record gross profit margins. Our performance yielded an increase in EBIT and expanded EBIT margins despite lower sales. Our results benefited from OEM pricing actions. Our pricing technology platform called Price FX also contributed. Gross margins remain a focus. There is much potential to improve over time. SG&A increased 6% as we incurred extra cost during the transition. We also added 10 new locations from recent acquisitions. Our balance sheet remains solid. We have a strong cash position and no debt. We continue to invest in innovation and technology to separate us from our competitors. Watsco's technology journey began 15 years ago and we have made terrific progress. Examples: e-commerce continues to grow and is now a $2.5 billion business or 34% of our sales. Mobile apps have now 70,000 users and grew 17% versus last year. The annual volume of products sold through OnCall Air, which is our digital selling platform for customer contractors, increased 19% to $1.6 billion. It's a great assist to our customers, but we are not standing still in terms of ideas and making further investments. We are building on or adding new initiatives to drive growth and to delight our customers. Examples include a new technology-driven sales platform being developed to capture larger national customers. We're talking about national customers here. This will be incremental to Watsco's core replacement business and is expected to be launched in 2026. We have accelerated adoption of our pricing platform. Price FX is the name of it. Our goal is to reach 30% gross profit margin. We have launched an initiative to grow the parts and supply segment of our business, which today is roughly 30% of sales and can be much larger, can be much larger over time. We launched two AI platforms, one internal and one external, to harness our data. Artificial intelligence offers the potential to further transform our customer experience, improve operating efficiency, and create new data-driven growth strategies. This is an exciting time and these are just a few of the many initiatives underway. Now. We will expand on these themes at an investor event in Miami which will occur after temperatures have dropped a bit. Stay tuned for additional details. Finally, we believe our culture of innovation, along with our scale, entrepreneurial culture and capacity to invest are unmatched in our industry. With that, let's turn to Q and A. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then two. At this time we will pause momentarily to assemble our roster and our first question here will come from Ryan Merkel with William Blair. Please go ahead with your question. Hey, good morning everyone. Good morning. My first question is just, you know, on volumes in the quarter were a little bit worse than I was expecting. I know you mentioned weather, A2L, new construction. Would just love to hear from you what happened there. And then more importantly, are you seeing trends improve in July? I'm going to ask both Paul and Barry to respond to that. Yeah, revenues were not as strong as we anticipated going into Q2. You know, what we saw was a kind of a lumpy picture in the marketplace where April came in strong, May ended up being very weak mainly because of the weather patterns in the north. In June they came back again and it was pretty much, you know, RNC is probably our new construction. Residential new construction is probably down 15%-20%. Replacement is still holding fairly strong. We did not really see a lot of repair in the beginning of the quarter, which we saw towards the end of the quarter and continues into July, but not enough to offset, you know, the unit sales that were certainly down. Comment on international sales. Yeah, I'll comment on that. Also on, you know, one of the exposures we talked about in the first quarter that repeated itself in the second quarter was our international, which is Mexico. Mexico is probably the most volatile market. It's a small part of our business, but a big contributor from a margin point of view. Mexico was down, well, let's put it this way. Cost us about $0.10 a share in the quarter, $0.20 a share year to date. In June, it grew. In July, it's grown since then. I’ll take kind of one market that's been irritating, which seems to be a lot better in the last couple of months. As far as July goes, Ryan, I would say it's better. August is bigger than July in our forward looking commentary. If I say that July is better than what we saw in June, that's okay, but it needs to extend itself and extrapolate itself as the year goes on. The good news is that in general what we can control is margin pricing and the wherewithal of our business to support all these new products in the market with our customers. I'm glad we have our balance sheet to do that with because it's been a pretty extraordinary product change this year. You can see the building of inventories. That's a customer focused effort to help our customers get going in this market. The margin speaks to capturing new pricing on, as we say, over half the products we sell. We had to capture price inflation since that price and get off on the right track in margins. Needless to say, that's been accomplished. We like what we can control. We'll be patient about what we can't control. I think also maybe this is more of a 2026 discussion, but the entire industry, every OEM we sell products for, have been through an extreme product cycle probably for the last two or three years. At what point does that serenity play itself out in terms of growth and market share development and product expansion, the blocking and tackling that I think is particularly good for us and that we're good at. Maybe that's more of a next year event, but we're kind of looking forward to it, quite honestly. Yeah, that's fair. Okay. Since you mentioned gross margin, that was the other metric that was really strong this quarter. My sense is it's both price cost and initiatives. My question is I don't want us to extrapolate that 29% into the back half. Just how sustainable is that? Was 2Q kind of temporary due to price cost timing? Go ahead, Barry. Yeah, I think there is obviously an algebraic benefit to margin when OEMs raise prices in April and May. We talked last quarter that OEMs had faced some inflationary realities going on with tariffs and raw materials and so on. On top of the like-for-like price increase on the new product. They introduced inflationary pricing early in the quarter. That clearly helped build a bigger margin this quarter. The benefit of that kind of slides off into the third and fourth quarter. I'm the one that probably three years ago talked about 27% as a floor, as a benchmark, and I stand by that, obviously. If I say now 27% plus, I would expect that for the last half of the year. We won't have the benefit of those pricing actions that you see in the first half of this year. Somewhere in between would be my conjecture and the market will play out and determine what it is. I think we have a chance to beat our benchmark but not have the benefit that we saw as extraordinarily this quarter in terms of pricing. That is great. Just want to add, I mean, this is A.J. Just real quickly, I mean, there is the benefit from the OEM price increases, but also the efforts we are making on our price optimization and the leadership of those teams and the pricing teams, that is also working. It is a combination of both. We continue to put points on the board in terms of the pricing efforts that we are taking internally. Let me add, as we move our product mix, which I mentioned in the opening statements, towards parts and supplies. That is what we're focused on with our technology that by its nature carries a higher margin than equipment sales. Our product mix, hopefully sometime later this year or into next year, will improve margins too, because parts and supplies carry higher margins. Thank you very much. I'll pass it on. Our next question will come from Brett Lindsey with Mizuho. Please go ahead. Morning, Brett. Hey, good morning. Yeah, maybe just a follow up on. That last point there. If you could maybe just unpack. The year-over-year gross margin contribution. Is there any way to delineate that? Between the pricing optimization tools versus the parts mix versus some of that raw pricing just in the marketplace in the quarter? That is an interesting question. Who wants to deal with that? Yeah, Brett, I'll take a stab at that. This is. Rick, this is directional because there's a lot of art and a lot of science to this as well, but it's not all science. When we look at the quarter, there was, and when we look at the year as well, pretty consistent, there's about 50-60 basis points of gross margin enhancement that we can attribute to that raw selling margin, which is basically the day-to-day job of a distributor in the market: what are you buying for and what are you selling for? Gross margins would have been in the high 27s absent any of that inflation. The inflation helps, but it's not something that you can underwrite perpetually, obviously. That's what it's amounted to. By the way, that's been pretty consistent. If I look back maybe two or three years in the data we've been at that we can aggregate and say that there's been about 200 basis points of gross margin expansion attributable to this pricing optimization and bringing more technology to how we price. Keep in mind that the complexity of price in the industry is something that generally benefits a distributor. What I mean by that is that virtually every SKU has a different price to every customer. To imagine that we are optimized, well, it's the opposite. We're far from optimized. That is why we think there is so much room still to go. Oh, by the way, just to finish the thought, during that period of time we have also gained market share. We have about 200-250 basis points of incremental market share over that three-year period, if I measure it. That is mainly attributable to all the technology. My point there is that everything that we are doing on the technology side with margin has not borrowed from customer acquisition and market growth at the end. That's very helpful, I appreciate that. Just a follow up on the cylinder shortage. Sounds like you guys think it abates by the second half. I know some of the peers think. It does persist into the second half. Maybe what was the impact you think in the quarter from the shortage situation? Are you assuming that some of that does carry into H2? Yeah. I think, you know, as Paul, what we had was we had an allocation situation where we were being allocated refrigerant. What the OEMs did was they came through and did an overcharge in the unit so that they did not require as much, you know, field installation type refrigerant. It has become less and less of a concern as time goes on, as our allocations continue to increase. We feel good that sometime in August we should be off of allocation. I think it was very irritating. It was very disturbing that we had to go through that. I do not think that really is the total cause of why the market was slower than what it was. Thanks for the color. Yeah, just an editorial on that. The like-for-like SKUs that we're selling now, A2L versus the prior, is the 10% difference in price. And a speed bump on the canisters or refrigerant. Is that a speed bump? The transition itself, if we look forward again to that word serenity I used earlier, we're looking forward to it. Thanks, barry. Our next question will come from Tommy Molt with Stephens. Please go ahead with your question. Morning, Tom. Good morning, Albert. Thanks for taking my questions. I wanted to start on inventory. Maybe you could characterize for us the. Investment there versus what you would have expected to need for the transition. Just in dollar terms, is it about what you would have soft circled or maybe a little elevated? Anything you can do to frame that for us? Also, how you think it might trend over the next couple quarters? The honest answer is that it's more than we had hoped for. Some of that is because we expected not to have the unusual demand, industry demand, the lower industry demand. We peaked at about $2 billion. We are now very focused on what to do about it. We've lost, in terms of inventory investment, $200 million so far in the third quarter. We're down to $1.8 billion. Plus this transition of product, you have to have the old and you have to have the new on the equipment side, and we'll transition out of the old before the end of the year. That will help reduce the inventory investment. That's a very good question. I'm very dedicated to increasing our inventory turn, and it's been a rough time to do that, but I think. Yeah. Go ahead. Yeah. On a raw number basis, you know, we had double inventory. We had 5% of the total inventory was 410. And then we had the more expensive A2L product in there. So we probably had a 15% rise just between what we had in 410 left over and what we experienced. When we have price increase, the balance of it is exactly what Al said. You know, the demand just wasn't there. To be able to take the inventory back down that you're going to see come down at the end of the third quarter. Thank you both. As a follow-up, I wanted to ask about the M&A environment and pipeline. Hasn't gotten a ton of. Airtime lately, but how can you characterize that for us? That's a very good question. We are eager, eager to see what owners of distribution businesses in HVAC are going to do with this existing very soft market. They may do nothing, they may continue or they may say, now it's time to do something in terms of an M&A. Of course, we have a great reputation with independent distributors because of the way we treat sellers. We're very careful about relationship built continuing post acquisition with the existing leadership of a business acquired. I can't say it's going to happen, but I'm sure hoping. We have a very, very strong balance sheet and we can take advantage of opportunities as they come. I cannot, I can only tell you that, I can't disclose it, but there is one that we think is causing much more than that, that is of size and we'll see how that turns out. It's still understudy. Yeah. Rest assured, we're having as many of those conversations as we can. We're super ambitious and we have the balance sheet to support anything we want. If we can manage to muster up. Hopefully it can be an exciting period in May. Thank you both. I'll turn it back. Our next question will come from David Manthey with Baird. Please go ahead. Morning, David. Hey, Al. Good morning. I was wondering if you had any. Thoughts on consumer preference during this product transition. Like, are you continuing to see a? Premium on the R410A systems? As people are buying the. A2L, are they gravitating to one end or the other of the good, better, best tier? That's an interesting question. I wonder who in our team can respond to that. Paul, are you the one, Paul? You always are. Yeah, the industry really hasn't topped as far as high efficiency product. You know, it's still at the entry level. I mean, we're at, you know, basically using the old SEER rating, we're at above 15 SEER for minimum efficiency. So it's high efficiency product. We really haven't seen a change in the direction of the industry. It's still very, very much sliding along the idea that it's going to be whatever the minimum efficiency is, and that represents probably 85% of the market. That has not changed. When you get into the brands that we're selling, the brands have been consistent throughout the year and they continue to hold steady. You know, we're seeing the Carrier brand and the Rheem brand, you know, and the Goodman brands all doing their job and holding up their share of the business. We're not seeing a migration to a lower branded product. No. Dave. Just to add to that, for the fun of it, if I look at brands, products, markets, customers, geographies, north and south, east and west, and we're selling close to 20 brands, the first half of the year is very consistent amongst that collection of data points. Nothing stands out, Dave. I don't think this has been disruptive to what kind of the baseline products being sold is going on. Yeah, the exciting anomaly though, and I think it's in our press release, is OnCall Air. When our customers are using the tool that we've created for them, which we call a sales engine, they are selling high efficiency systems at a much higher rate, like the inverse amount meaning I think it's like 70% or 75% of the time a contractor selling using OnCall Air, they're selling high efficiency systems. When we can help influence that. Through that tool, that's powerful because the. Consumer gets a better product, the contractor. Makes a bigger ticket, as do we. It's a win, win, win. It sounds good. Thanks for all the color there. My follow up, it's the first time. We've seen others do better than that. Equipment in a long time. As Paul said, the residential new construction is not helping. I assume all the duct work and thermostats and things in the other category. Should we not read into this that there's a stronger fix versus replace trend this quarter? Or is it, I don't know, commodities or? I'm just making this up. Any thoughts on that? It's pretty small. You know, when you take a look at the entire marketplace, you know, you just take compressors. You know the normal demand for compressors in the U.S. is about 1.2 million to 1.3 million and the balance of them go warranty because you have a 5 and a 10 year warranty on most of the equipment. You take a look at the equipment side, it's 7-8 million units. So for the offset of a down market on the unit side through additional parts, yes, it's going to help our gross margin but no, it's not going to help the top line. It's not going to help your revenue line. The ratio is just too great between what parts represent versus equipment. Are we seeing an uptick? Yes, we started seeing an uptick in June which historically is the month in which you're going to see that up. It's continued into July but we really haven't seen a radical increase in units. We've seen an increase in dollars more. Than we have units. Let's not mislead either. Our sales in the new quarter are not. They're pretty flattish. Small incremental, low digit increase. They're not. It's nothing that does not signify a major double-digit increase yet. No. Thanks very much. Yeah. When we talk about unit growth of compressors and coils, things like that year to date is single digit. It's not, you know, it was not an avalanche of transition to that. It could be us just selling more compressors in the market. I think you heard Carrier talk yesterday very directly about that. They're talking to 150 independent distributors when they're answering your question to that. It's obviously an opportunity to sell more parts. The wholesale trend is not something that I think is quite in the numbers yet. Thanks, Barry. As somebody mentioned earlier, the M&A, we're very eager to do more M&A. Sometimes opportunities arise when you have these kind of markets. I'm sure hoping for it. Are we shut down again? Our next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead. Hey, good morning everyone. Is this real AI or AI Al. It's a combination. You have to figure it out. You see, I know it's the real. Alright. Just to clarify on the flattish. Sales comment, was that parts for July? Or is that overall? Overall okay. Overall. Just on back to inventories, can you just maybe talk about where you want to ultimately get your turns to. I know you were kind of running. Four and a half turns a year pre Covid and pre all these regulatory changes and now you're kind of three. To three and a half and you. Know, kind of where you see that. Happening over and over. What time frame? First of all, let me compliment you on the data. You're right about those terms. I'm not going to put a time limit on this, but I'd like to get to five at some point in time. Given all the technology we're investing in it, I'd like to get to five. Think about it. Yeah. Pre Covid, we were at four and a half. We did not have the technology investment in inventory systems and the management systems that we currently have. As we come out of it, I think Al's goal of 5 is very attainable. We have what we call the Dream Plan. We may have mentioned it before actually, Dream Plan 2, because Dream Plan 1 was achieved after three years of effort and Dream Plan 2 is anew and may take three years to do that. Dream Plan 2 is $10 billion in revenue, 30% in gross profit margin, and five times on the inventory turn. Those are the targets that we're focused on. I remember when it was 10% growth. 10% margins for $100. You guys blew through that one, believe it or not. Believe it or not, that was 20 years ago. Boy, a hell of a history lesson. Here today for those, for those 20-something year olds listening to us. Jeff is right. It was called 10 and 10 equals 100. It was called 10 and 10 equals 100. We got our management team together and rallied around that. Many of them thought Al was out of his mind. Obviously, we have blown past that, you know, some time ago. We reinstituted that cultural kind of concept about six months ago, actually a year ago, and got everyone together. Some of the initiatives that you are not asking about today that you will ask about as we develop them. Is. Built on that Dream Plan 2 concept. If we had 75 other Watsco managers on this call, you would be able to ask them about it, not just ask us. Just know that culturally those kind of things go on and we have fun with it. Yeah, and culturally, really the takeaway is that we're super ambitious and that's why we're investing in these big goals that we expect to hit in time. The truth is that we also have an equity culture that really inspires people to achieve and to meet the goals set by senior management. Which means what is the equity culture? Many, many employees own Watsco shares either through a 401k or through the different stock plans. We like that. We like the ownership culture to be spread out throughout the organization. It is very unique and it is very extensive. That ownership culture drives their desire to meet goals, I think. I have always used it and it has been working and I expect it to continue working. Great. Thanks for the time, guys. Our next question will come from Patrick Bauman with J.P. Morgan. Please go ahead. Good morning. Morning. Thanks for taking my questions. Maybe I was just curious if you could provide some examples of the large enterprise institutional customers you cite as offering emerging opportunities for growth and what exactly are you doing to go after them? Sure, Barry. Go ahead. I would have A.J. Into that. Rick. A.J. Yes, I'll jump in first. You know, we teased some of this in our press release and also teased that we want you guys to come down to Miami and spend time with us and see it and hear it and feel it more succinctly. There are macro trends going on in our industry, including private equity trying to buy up and consolidate contractors. Between that and home warranty companies and other institutional type customers, there are emerging and have emerged, I would call it, multi location contractors who may have some business in Florida, some in Texas, some in Tennessee, you name it. With our size and scale, we should be able to, we should be their preferred vendor. We should be the most exciting place for them to buy product. We do not necessarily have a unified experience for them to take advantage of our whole offering and our whole scale. That is what we are building. We call it Watsco 1 and it will be exactly that. It will be one interface for these large institutional type contractors to buy and secure the products that they need from any of our locations whenever they need it. Interesting is it doesn't. This is a huge, huge undertaking. It does not sound that way, just using words, but we are a very, very decentralized system and to aggregate, to meet, to aggregate our inventories and our pricing systems and all our support systems to meet the needs of a large national customer, that is, it takes a lot of initiative and we are investing to prepare all those tools to do that. It should have a very significant impact once we have accomplished it because no one else has these capabilities. A follow up to that. Would you see selling to a larger national account contractor any different than I guess you said it is? In terms of their buying capacity, is that something that you would see as a headwind for your gross margin over time? Of course. I would say yes. We also have the opportunity to sell them a lot more parts and supplies, which, as we discussed earlier, have a higher gross margin profile. Right. That's why I think it's not. The answer is not so linear, Pat. It's because today, when we look at those big institutional type accounts, we're largely selling them equipment and we're selling them equipment in bulk. To broaden that offering means we're taking all else equal, we're taking a customer, and broadening the mix of products we sell them. That's generally accretive to margin at the end of the day. That makes sense. Okay. Pat, I'm just going to say this again more for the fun of it. I mean, a great home services business you could invest in the last 50 years is Rollins. If you don't know the company, look it up. Technology deployed at Rollins yielded 10% higher EBIT margins for their business over time. The question is, in our partnership with any customer of any size, do we have a business model, an ecosystem that can help them grow, help them price products, help them operate their business? 24/7. Part of the visibility of what we've done for most smaller contractors, the question is, is that a pliable technology for larger accounts and larger contractors? It's not about just selling more stuff, it's about helping any kind of size customer operate their business more profitably through us. Our products just happen to be the ones they'll scale with, to do that with. This is as much of a technology play as it is a product or any other kind of label you might put on it. Thanks for the color. Sounds interesting and exciting. Maybe just switching gears on my next question. On the operating cost side, I think you cite something in the release about targeting cost efficiencies for the rest of the year. Could you provide any color on, I guess one, the 6% growth rate in the second quarter of SG&A expense. You mentioned costs of the A2L transition. I don't know how that kind of made its way into SG&A, but if you give color on that and then can you bend that growth rate in the second half with some of the cost efficiencies you're targeting? Sure, Pat, I can. I'll take a stab at the. First, let's take. Let's start with the 6%. We said in the release that we made some acquisitions, we have opened some new locations. About 25% of that 6% is attributable to that. You can think of, you know, core SG&A growth, if we call it that, more in the 4.5% range, which is still, you know, higher than it should be in a down quarter, but that is kind of our starting point as we think about it. When you think about just the day-to-day life in a branch during a transition, if we have more inventory, it means that we have received more inventory. It means you need more people receiving that inventory. It means that you have more trucks coming to your locations. It means that you are not optimizing what you have. It is not business as usual in the day-to-day, in the day-to-day life of a branch during such a large-scale transition. To underscore something we said earlier and mentioned in the release, this impacted every domestic location we have in the U.S., about 650 of them. That is where there was some inefficiency, as I would say, in the labor and the logistics side. Do we think we can bring that down and bring it more into balance at the end of the year? The answer is yes. Our leaders are working on that right now. One of the things that should naturally help that is that. When we look. At our inventory today, about 5%-7% of that inventory is for 10A product, which means we've largely received all the new product we're going to get and we've largely worked out of all the old stuff. That means that the branch can get back to kind of its routine and should be a little bit more efficient in the back half of the year. Yeah. Just to say it a little my way, as we sell through 410A product, we need to make sure that we have system matchups that are selling in locations. There is a lot of transferring product within our network to make sure that we have the right systems in place that are sellable in a market where they are selling, if that makes sense. There is some extra cost that has gone. Into that as well. That makes a lot of sense. Thanks a lot. I really appreciate the color. Our next question will come from Damien Carras with UBS. Please go ahead. Hi. Good morning, gentlemen. Good morning. Morning. I'm curious how you're thinking about pricing through the rest of the year. On the equipment side, our price is pretty much set for the rest of the year. You're just going to continue to get that benefit of the higher value mix flowing through top line. Do you foresee any changes on your parts and commodity supplies with respect to price and just thinking about further metals inflation and tariffs? Yeah. I don't think on the equipment side we're going to see a lot of price increases going forward. On the non equipment side, you know, Friday is copper day, 50% tariff start on copper. We've already seen about a 10% increase on some of those products that are heavily endowed with copper. So, you know, it's just a matter of wait and see on some of the non equipment type product. I think equipment is pretty much in place though. Understood. Yeah. I would just say let's just make sure. I think what we're talking about is cost. We're getting cost, the cost of our products and our equipment products. I don't think we're expecting much change from our OEM partners. On price, meaning our price to. Our customers. That's what the tooling and the technology enables is because every different customer has a different price on every product we sell in every region, in every market. That complexity is opportunity because with our tooling we can study where there are trends and patterns and anomalies and outliers and segments that should be priced appropriately. We run different, I call them plays where we can measure and track. When we make a change in a customer's price or a customer segmentation price or a cohort of customers pricing on different products, we can take that to market, we can measure and track and we can see the impacts and either double down or go on to the next slide. Pricing will always be opportunity. Just to clarify the costing versus pricing. Got it. That's helpful. I know this is never an easy task, but if you had to guesstimate, if you will, how much of a headwind to volumes in the second quarter do you think are attributable to weather and the canister shortage versus weaker housing and underlying market demand? I'm just trying to get a sense for what underlying demand might look like as you move past these more transient issues. I don't think the canisters have anything to do with sales in the second half of the year. You know, as far as the refrigerant we receive, I think it's going to be what the consumer feels like, what the weather patterns are going to be like, how we're able to react and meet the inventory demands that the consumer need or that the contractor needs to handle the consumer. I think it's just going to be blocking and tackling in the second half. Yeah, I mean, I think it's all been said, but this has got to be the noisiest year in HVAC ever. Between the tariffs and the weather and consumer confidence and the canister shortages and the home building changes and interest rates and trading homes isn't happening as frequently. I mean there's just so many things going on at macro levels, most of which are out of our control. It's a lot of noise in the industry and our job is to win in any environment and emerge bigger and stronger and more profitable and take more share from our competitors. That's, I like where we sit in that equation because of our scale, because of our balance sheet, because of our willingness and ability to invest in technology. I'm very pleased that Watsco, given all this noise. Really appreciate your thoughts. Good luck out there. Thank you. Our next question will come from Nigel Koh with Wolfe Research. Please go ahead. Hi, good morning guys. Appreciate all the color. Hi, Al. I think you mentioned 410A was 60% or thereabouts for the quarter. I'm just curious how that trended or maybe where that's trending right now, real time. Any concerns that you're holding too much 410 inventory just given the demand weakness or are you confident you'll be done with that transition this quarter? I'm chuckling because that's very much on my mind and yes, we're doing something about it so that we don't have that risk. Paul, you can answer in some detail if you'd like to. Yeah, it's less than 5% of our inventory at the present time. You know, where we're really, you know, working our butts off is to be able to get the right combinations that A.J. mentioned before. You've got to have an indoor unit to go with the outdoor unit. As you sell the inventory down, the pond gets lower. You end up with an indoor unit sitting in one city and you end up with the outdoor unit in another. We are putting those pieces together, which is going to be a drag on SG&A with freight, you know, for a period of time here. I think each one of our companies hear about it continuously that we need to reduce it. We need to keep the focus on 410, get rid of it and focus then on being able to sell the A2L product that we've got. Does that mean, though, that—sorry, does that mean you're incentivizing, you know, that sell-through of that? Sorry, sorry for cutting off that. Does that mean you're incentivizing that process to make that happen? That's not how we work. We deal the markets on a decentralized basis. Those are local decisions made by the local entities that we own. Okay. Nigel, I would just add that. Just to add very quickly in terms of the progression of A2L. It'S. Progressing very, very well. I mean, we exited the quarter in June with more than 80% sell through of the A2L product. And so that's a function of obviously diminishing inventory of R410A. It's also a function of contractors transitioning and adapting well to the product. At this point it's greater than 80% of our sell through, as you'd expect. Okay, that's a great color. My follow up is what we've seen from you and from your suppliers is tremendously strong price. Price is holding, which is good news. Obviously volumes are incredibly weak. What are you hearing from your contractors? Are they asking for some incentives here to try and stimulate movements, or are they content to just wait for rates to turn and perhaps demand picks up? Are you starting to get more inbounds on price reduct or discounts or incentives? I do not think we are really getting a lot of feedback on getting lower prices in the market. There is not elasticity to this market. If we drop the price 2% or 3%, it is going to stimulate a 10% or 12% increase in volume. It is not going to happen. I think the contractor always wants the lowest price, the best price in the marketplace so that they can compete fairly. I do not think we are getting a lot of pushback right now from most of the contractors on the price. Okay, makes sense. Thanks, guys. Appreciate it. Our next question will come from Sam Schneider with North Coast Research. Please go ahead. Hey, looking forward to morning. How are you? Good looking. Thank you. Looking forward for an excuse to come down to Miami paid for by my employer. You did hear loud and clear, right? Yeah. Oh, yeah. Let's wait till it goes off. That was good. We'll welcome you when you're coming. Oh, yeah, no, thank you. Look, just focusing on the mix shift which seemed to benefit margin on parts. Was wondering if the shift was in part at all due to the canister shortage where you had people do more repairs. For the time being. Most of the canister shortage occurred in the first and the second quarter. It was something that we worked our way through. We made it through it. Now, as I said, we're seeing a lot more inventory coming in. It's going out as quickly as it comes in. I see it stopping sometime in early August. Early August is what, two weeks away? I don't think it's really playing on demand right now as heavily as it was before. I don't see any bubble happening on repair versus replace because of canisters. Got it. Okay. Just a real quick follow up sort of on the same topic, but any sort of sizable shift to R32 based systems and you know, if so is that a temporary thing or more permanent in your view? It's only one manufacturer, Daikin, which we represent very proudly with our Goodman and Amana lines, is R32. The rest of the industry is 454. What we've seen is, you know, excellent response from Daikin to be able to help us with the 32. There hasn't been a shortage of 32. You know, when you get into the 454, it's been Carrier, Rheem, American Standard, all of them sell 454 units. I would remind everybody that 454 is roughly 70% R32. It's a blend of 32 plus 1234. YF. I keep tuning out. Did everybody tune out or is that just me? Yeah, I think there's a pause there. A big one. That's happened three times already. Yeah, are you there? Yeah. Joe? Yeah, I'm here. That's you, Barry, the operator. Operator. Yes, I'm here. Why are we tuning out? We can go to the next question. Shall we go on to the next question? Okay, our next question will come from Chris Denker with Loop Capital Markets. Please go ahead. Hey, morning guys. Thanks for taking the question. I guess circling back to Watsco 1, you guys sound excited and sound there's a pretty big opportunity. Is there any way to get a bigger than a breadbox sense here? I mean are we talking about serving 500 customer locations? 5,000. Is it too early to kind of get into that type of scaling? Maybe a better way to approach it is what is our existing sales of parts and supplies and what do we think we can. I don't want to speculate too much. What kind of margin improvement do we think we can get from that? It's a very big chunk of our business. 30%. 30% of $7.5 billion. How much of that could we improve our margins on? I'm not going to speculate, but there will be an improvement. You take any percent of that number and it's meaningful. Makes sense. Makes sense. Thanks for that. I guess maybe just to touch on the AI a little bit here. Can you give us maybe some examples for what the use cases are for Ask Watsco internally? I mean, how is this kind of helping your associates? Is this inventory positioning? Is it warranty data? What's the real use case here? Oh, my gosh, there's so many. How much time do we have? It's helping marketing folks design content and publish content. It's helping our software engineers write code and publish and push more technology faster. It's helping our business unit leaders and their teams sort through data and understand trends and patterns and anomalies. It's helping our customer service folks. Get. Through more cases more quickly with more accurate answers and therefore helping our customers at a greater scale or greater rate and increasing customer satisfaction. I can go on and on and on. Like could be said in the press release, there's about 2,100 people a week internally who are using these tools or the tool. And the ways that they're using it are more and more creative and vast. I mean, it really is holistic then. Thank you so much for that. A.J. and thank you all for the time. Thank you. Our next question comes from Chris Snyder with Morgan Stanley. Please go ahead. Thank you. I wanted to follow up on the 410A inventory. I think you guys covered less than. 5% of your inventory. Do you have any sense for what? That number could look like across your distributor competitors? No, I don't think we really have any good intelligence on that. We try not to figure that that's irrelevant. It's being phased out. We don't really care. Fair enough. Yeah. Chris, there's a couple data points. I mean, I think, you know, one peer of ours that also distributes their product gave a data point on that in terms of what their sell through is, and it was pretty high. The other data point, these are all anecdotal. This is not science. It's aggregating anecdotes. Is when we are talking to M&A targets, what do they tell us about their philosophy and their positioning? As a reminder, most of this stuff was built prior to December 31 and shipped in the first quarter. Someone would have to make a pretty big bet on inventory and would have to really leverage their balance sheet to do that. Our sense just by having these conversations in the channel with the M&A targets is that they're largely phasing out of 410A at about the same pace we are. Thank you. I appreciate that. Maybe follow up on a different sort of inventory question. I guess it's kind of surprising that volumes remain down materially. It seems like in July. With the weather picking up. Does that change the way you guys think about how much inventory is downstream at your customers? Could they have been holding extra stock and perhaps that's why the sell through has been softer? Thank you. I would say some of the bigger contractors may have some inventory. Inventory at the contractor level is not, not really material to our industry. It's, it's being held at the, at the distribution point, not at the contractor point. I don't think it's, it's a big deal, you know, with, with the contractor. I would always also remember that, you know, in Florida, it's either hot or hotter. It's not just hot, you know, all the time. We've not had a cold summer down here. We've not had a cold summer in Texas. Where the weather really impacts us is up north where we've got, you know, where it's, you've got a chance out of every third year that you're going to have a hotter than normal summer or a normal summer or a lower than normal summer. We are definitely seeing a lot of regional differences in the volume based on weather. In the south, we're not really seeing much movement because it's hot in Florida or hot in Texas, it's always hot. Thank you. Appreciate that perspective. This concludes the question and answer session. I'd like to turn the call back over to Albert Nahmad for any closing remarks. Thank you for your interest. I love the questions, and that shows a lot of interest. I hope we've answered your questions fully. If not, please contact us on your own and we will respond to whatever questions you may still have. Other than that, look forward to having you visit us in the cold months that are coming and we'll give you more detail. Thank you. Bye. Bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.