This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Good day and welcome to the Wattsco second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, 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 your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Albert Named. Chairman and CEO, please go ahead, sir.
spk05: Morning, everyone. Welcome from rainy, cloudy Miami, Florida. This is our second quarter earnings call. And this is Al Namid, Chairman and CEO. And with me is A.J. Namid, who is the company's president, Paul Johnson, Barry Logan, and Rick Gomez. Before we start our normal 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. On to our information. Watsco delivered another exceptional quarter. Records were set for virtually every measure of performance. Earnings per share jumped 33% to a record 4.1%. to a record $4.93 per share. That's a record $4.93 per share for the quarter. Sales grew 15% to a record $2.13 billion, which is our first $2 billion quarter. Operating income increased 32% to a record $287 million, with margins expanding 180 basis places. to a record 13.5%. We are particularly pleased with these results given the strong comparisons against the second quarter last year. Now, that was a heck of a quarter last year. Same-store sales were up 29%, and earnings per share was up 64%. That's the comparison that we're up against this last quarter, the second quarter of this year. Now, for the first half of this year, earnings per share is up 53%, on the record $7.83 on a 22% increase in sales. Looking at current trends so far in July, we see meaningful unit growth and additional price capture as inflation remains a reality in our industry. For the year, we expect 2022 will be another year of record performance. Then looking to 2023, higher interest rates and perhaps an economic slowdown is what we think about. We will react in creative ways to take advantage of our scale, product diversity, and technology leadership to sustain growth and build upon our growing market share no matter what comes in 2023. We have also asked our teams to focus on productivity and operating efficiencies, which have been more difficult to achieve the last two years, given the unprecedented supply chain, transportation, and business disruptions that have impacted all businesses, not just ours. We are also engaged with our OEM partners and working together to develop forward-looking growth initiatives. Wattsco has deep relationships with virtually every domestic and international OEM, and we possess the best, most diverse brand portfolio of any distributor in our industry. More fundamentally, there are numerous reasons to be optimistic about our business and our industry in the medium and long term. This morning's press release provides a number of additional data points that we feel support Wattsco's growth trajectory. We have immense technology advantage in our marketplace, and we are investing to grow that advantage, to grow with that advantage. Our technology investments are paying dividends in the form of higher customer engagement, reduced attrition, and substantial market share gains. We have a market advantage in the breadth and diversity of products we sell across dozens of brands. Sorry, let me say that again. Our market advantage is the breadth and diversity of products we sell across dozens of brands and hundreds of product categories. This diversity allows us to offer the full variety of price points required in a market in most any economic environment. In addition, we have a concentrated position in the Sunbelt markets. where both population migration is greatest and the necessity of HVAC products is the most absolute. Now turning to something that's very important, that's the regulatory front. We have several important federal regulatory changes coming to provide opportunities for growth. The minimum federal SEER standards will increase in 2023 across the entire United States. The price points associated with these new products will be higher and should benefit 2023 results. Another very important regulatory change will occur in 2025 as the industry transforms or transitions to new refrigerants. Federal mandates are now in place to phase out the current high DWP, which means global warning potential, And again, GWP, global warning potential refrigerants, used in millions of systems. OEMs are developing new products to incorporate the lower GWP refrigerant. To sum it up, there is significant opportunity for homeowners and businesses to upgrade systems that will, over time, be both efficient and environmentally friendly. We believe our scale matters. Technology and financial strength position us extremely well to capture these new market opportunities. Finally, we're always concerned ourselves with our balance sheet so that we are in a position of financial strength. Today's balance sheet remains in pristine condition with a small amount of debt and we can continue to funding investments to grow our business. We are fortunate to be the leader in such a key industry. As we mentioned, we feel there are and will be several important drivers for growth in our company in years ahead. As always, we have presented only a small portion of our technology story in today's release. If you have any interest in learning more, let us know and we will schedule time with AJ and his team. We are always happy to share more about our progress. But with that, let's go on to questions and answers.
spk09: 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. And to withdraw your question, please press star then two.
spk02: And at this time, we'll pause momentarily to assemble our roster.
spk09: And the first question will come from Tommy Maul with Stevens. Please go ahead.
spk05: Good morning, Tom.
spk10: Good morning, and I appreciate your taking my questions. Of course. So maybe no surprise, I was hoping to start on gross margins this morning. So a couple components here. I guess maybe just to start, any update you can give us on some of the digital pricing optimization investment you've made that can impact that gross margin? And then as a follow-up, any drivers you could call out, particularly from a sequential basis, from first quarter to second quarter? And if anyone's willing to hazard a guess on whether that margin might be flat up or down in Q3, we'd all love to know that as well.
spk05: I think the first part of your question is very well placed because we do have technology that help us with that. And the second part of your question, that's a little more intense, and we'll get some comments on that. AJ, you want to start? Sure, sure.
spk12: First question. First, to give you some context, you have to understand that we do business with about a thousand manufacturers and all of them, I think it's fair to say all of them, have had probably multiple price increases over the last several quarters and years. So just the administration of making sure that our systems are up to date with the latest cost basis from each of these suppliers and making sure that we have the right cost and price in the marketplace is enormous. And before we had the technology we do now in our pricing tool, I'm not sure we could do it. Certainly not to the way, not to the extent of proficiency and expertise that we did today. So just the administrative burden has been eased by the tool itself. Len, you can start talking about the opportunity. The opportunity is to make sure that we capture the the additional price in the marketplace that needs to be passed along to our customers and to their customers and to be reflecting of the inflationary environment. And our tools enable that and then enable us to slice and dice and do analytics to find opportunities to maximize or I should say optimize price by product, by category, by geography, etc., and the opportunities are endless. And it may, just so you know, it may not always be going up in price. It may also be going down in price. There are definitely times where we are out of line with pricing, and when we get in line, we can move products more efficiently and create, or I should say, capture demand that's out there when we have the pricing correct. So I'd say we're still early days with the tool because the tool has really enabled infinite opportunities but it's an exciting and important opportunity that we have in front of us.
spk05: Very good. You want to repeat the second part of your second question, please?
spk10: Sure. Any context, qualitative or quantitative, on the gross margin from first quarter to second quarter and to the extent you can give any insight on second quarter to third quarter?
spk15: Barry, you want that? Sure, Tommy. Good morning. Well, first, again, I'll answer the second part first because it's a bit longer term in view. And last quarter, first quarter conference call, we talked about 27% as a longer term target for gross profit. And so therefore, the amount of that target that's above historical levels is the structural and and strategic and tactical progress we believe we've made on gross profit. And where we're in an inflationary environment, which we have been in for the first half of this year, it can be something more than the 27%, and that's precisely what you see in the numbers, your date. Sequentially, it's noisy, to give a simple example. A simple thought, which I'll develop, and the noise is that in the first quarter with pricing actions by the OEMs, when we flip inventory for the first 90 days in the smallest quarter of the year, the benefit of that spread is in gross profit and builds a gross profit that's higher, and that's where the 29% came from. It's really simply the timing and level of OEM pricing that came into the market, and when it came in, relative to our first quarter. So the smoothing or the predictability or the projection of gross profit has to look over a longer curve of time than just one quarter. I wouldn't want you to take every quarter that we report and try to get too many inferences out of it. Just listen to the long-term target. Listen to the structural elements of what we've been doing. And if there's more inflation on the road, it's something that can be improved. If there's lack of inflation, then I think the target that I've mentioned is what the more likely event is long-term.
spk10: All very helpful and very much appreciated. I did also want to ask about SG&A. You highlighted that there have been some factors that – some factors in play recently and that you may need to, I believe the term was re-evaluate to the extent that business conditions normalize. Can you give us your current thinking on the potential need to re-evaluate there? And I guess ultimately what we're all trying to discern is in an environment where Potentially, you even see some reversal on input costs and maybe even some broader economic headwinds. Can you still hold a double-digit operating income margin?
spk15: Thanks, Tommy. Well, first, obviously when you manage the business, you're managing all the pieces that end up being double-digit, even margin or not. So if I focus on SG&A, there's been a complete lack of capability over the last probably 18 months, almost two years, a lack of an ability to find efficiencies when supply chain was completely disrupted and You had exceeding demand in terms of chasing demand in the marketplace. You have competitive factors that we wanted to take advantage of, so we hired more people, brought in more customer service, more of everything in order to grow, and our market share gains are evidence of that accomplishment. All of that has to be built through SG&A. We also asked our vendors for and for benefits and economics so that we could invest more people. We could open up more locations, and we have. And obviously the technology spending has proliferated over the last two years for good reason and with good results. So now I've built that up. Needless to say, the message now is, Where are the efficiencies? Let's put the nose to the grindstone. Ask our teams, ask our leaders, ask our field people, ask our branch managers to take a breath. They're still very busy, by the way. It's still a very busy season, and business is still very good. But when we look out beyond the horizon to some extent, SG&A has to be dealt with in the creative and entrepreneurial way that we know is possible today. virtually every variable cost has increased in line with sales over the last two years. And remember, sales are probably up 25%, 30% in the last 18 months, if I put that in perspective on a same-store basis. And so variable costs will be dealt with in whatever that variable picture looks like in the next 12 months. And then you have a bunch of structural costs that have been frankly, again, built in a very inefficient environment that will become more efficient as time goes on.
spk12: If I can, this is AJ. Let me give you another example of how the supply chain woes have added to SG&A, and you can do the math of as things quote-unquote normalize, these SG&A costs should come out. An example is that our vendors and our suppliers They may be getting a high quantity of products, but it may not be the right mix of products in the right locations. For example, we may have more indoor units than outdoor units, and I'm making this up, in one geography or vice versa. And so we have spent an incremental millions of dollars simply moving products among our locations so that we have matched systems that we can fill customer requests for. And that's a direct result of just the challenges in the supply chain. So as things normalize, you would imagine that some of those additional costs should come out as well.
spk10: Appreciate all the insight, and I'll turn it back.
spk09: The next question will come from Ryan Merkel with WB.
spk00: Please go ahead.
spk09: Good morning, Ryan.
spk00: Hey, everyone. Good morning. Good morning. First off, can you comment on sales trends exiting the quarter and into July? Just curious if there's been any slowdown in demand.
spk05: You mean in the beginning of the third quarter? Yeah, correct. Oh, yes. We've seen a terrific increase in demand. Let's have Barry or Paul, either one, give you the numbers.
spk14: Go ahead, Paul. Okay, yeah, definitely, Ryan, we've seen an uptick in the month of July. And it's been one in which we've seen different regions come to life and really give a pop. The most important two regions that are really performing well right now are in the southeast and the southwest, where we're seeing substantial increases, you know, even compared to last year's July. Barry?
spk15: I've said from my career that I want to report in April and through September half and this quarterly dance that we get on with volatility would go away and that's I think what we're seeing. We're seeing very strong comps that we're up against in the second quarter. We're seeing now very strong growth in July which is the biggest month of the year by the way for our company and The question is, is it some type of wall we've hit, or is it simply a volatility discussion? I believe it's more a volatility discussion versus what last year's performance was. In the short analysis, the long analysis is that price and units are very strong as we're getting into the third quarter.
spk05: I think we commented the units are up mid-single digits. In the beginning of July.
spk00: Beginning of July, unit sales up mid single-digit to high single-digit?
spk05: That's correct.
spk00: Okay. That is very strong. And then my second question is looking out to 23 with the SEER change. I think there's some misunderstanding about sort of the impact. If you guys could unpack it, it would be very helpful. So my understanding is you're going to see an increase on the base units, but you're also going to see an increase on SEER 16 and 17 because of the SEER 2 testing. So my question is, what could be the price mix benefit in 23 when you put all that together with price carryover?
spk14: Paul? Paul, I would say right now everybody is kind of scrambling, looking at that number, trying to figure out exactly what – what the market price will be for the 16-17. As far as the baseline products, the old 15 SEER, the new 14.3 SEER products that's coming in, I would say that that's going to start in the mid-teens up from what we currently have today at the 14 SEER level.
spk03: Okay.
spk00: So asking in a different way,
spk14: could roughly 75 80 of your equipment sales be up mid-teens in price in 2023 or do we not have enough information to answer that at this point yeah you know ryan if you look at you know where we are today you know with the you know the base products today represent about 75 to 80 percent of the sales volume for the uh industry market and If you assume that that carries over into 2023, then yes, you would see a mid-teen growth.
spk00: Got it. Okay. So punchline is price mix in 2023 is going to be pretty meaningful. Yes, it is. Perfect.
spk02: Well, that's it on. Thanks.
spk09: The next question will come from Stephen Volkman with Jefferies. Please go ahead.
spk05: Morning, Stephen.
spk11: All right. Good morning, guys. Thanks for taking the question. Can I just follow up on that one? Because it feels like one risk might be that people who were, you know, choosing very high SEER product when they felt flush and 401ks were big and all that might choose sort of closer down to the minimum. And so there could be like a negative mix shift on that. I gather you're not seeing that yet, but do you have any views on that? Go ahead, Paul.
spk14: Okay. Stephen, yeah, we have views, we have opinions, but obviously it's very hard to predict what the consumer is going to do and the elasticity of it. There are definite differences between the high SEER and the standard SEER in the areas of comfort, reliability, warranty. There's a lot of soft differentiators besides the energy savings that they accrue. There's also a second element to it, which gets into efficiency. both local and state rebates to the consumer. Also, we're getting into a situation where utilities become more aggressive in their rebating as we have disruptions in electric supply in the marketplace. So if you did just a straight calculation and said, would there be a compression, I think we'd have to go back in history and say in the past there has been a compression to the minimum seers. when we went from 10s here to 12s here and from 12 to 14 in the south. So if that were to occur, I think you probably could lay out some historical numbers and see if that happens, but that would be just an estimate at this time.
spk12: Yeah, I think it's also interesting to note, it's interesting to start to interrupt is that part of the, I should say a victim of the supply chain woes have been high efficiency systems. There's simply just not as many available for us to sell. So our mix is at least somewhat affected by our inability to get those products from our OEMs and sell them to the marketplace today.
spk11: Great. And I think it feels like you're reading my mind, AJ, because my follow-up was actually about supply chain, and I was wondering if you could just kind of comment, you know, are we kind of back to normal or is that overstating it? And, you know, how do you see that playing out?
spk14: I think we're getting back to normal. You know, the supply chain is good. However, there are disruptions in certain product areas. You know, commercial unitary right now, very difficult to get any product in that. The large commercial products, very difficult. very long lead times. When you get to just the standard bread and butter product, we're seeing a pretty good supply chain right now where we're bringing in the indoor and the outdoor are actually coming together for a change. When we look into the future, all these manufacturers, all these OEMs are going to be changing over to a new product, some of them completely redesigned, some of them modifications of what they currently sell. So I guess in My heart, I think that we'll probably have some moderate disruptions as they go through the changeover to the new product line for 2023. And each one of them are going to perform in different manners. And that's the good news about Wattsco. We represent just about everybody in the industry.
spk03: Super. I'll pass it on. Thank you.
spk09: The next question will come from Nigel Coe with Wolf Research. Please go ahead.
spk03: Morning, Nigel.
spk02: Perhaps you're muted, Mr. Koh.
spk01: Yes, I am. Thank you very much. Sorry about that, everyone. I'll say good morning again. Just on the 15% kind of mix-up on the new sort of minimum CF units, Do you think that's going to wash with customers? Because there's obviously a lot of inflationary pressures right now. Are you seeing any signs of increasing pushback from the channel on pricing?
spk14: Well, to date, we have not really seen any pushback on pricing. Obviously, demand remains strong. If you look at the industry itself, we're performing at record levels over the last two years with ever-increasing prices. And I think as we move into the new product, It's going to have higher efficiency. It's going to have other attributes which should be beneficial to the consumer. I wish I could read into what the consumer's mind is when it comes to the cost of a replacement of an air conditioning unit. It's unlike a car or any other staple that a consumer buys. It's something that there isn't a list price out there that they can go ahead and match. There's not a consumer report that tells them what a price should be. And each job, as you recognize, is custom, and so it has different attributes and different issues that would affect the price to the consumer. I think particularly in the Sunbelt area, when it comes to the new products that we're going to be selling on the air conditioning side, it is a necessity. You're not going to live without it. So if you have to replace a unit, I think most consumers are going to find a way to be able to... to afford it and to do it. And the same holds true with gas furnaces and heat pumps in the North and the Mid-Atlantic. Once again, if it's 20 below zero in Alberta, Canada, you're going to be changing out your gas furnace in that market. So kind of an iffy question. I really don't know how the consumer is going to react. I don't think there's any good tests that we can put on it analytically to be able to determine what the analytics are or what the elasticity is for the consumer.
spk15: I think, Paul, I just think to add to that, and this just adds a layer of another thought to that, is the cost of repair today has probably escalated at even a faster rate than the inflation rate of new equipment. First, labor and materials that the contractor might prescribe for a repair has gone up, obviously, materially. Refrigerant, which is used in most repair situations, either a compressor change-out or a coil change-out or something like that, that's multiplied in price over the last couple of years. And it's only going to get more expensive with the full teeth of the phase-out of that refrigerant occurring. So the cost of repair is no cakewalk and not a party. It's something that's become much more expensive as well. And contractors despise repair if they see a replacement opportunity. So I think it's, you know, it'll be interesting times, but I don't think the volatility is as great as other consumer products, let's say.
spk05: And touch consumer financing, Paul Perry.
spk15: Yeah, and at the root of how do people pay for these things historically has been cash and credit cards and potentially a small home equity line. But financing has really only, explicit financing for these products has only been for elite homeowners and elite contractors that offer that financing versus broad-based programs and so on. So that's something that we are working on building on our invention, which is called Credit for Comfort, which becomes available to all of our customers and a much broader group of consumer capability because it's not one finance company, it's a cascade of finance companies. So that's training, that's effort, that's launch, that's adoption, that's a curve that we're very early on. But the long-term, this consumer financing side of things will become a component of these calls and part of the backbone of what we're doing with technology.
spk01: Great. That's a great perspective. Thanks, Barry. Thanks, Paul. And then just my follow-on is really the perspective on 2023. And I know it's a long way away, but I'm just curious why now? because it doesn't feel like you've seen a real break in the trend into July. No big repair versus replace changes. So just wondering why now, and what do you think normal looks like, whatever that means?
spk05: I'm not sure I understood the question. I don't either. Can you clarify that?
spk01: Yeah, I'm just wondering why the perspective today on 2023 just given it's some ways away.
spk05: Well, because we see the federal government changing the industry and changing what we'll be selling and changing what consumers will be faced to buy. And that's a big thing is the regulatory environment. plus the ability to move to higher efficiency systems and reduce costs to the homeowner and contribute to our ability to help with the environment with emissions. Every time you move to a high-efficiency unit, you're removing emissions from the planet because we're producing more cooling with less electricity. And if you produce less electricity, you're producing less emissions. there are a lot of factors here. None of them are negative other than the earlier question was how can a consumer afford it? And we're very motivated to help with that with our consumer financing. And I believe we have the best software now to help the contractor bring the homeowner or the business owner onto a finance program. Now, we're not doing the financing. We lay that off to a series of different finance companies depending on the credit rating of the consumer. And that's just beginning. So it's hopefully I gave you some answers. If not, keep asking.
spk01: Okay. Well, that's very helpful. Thank you very much.
spk09: The next question will come from Jeff Hammond with KeyBank Capital Markets. Please go ahead.
spk05: Hi, Jeff.
spk09: Hey, good morning, guys.
spk06: Hey, so I just want to come back to this gross margin dynamic. I appreciate the color around the 27. And it looks like versus a few years ago, that's a nice 250 basis point benefit through kind of structural changes. But just as we look into the second half in 23, it seems like this inflationary environment, whether it be regulatory or just carry-on pricing, seems like it's with us. So just I guess the assumption as long as we stay ahead on where we see inflation, we run ahead of that number, and as inflation settles, we get back to that 27.
spk05: Well, that's a good accounting question. Barry, you want to deal with that?
spk15: Yeah, Jeff. I think in general, I think if we all had a crystal ball and said, what will inflation be a year from now? And yes, there's some unique things to our industry, but just general economic inflation, it will be less than today. I mean, we have a pretty immense federal government exacting monetary policy that sees to that, correct? So just in our own kind of conservative way, we want to say that as inflation also comes back down to some reasonable level, the benefit of that in a distribution gross profit will also moderate. And that's a little bit of, I think, conservatism that we need to have. And that's why the 27% is there. I don't think that the pricing actions hit a wall instantly. They won't. There will still be pricing decisions being made across the market, across product lines, across OEMs. That will be a reality for probably the next 12 months. We're just trying to give a little bit of insight level set to thinking beyond just the current, you know, the current year.
spk05: You have to remember also half our revenues in that approximate amount is not equipment. It's all the other stuff that keeps the, that you need to install the air conditioner to maintain the air conditioners. There's a lot of supplies, a lot of different things. And that's a solid business. I think The demand of that is more reliable than the demand on the equipment. And that's generally at a higher margin.
spk06: Okay, great. And then just back on commercial, it looks like it may be flattish in the quarter and maybe down on volume. But is that just simply a function of supply constraint, or what are you seeing on the demand side?
spk05: Certainly, we know that supply constraint is a big player. Anybody else have any comments on that?
spk14: Yeah, it's been the worst nightmare. Demand on commercial is up. Supply is down. And lead times for unitary product and applied product both have been extended out beyond where I've ever seen them in my history in the industry. So I think that's going to be just latent demand that we're going to pick up as supply picks up. I think those jobs will be filled. but probably at a later date, not now.
spk03: Okay. Appreciate it, guys.
spk09: The next question will come from David Manthe with Beard. Please go ahead.
spk05: Morning, David. Hey, good morning, everyone.
spk04: And yeah, Al, could you explain to us your cautious outlook here? Is this based purely on the macroeconomic data, or are you seeing some kind of forward-looking indicators that indicate slowing demand? Because I agree with the 2023 outlook, but when we're talking about pricing, it sounds like that's going to be up. We talked about the inelasticity of replacement demand. Really, all that's left is the minority of your business, which is new construction demand. Is that the piece that you're focusing on as it relates to the 2023 outlook?
spk05: I don't believe we're trying to be negative on 2023. We're very positive about 2023. But you did put your finger on a small part of our business, sales to new construction. It's in the newspapers that startups are down. But that is a small part, and it's certainly a small part of our margins. That business has got a small margin for us. But I think we're pretty positive about 2023. Did you think that we were not?
spk04: No, I just think that, you know, the way the press release read and talking about, you know, normalizing conditions and things, I think people automatically jump to that means slowing. Oh, really? Or negative growth. But if it didn't, that's fine, too. Well, Barry wrote that thing. Barry, why are you...
spk15: I glanced at something before the call, which is interesting, and that's that if you look at six-month operating profit two years ago versus today, it's almost two and a half times greater today. Put that in perspective. Two years ago, six-month operating profit versus this year's operating profit, it's almost two and a half times greater today. The messaging is we love the growth rates, we love the structural profitability gains, but in terms of slower, slower is not a bad thing. Slower can mean growth that's more in line with a historical trend, not two and a half times the current thing two years from now. It's trying to pull the reins a bit on on reality and expectations and also in the backdrop of the macro economy.
spk05: Let me ask it this way. Do you think we're going to be in record territories in 2023?
spk15: I think we'll be in record territory in 2023. Good to hear.
spk03: Okay.
spk05: For the year, yeah. All right, yeah. I mean, we're spelling out all the things we think are going to drive demand. The regulatory thing is a big deal. But Barry is saying that the growth rate of the industry is going to slow because we were in an extraordinary period for the last two years. But that doesn't mean it's going to slow. It's going to go to normal. It's not going to go. We are expecting some decrease in demand for all the factors that we've mentioned in terms of normality. No, we're very positive about 2023. Yeah.
spk14: If I could throw one more thing in there, the same dynamics that create demand in our industry are still going to be in effect, and that is we still have an aging population that's, you know, looking at myself, I know I'm going to continue aging. We've still got migration and urbanization. Urbanization continues to grow as people move more and more to the cities and move more and more, frankly, to the cities that we like in Texas and Florida and in the mid Atlantic. Um, we also see climate change and, and, uh, things happening in that area, which is going to impact and help our business as well as a drive for more efficiency. So those are the four demand creators that we've had for the last 30, 40 years that I've been around and they're going to continue in 2023. Right. I can't help myself.
spk12: I have to summarize it my way, which is this, this, This extreme growth market environment can't last forever because it's too extreme. But no matter what the market conditions are, we expect to grow. We think there's a lot of tailwinds behind our industry. And then as a company, we think we've made investments that will ensure growth for many years to come in the long term.
spk05: Well, thanks for clarifying Barry's comment there, H.N. We should have added that one. Yeah. Thank you for that. We're very positive. We're not negative on 2023 or beyond.
spk04: I got it. Okay, and second one, hopefully I can sneak this in here. As it relates to Barry's comment about SG&A growing in line with sales growth over the past couple of years, given how much of that revenue growth is due to price, is that seen as disappointing at all? Or maybe are there some expenses in there that were front-end loaded that will easily come out of the SG&A operating expenses as things normalize?
spk05: That's a very good question. Why don't we try AJ? Somebody that can comment on that or all three of you, Barry, AJ and Rick.
spk12: How about Rick? Yeah.
spk05: Rick. Yeah. Rick.
spk13: Morning, Dave. Um, well, yeah, I, I, I do think that there is a, a, a, there, there are multi multiple facets to the SG&A question. Um, First, just to give you some context on the year-to-date picture, when you look at the increment in year-to-date SG&A organically, a big, big chunk of that, almost half of it, came in variable categories. We've already talked about freight and interbranch freight. We've mentioned things like commissions and incentive comp in prior press releases. And in our minds, those are things that are largely self-regulating in a slower growth environment. If that's in fact what we have in 2023 or a more normal growth environment. And so there is a, there is a good understanding of, you know, what's variable, how does it, uh, how does it moderate and how do we expect it to behave in, in, in future periods based on, uh, based on different growth algorithms. The trickier question is on the fixed costs. And as we've said, we've made investments to sustain a higher business and to propel the market share gains that we've seen the last two to three years. And so we need to now look at some of those investments and figure out where they make sense, figure out what we can do to make them more profitable and more efficient. And of course, we look at things internally and not just in terms of volume and price, but we look at it in terms of just what I refer to as the stock. It's branches, it's people, it's trucks, it's square footage, those things that we can measure almost independent of the inflationary environment. And that's what we said in the press release. We've challenged our leaders to make all those categories more productive going forward.
spk05: All right. Thanks, Rick. Thanks, everyone. In other words, we have a lot of opportunity to get more efficient. And we know it. Because what's happened the last two years, we were all scrambling. And scrambling costs us a lot. But that scrambling is going to decrease as the OEMs catch up. We still are short in high efficiency. And it's going to normalize as things normalize. the SG&A will normalize to something that the percentage of sales lower than what it is today is our expectation.
spk13: Right. I would also add one more thing, which is that on the technology front, we are still a young company as it relates to some of our internal facing technologies. So we've talked about the pricing technology that's more, you know, margin oriented. That's really only been in the hands of, you know, the masses in the company over the last 12, 18 months. And there is additional technology now being deployed to, you know, further that warehouse optimization. So it is still very, it is, we are earlier in our journey on the technology front for some of that internal technology that's really aimed at productivity.
spk09: Terrific. Thank you all. The next question will come from Steve Tusa with JP Morgan. Please go ahead. Hey, guys. Good morning. Good morning.
spk08: Good morning. Good morning. I guess AJ needs to help Barry write these press releases from here on out.
spk07: Yeah. I think so too.
spk12: But it actually worked out because now we get to tease Barry for the next several weeks.
spk07: That's right. That's worth it. That's definitely worth it.
spk05: Very good, Steve. I didn't know you had that kind of humor. Oh, seriously? Yeah.
spk08: Well, it's a sign of a good CEO to point the finger at the guys that work for you, like Barry. That wasn't your press release.
spk07: Every chance I get. That's right. You're right. Every chance I get.
spk08: You guys mentioned July, and you mentioned volatility. I mean, what did June look like? Because we've seen the Hardy data. We've seen the AHRI data. What did June look like for units for you guys? Mr. Logan?
spk15: Boy, June units, I would say June dollars was a bit better than the quarter. June units, I don't have, Steve, and that's getting a little bit granular, but I would say June was a better month than the others, and that momentum is even that much greater in July.
spk08: Okay, but the July comment was a unit comment or a dollar comment?
spk03: Both.
spk08: Oh, so units up mid-single? So what are you saying on units and dollars for July again?
spk05: Well, he doesn't know what it was for units in July. He just knows the dollars.
spk15: I'll say it carefully. I mean for June. Units were up in June, and Al commented earlier, July units were up mid to high single digits.
spk08: Yeah, okay. Got it. All right. That's helpful. And so on this kind of the great gross margin commentary, you guys have talked about what's normalized. You know, we can see what happened in the first half and the second quarter. So if that's kind of a normalized number that you should trend along, is there a quarter here where as the inflationary dynamics change that you would go below that number for a period of time and then, you know, obviously bounce back as things, quote unquote, normalize? Will there be Because 1Q to 2Q, there's some volatility there. Is there continued volatility as we move forward in the next couple quarters on that? And would that go below the 27 normalized at some point?
spk05: Wow.
spk14: Who wants that one? I'm punning to Barry.
spk08: Al, it's going to come back around to you. If you're not careful, it's going to come right back around to you.
spk15: By the way, it's my 128th I think it's my 128th press release, by the way, just for the fun of the math.
spk05: I'll stand by my long-term track record. The obvious answer is that we're very focused on gross profit. We have tools that are helping us, and we want to do 27%. We want to do better. Can we predict it? I'm not sure we can, but we feel pretty comfortable. comfortable on that number going forward or better okay okay i mean there could be ups and downs but we're very focused on margins i'd like to if i want to speculate this is pure speculation my goal is to get it to 15 percent ebit margins eventually got it okay and then one last one
spk08: Are we close to the end of the OEM's residential equipment price increases?
spk14: No. Yeah, I think we're very close to the end of that as we reach forward and introduce the new products that are going to be coming in probably in the fourth quarter. We'll see a price increase then.
spk08: Right, on the new ones, but not a like for like on the existing ones.
spk05: But don't forget, Steve, that a lot of – half the United States will be unable to sell low-efficiency air conditioners. So that's an inventory trick. But the stuff that we will be selling is the new stuff, and they're coming at higher prices. We already know that. Right, right. Okay, great.
spk08: Thanks a lot, guys.
spk09: Appreciate it. All right. This concludes our question and answer session. I would like to turn the conference back over to Albert Nomad for any closing remarks. Please go ahead.
spk05: Well, thanks very much for your continued interest in Watsco. We try to keep it light, our conversations, but this is a serious leadership team, and we hope you have enjoyed our story. and we hope to continue giving you good news as the quarters go on. So thanks again for your interest. Bye-bye.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer