Watsco, Inc.

Good day, and welcome to the Wattsco 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 touch-tone 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 Namit, CEO and Chairman. Please go ahead.

Good morning, everyone. Welcome to our second quarter earnings call. This is Al Namit, Chairman and CEO, and with me is A.J. Namit, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start our normal cautionary statement, this conference call has four looking statements as defined by SEC laws and regulations and are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the affordability statements. Wattsco delivered healthy second quarter results in a 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'll look forward to operations of simpler business in 2026. Let me turn to second quarter highlights. Sales declined 4%, like being 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, Wattsco 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 PriceFX, also contributed. Gross margins remain a focus. There is much potential to improve over time. SG&A increased 6% as we incurred extra costs during the transition. We also had 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. Wattsco'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're 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 Wattsco's core replacement business and is expected to be launched in 2026. We have accelerated adoption of our pricing platform, PriceFX in England. Our goal is to reach 30% gross profit margin. We have launched an initiative to grow the parts and supplies segment of our business, which today is roughly 30% of sales and can be can be much larger over time. And 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, or unmatched in our industry. With that, let's turn to Q&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. And if at any time your question has been addressed and you would like to withdraw it, please press star, then two. At this time,