Q2 2021 Watsco Inc Earnings Call
Good day and welcome to the Watsco second quarter 'twenty 'twenty 1 earnings call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded and now I'd like to turn the conference over to Mr. Amit <unk>. Please go ahead.
Morning, everyone hope, everyone is having a safe and good day.
Welcome to our second quarter earnings call and widening credit of a quarter it was for watsco.
This is al <unk>, Chairman and CEO and with me is a J now, but who is our president.
And our 2 executive Vice President and Paul Johnston and Barry Logan.
Now as we normally do before we start.
Uh huh.
I need to read our cautionary statement on the conference call has forward looking statements. It's the.
Fine by S. C C laws and regulations that are made pursuant to the safe Harbor provisions of these various laws ultimate results may differ materially from the forward looking statements.
Now onto our report.
I am pleased to share that watsco has delivered incredible of second quarter, achieving new records on virtually every performance metric.
Earnings per share jumped 64% to a record $3 of 71 cents per share on a 66% increase in net income.
This was by far our most successful quarter ever.
Sales grew 36% or nearly $500 million to a record 1 billion on $850 million in the sales for the quarter.
Gross profit increased 50% with gross margins expanding 220 basis points.
Operating income increased $88 million or 68% the 207 teen millions of dollars.
And operating margins. This is the big 1 operating margins expanded 220 basis price to a record 11.7%.
Now these results are all of the more positive when considered against last year's second quarter, which had only a modest impact from the COVID-19 related slowdowns.
Now we have 2 new companies on our family of T E C and Acme, they performed very well and we cannot be happier that they are not part of it of an important part of watsco. They have of rich and successful history, and we will help them any way we can.
Looking ahead, we are engaged in a very fragmented $50 billion North American market again. This is a $50 billion North American market.
And we have we hope to find more great companies to join US greater scale in this industry provides more capital for us to fund our growth priorities.
Also lots of course industry, leading technologies continue to gain traction and we believe they are helping us gain market share.
Here are a few important highlights dimension.
First.
Growth rates among active users of our technologies.
It continues to outpace the growth rates of non users.
Customers using our technology are simply growing faster.
Next attrition among customers using our technology is meaningfully lower compared to non users.
The technology enables us to create stickier customer relationships.
Also more customers are using our digital selling platforms that are called Oncall air and credit for comfort.
They help and modernize the ex fee solutions are presented to homeowners.
As evidence.
Of the success of on called Air and credit for comfort the number of digital sales presentations made by our contractor customers to end consumers increased by 84% and on.
Help close over $200 million of sales during the quarter.
These tools have also benefited the sale of higher efficiency systems, which we think of as an important contributor to the climate change the discussion.
As the older systems are replaced our technology can play an important role in helping consumers choose more energy efficient solutions.
Our progress is very encouraging but we believe it is still early in terms of reaching the full potential of our technology investments.
Our focus remains.
In the long term.
I think you've heard me say that over and over again, we are long term players in the industry.
Please feel free to schedule, a zoom call with us and we can further explain.
Our technology and its impact.
Finally, but very important our balance sheet remains in pristine condition, where the only a small amount of debt.
We have plenty of capacity and even more ambitious.
To grow our company, both organically and through acquisitions.
Yeah.
With that a J, Paul Barry and I are happy to answer your questions.
We will now begin the question and answer session.
Ask the question you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Yes.
Our first question comes from Jeff Hammond from Keybanc Capital markets. Please go ahead, good morning, Jeff Hey, Good morning al good.
Good morning, guys.
So I just wanted to hit on the gross margins that you know they've been kind of exceptional here. The last couple of quarters and I just wanted to understand what's driving it and how you feel about the sustainability. It just seems like kind of the last 5 years 7 years, you've been in that 24% to 24 and a half and now we're up close to 26.
[laughter].
Barry.
Hey, good morning, Jeff.
On a gross margin always is.
The primary component of of what do we pay for our products and what do we sell products for and it's all very decent decentralized and regional and local on customer specific and.
And so there isn't 1 answer to your question is about 16000.
The answers to your question as to how it plays out of the marketplace each year.
Clearly a high efficiency systems are being sold out of out of greater rate.
Clearly the price increases as they flow through benefit some of the gross margin.
You know flow through if you will also culturally we've done a lot with pricing systems and pricing technology on pricing data.
Pricing software.
Due to the optimized price that doesn't mean necessarily raise price it means optimize price of markets.
And also working closely with all of our Oems, we have about 600 total manufacturers.
They're they're facing you know.
Inflation, they have to decide on their own pricing mechanism into the markets and as we worked through that with them you know some of those benefits occur.
What does the future. Your next question was you know what is the future of hole.
Well, Paul maybe you want to comment on it but there is still continued pricing actions going on in the market.
And yeah, we would expect to continue to.
To work with Oems and customers in the flow of that dynamic through our business.
Kind of can agree with you more Barry.
And in the future we've got the right amount of discipline the name.
To to hire people, who are in positions now where there they are actually managing and looking at pricing on a daily moment by moment basis.
Think of I think working with our vendors and with our with our Oems I think we can continue.
The improving gross profit maybe at a more moderate.
Right than we've done in the past 18 months, but still we can groups.
Okay, and then just on price our channel checks were picking up kind of high single digit price increases with the kind of the multiple increases coming through can.
Can you just talk about how much youre seeing on on price or price mix and if theres much variation between pricing traction in equipment versus non equipment.
Paul.
Yeah.
The equipment manufacturers each each 1 of them with the exception of 1 right now I think of announced that they've got their third price increase of the year going.
And you know each 1 of them at the announced a of.
A recent price increase September August timeframe of.
Anywhere from you know.
4% to 8%.
And there are real price increases you know the genuinely need the price increases we all do because there has been an increase in the material costs.
So on the OEM side, Yeah, we've seen price increases.
The 3 times this year.
When you get to the non equipment piece of it the parts and the supply side.
It's been a pretty continuous stream of price increases that we the weed.
The been administering.
Well in excess of roughly 200.
Price increases.
Most of the multiple obviously so you know the industry definitely has has seen the an upward turn in pricing.
All of this is Ajay all of that debt.
As it relates to our total gross profit margins, we are focused on selling and inspired to sell more parts and supplies, which inherently have a higher gross profit margin. So that also contributes.
Are you guys able to quantify what price the price mix it was in the quarter.
No we haven't.
Yeah. It's.
There is not a regular cadence to it so for us it's.
Making sure that where we're getting the price increases into the customer's hands. There has been a priority 1 they've been coming out of so fast.
As far as the measurement, yes, what it will do a reconciliation and find out exactly what that is at some point you know once the once the.
Your progresses.
Okay. Thanks, guys.
The next question comes from Jeff Sprague from vertical research. Please go ahead of the morning.
<unk>.
Hey, good morning, everyone.
And the question.
From the first just on the the multiple price increases it is interesting.
He mentioned more high efficiency.
So since the systems it doesn't feel like you're bumping up against any elasticity here on the pricing.
Understand the consumer generally doesn't know what the staff cost until the unit price and they find out but any sign at all of that.
You know, there's a tilt towards the back down a little bit.
The what was the question any sign of what.
Well I'm just wondering if you see any mix erosion in response to the escalating and price. It doesn't sound like you did in the quarter, but I just wonder if we're on the edges.
You are starting to see any signs of like demand destruction.
Well.
Let me say that we also.
Are aware of the end consumer.
And we are now presenting more and more.
Noodles of our financing program.
So that whatever the cost increase is less.
Of the burden for for homeowners because of the terms of the AR that we provide through 1 of our platforms for financing.
And particularly equipment and.
And somebody else wants to say something go ahead.
Yeah, I don't think there's been much pushback from the consumer at all you hit it right on the head of the consumer doesn't know what the 1 of price is.
So it's not a frequent purchase for the consumer.
So to date, we have not seen a lot of pushback of lot of it has just been based on availability.
Able to satisfy the customer's need for for home comfort indoor air quality.
And the humidity control.
I mean out of what I would add.
So just wanted just what I would add to that as the 2 things first what we sell as a component of the consumers' cost isn't the consumer's costs. So.
So how the contractor prices and ultimately.
You know complete the job and sells the job and and as Al mentioned, how we can help them finance the job.
It's a relatively a layered type of transaction in and.
And we haven't seen any deterioration of exact growth rates for high efficiency.
Our well beyond you know the overall equipment growth rate that you see in the press release of 29%.
Second thing I'd say is part of the technology that we have is the presentation software to push and recommend and really help contractors.
They'll be on paper when they present these different options to homeowners.
And so in the press release, where you read about on call are.
Nearly doubling in size in the quarter, that's that's the piece of software.
And high efficiency as his ruling the day and in that in that environment.
And I'm wondering if that's interesting and I want to get back the financing with interest rates.
But he knows or low.
And so we're helping our distributors, which are our customers with financing and then we're helping their customers the homeowners with financing and with the.
We're taking advantage of lower interest rates to help the end consumer and the health of the distributor.
And Youre doing that through third party intermediaries sort of you.
On your balance sheet more or less from your balance sheet, well, we do sometimes with extended the terms of our own but it's a combination of that and using third party when it goes out in several years.
Thank you and my second question on I appreciate all the detail on the first 1.
Just on the issue of availability.
Looking at your inventories are a little lower than I guess, given the the pace of demand would you characterize things are still kind of lean in the channel or are we kind of follow up here on spending.
And the demand well first let me say that the Oems that we deal with.
I have really worked hard to meet the man, they're doing the best they can their suppliers on the other hand.
Sometimes letting them down or sometimes they are overwhelmed.
But we do believe that they are getting better at it. We we believe we could have sold more in the second quarter had we had more of it.
Particularly our equipment, but.
It's a matter of time, the matter will catch up with equipment I mean with the supply.
And in the meantime, we are doing the best we can as the numbers show.
Everybody's got some every OEM has 1 particular or 2 particular items.
Number of particular items that they're short on because they don't control of the manufacturing of it.
I'll just bad debt that I have to say that the our teams in the field have been working tirelessly tirelessly to meet their customers' demand and expectations they've moved a lot of product around in and hustled and we're we're grateful and I appreciate their hard work too.
Well thank you.
Yeah.
The next question comes from Nigel Coe from Wolfe Research. Please go ahead.
Good morning Nigel.
What day, everyone speed of long times, they've been on what sort of cool if it's good to because you have the question, it's a great quarter, obviously very strong.
Just want to pick up on Jeff's question on on sort of the supply chain and the part of the ability.
Yes.
Obviously, it sounds pretty prevalent all Oems have got some some form of of.
A part of shortages. So I'm just wondering how how you're sort of I teach tools of helping you mitigate these these pressures and I'm wondering if you've managed to gain some share.
As a result of that and then maybe just talk about any any share shifts you're seeing.
Because of your ability to manage that better than perhaps some of your competitors.
Ooh answer that question.
So I'll take a stab at it.
We manage.
We've got the.
1 of the best technology platforms available to manage our inventory.
And we have constant update meetings with each 1 of our Oems as well as some of our key suppliers, who don't make the finished good inventory.
And what we're working with them on is making sure that we have are complete visibility to what our needs are what our forecasts are and.
And what are order reliability from them has been.
And I think but it's what it's done is it's brought US a lot closer communication wise with the Oems.
And made us.
I wouldn't say of favored nation, but it would certainly make us easier to do business with them than most of the channel.
So I think it has helped us have we lost market share.
I think we've gained market share.
Because the because of our inventory management systems.
Great. Okay. That's what I was trying to drive up the share gain and then just on the regional variations.
It's a mixture of extreme heat on the west coast.
The Pacific Northwest the in June just wondering if we saw outsized growth in those areas relative to the a 2.9%.
Barry.
And Nigel good morning, Oh, well the west coast for US if you look at the branch count and are in our filings is actually a relatively small market place for us where we're not on the Pacific northwest at all zero.
And as the Western markets are again from a contribution point of view.
Did well in the quarter, but it didn't contribute to the overall results materially.
So we do want to be actually much bigger out there.
And in relative terms, it's not very material.
Okay. Thanks, guys.
The next question.
She comes from Tommy Moll from Stephens. Please go ahead good morning Tommy.
Good morning, and thanks for taking my questions sure.
They've talked about gross margins on price cost a little bit if we step back as you think about.
On a multiyear basis potentially.
Or even just through let's say through an inflationary cycle.
In your mind does that is that of net benefit net neutral.
Net headwind.
For you as a distributor.
The smooth it all out.
Well, we don't like to.
Being an inflationary environment like any other business.
I don't think it's something that it's good for the consumer or anyone else in the distribution chain.
But sometimes.
Things happen.
We do the best we can.
And I keep referring to.
The way, we can assist the distributor and his customer is by providing.
Especially.
Opportunistic financing now given the lower rates to offset some of that.
But generally speaking wherever the inflation is we'll adjust to it.
1 way or the other and I think we're gaining share but the things that we do.
Anybody else want to add something to it Barry or Paul or AJ.
Yeah, I think the only thing I would add is you know we do operate the business with 655 locations and it's different every 5000.6000 people and to the extent there is an element of fixed cost.
We do benefit and in terms of profitability.
An inflationary environment, if if those fixed costs are not growing.
The inflationary as well so there's always some pressure on cost in this environment.
And if if if the you know.
Not always proportionate to the overall inflationary rate and it's an opportunity to have some profitability growth, but again I wouldn't I wouldn't say, it's it's a huge material a huge material amount of assistant opportunity for us.
Great. That's helpful. If I could follow up on technology.
It's good to see continued momentum for adoption on a lot of the key platforms as you highlighted in the release.
In your remarks.
As you think about the path forward.
Is now a time when you lean on and even more than the increase that investment given.
In addition to the the momentum with the adoption just the the macro environment. The favorite question of the President of the company [laughter], Yeah, I was going to say I am not sure. We are we are we don't consider ourselves constrained and technology investments. This is a technology company that just happens without heating and air conditioning.
And you know we stay technology, that's really a big broad.
I'm proud of the term or using the define our culture of really which is continuous improvement continuous learning continuous ways to find find ways to help our customers grow their businesses.
Which is the end of the day, that's that's our mission of our customers are small and medium sized entrepreneur that businesses and we can bring tools and technology to them to help them grow we can make ourselves better to help them grow.
That is our ethos.
So we call that technology for short, but that's really what we're in the business of doing and will continue on debt yes.
Thank you I'll turn it back.
Okay.
The next question comes from David Manthey from Baird. Please go ahead David.
Hey, good morning Al.
My question is back to gross margin.
Look at the 10 year average is first quarter was close to 100 basis points of.
Above that this quarter was about 200 basis points and I understand the the.
Mix and some pricing dynamics and kind of if there's rebates or whatever and there could you talk about.
Do you see some portion of that gross margin overage as being transitory versus structurally sound going forward.
You mean in terms of gross profit margin increases are flattening or declining and that sort of the.
Yeah, the gross margin percentage of.
Yeah, you've been sort of on what you're moving along in a range and you pop 200 basis points above that range this quarter.
Yeah.
I think I understand but we.
We're very focused on.
On our gross margin percent.
And the.
We mentioned some tick all the people who bought in with pricing FX and we've mentioned other.
Ways too that we're trying to achieve that that's not going to stop them I don't know, where the where the end will be but.
That's what we're going to continue to seek to improve.
And the number of ways.
So that's an ongoing goal of ours and.
We've had successes with it as you say in the first half of this year.
And we're going to continue to focus on out of the second half and don't forget we're trying to change.
The supplies business. So in terms of the margins of the parts and supplies that they are generally higher than equipment. So we're emphasizing.
Our branches sales of those good and yet so that's something.
Something that could continue.
2 to increase the mix of our products more parts of supplies.
And the mix of the overall sales picture.
Somebody want to add something of that.
As well as high efficiency equipment to them, which doesn't yet so.
We're not having true up on debt because high efficiency equipment, we believe contributes to the climate change issue that's on there.
You have to start with the premise that in homeowners or they get the electrical bill half of it.
As do the heating and cooling half of homeowners electrical bill is due to the heating and cooling uses.
And if you have a higher efficiency of cooling and heating system youre going to use less electricity, which intern you're going to require less power.
The production in which in turn.
Minimises the the release of C. O 2 gases. So it is very well connected and we have a very clear eye about what we can do it.
Choose to.
Encourage the adoption and make it easier and help with.
With the financing at high efficiency equipment, because not all of these that help buses of corporation.
But it also helps the climate change the issue we true.
We're trying to figure out in many different ways how to help.
That particular issue.
Okay.
And on the parts and supplies I'm thinking more from a growth perspective. The last couple of calls you've sort of hinted at some initiatives you may be working on there.
Are you willing to share anything at this time regarding how youre able to accelerate the growth in parts and supplies from here forward. You mean, you want us to tell the competition how are we doing the [laughter] sort of have an idea.
Well, maybe it's better to give you of data.
Uh huh.
The fact, we've been in the effort.
I think we can share growth rates in parts of the supplies Barry.
Yeah.
David The chamber lost on any of it shouldn't be lost on anyone debt.
Looking at looking at the quarter for example.
Let's look at the house for maybe even better.
The growth rate of of residential products is up 24% in the half first half of the year.
Of course of supplies up 19.
And accelerated in the second quarter to closer to 25% versus supplies.
Typically there's some inversion historically, there's some inversion in those 2 numbers because as equipment gross parts and supplies.
Generally won't grow at the same rate because people are replacing systems.
So this is the this is the change in the last the last 6 months and it is the sales force that of the culture. It is our incentive system at as many things simply.
Simply to bring energy and data.
And technology and E Commerce systems and.
And it's it's you know again, it's 15 things, it's not 1 or 2 things.
Yeah, I forgot president equally.
E Commerce is a major contributor.
Because it's so efficient go ahead I'm sorry from the interaction.
So clearly clearly theres change and the benefits are there for the year to date and it started this all started last year in terms of of raw energy flowing into this and.
It's something over time that should benefit gross margin because gross margin of isms are considerably higher on that part of the business.
Great Alright, most of our e-commerce platform sales for the first half Barry.
On the run rate is about $1.8 billion for the last 12 months.
It would be it would be close to $1 billion I think for a 6 month period.
That's about a third of our business now.
All of our revenue.
Okay. Yeah. Thank you for the details I appreciate it.
The next question comes from Steve Volkmann from Jefferies. Please go ahead Martin each day.
Hey, Yeah. Good morning, guys. Thanks for taking the question I have a couple of long term questions because I heard that's how you manage the company.
I'm curious how big do you think you've mentioned financing several times, how big do you think financing could ultimately be for you I dunno, how is the percentage of stuff you sell or however, you like but that's a very good question because we haven't got an answer to that yet.
For example, should we be in the financing business should we partner with somebody and be in the financing business. Yeah. These are big issues that we haven't resolved yet, but I don't see any reason why not to 1 way or the other figure out how to how to ex.
Extend and increase the support we provide our distributors and their customers the homeowners.
The financial assistance, I, particularly like the interest rate.
The feel that the that we can take advantage of something like that.
Even when the rates go back up will there always be ways to tweak that to help.
Our customers. So we like we like the financing thing, we havent figured it all out.
If you've got a good company, we can buy the [laughter] accelerates it we'd be happy to talk to them.
It is a pillar of our growth financing.
But it's probably not going to run very hard fast on 2 in terms of development of southern more of the same.
Until we figure out the big picture by somebody or become part of somebody here.
You know that sort of thing.
Yes.
Looking for the headline number though on the product that we sell and our competitor south of the wholesale level get rethought of the retail level of our 80 or $90 billion.
Some portion of that is and will be financed.
Okay, Alright, TBD it sounds like a big opportunity.
On the second unrelated question kind of more on the M&A front and I'm just trying to think back I know you guys have seen lots of different end market environments.
Is this the type of environment, where you see more of the independents that are willing to sell their businesses because it feels like everything is so good it can only kind of go 1 direction from here or is this the type of environment, where these guys are doing so well that they don't want to sell and it's tougher to get deals.
I think I think maybe you should go out and tell them. This is the type of thing.
[laughter], we are engaged with distributors and that's part of our.
Of our culture always to be engaged with great companies.
I don't think we have an answer to that.
Thank you.
They may be concerned about the capital gains tax for example, going up.
But in the end.
What they want to do family of businesses, especially as connect with the company that's going to.
Preserve their their their own names in culture, and that's what we specialize in.
You know these 2 companies. We recently bought for example, the T C. Their culture. So strong all we do we act of support.
Uh Huh level, you know we're not.
We're gonna feed them whatever they want capital the equity for their of key executives the.
Technology, that's our style and the.
There'll be some people that want to get engaged with that.
Because of that reason.
Hum.
In terms of there.
The atmosphere about taxes going up and all of that I do you see any trend in that Barry 1 way or the other.
Yeah, I mean on let's say at all of it always helps quantitatively the confidence of doing something when things are going well. It helps our confidence it helps the sellers' mindset of of optimizing valuation not feeling like they're doing something.
You know.
Ahead of time, or what have you and the taxes matter too, but what really matters is none of that.
What really matters.
Emotional process.
Her family's net of other businesses for 70, 80 years third and fourth generation.
And I wish it was just the I wish it was a director of financial process, but it's entirely.
Times on an emotional process. So that's the part where I feel like we've been successful is dealing with that emotion going forward for another generation or 2.
It's why CEC and wife yourselves your before.
After 90 years 80 years of owning their business.
Only talk to us and we completed it and it's moving forward so.
I think youre right. It helps the discussion.
To do well it doesn't necessarily help the the you know the completion process because that's still on the emotional 1 for these guys.
Yeah, its really its really their family joining our family right.
That's an emotional decision more than anything else.
The 1.1 big happy family. Thank you I'll pass it on right.
The next question comes from Steve Tusa from J P. Morgan. Please go on.
Steven.
I like the.
You said the term blow out in the in the.
The press release.
Are we getting better on those press releases.
Yeah, I think you need to be of I think you need to be more clear on how you feel about the result.
Well I did ask Barry to put in more you know more color.
[laughter] that was the day that was a good on where do we where I'm not sure. We're allowed to say that but all of the compliance around here, but.
You know all of the obviously very very strong result.
I didn't I might have not caught this from the beginning but can you guys just say how much price on.
You booked in the quarter year over year.
Barry.
Yeah. We didn't we were asked and answered that we were not going to tell you exactly how much price was booked in the quarter are there obviously is positive price.
Yes.
Now again.
The 29% you know what the same store sales growth you can imagine most of the most of that is entirely of unit growth.
The prices of components, Steve, but we it's not something we've reported.
Got it and then when you think about the gross profit improvement.
Which is obviously very strong.
Was there a big difference in the year over year on that I think it was it was up like 40% or something on the same store basis was there any difference between the the parts of the equipment.
Yeah.
The difference in margin.
And the difference in gross profit performance I mean was there yeah I mean find gross gross margin improvement wherever you want to talk about it more of the mix goes to parts of supplies the higher the corporate gross profit margin will be.
Right, but I guess, but I guess like for likes just if you think about the performance of.
The year over year performance simply let's put it this way.
What was the year over year gross profit performance for the parts business was it meaningfully better than the up 40% you saw for the total company.
Alright, you deal with that 1 of the Barry Yeah. So you know there's really not much of a distinction in the performance if I look at product groups end markets and product categories things like that it's pretty consistent.
Across the across the across the company there is no 1 bias or 1 pocket or 1 <unk>.
Bubble, if that's the kind of what you're asking me nuts, there, it's pretty much across the board.
Yeah, I was just I'm just trying to discern like what the you know like I made there are some timing dynamics around you know your suppliers and you guys. When it comes to pricing I would assume and so I'm trying to discern how much of that is kind of on the part side versus the equipment side.
So the inventory turns which would which would matter in that algebra that you're talking about has been consistent across products. Okay. So again, there's no there's no.
No distinction related to make on that and I kind of like a kind of concept the again margins pretty much behavior of the same across.
The products and markets.
Got it and then 1 final 1 I guess, Paul mentioned I think it was Paul or maybe it was was al.
The price increase it's kind of coming through in the fall and he said that was kind of real price that they did theyre going after I'd I guess that means that we shouldn't like discount it too heavily like you know as you as we usually do or at least as we made normally have in the past those are some big numbers. I mean is is kind of 5%.
<unk>.
Of annual price for kind of the players in the industry, including you guys like is that too big of the number to assume for price this year price capture.
Wow.
I guess like I said earlier see this Paul.
Really haven't calculated debt, but the.
The price increases that we're seeing going through right now or are holding and they're real and by real I mean.
You know that.
Where we're seeing the the price increases are actually stick because you know the cost has actually gone up.
You know to price the product and you've got an availability issue on the side that.
It would certainly indicate that there's a supply component to it so right and are you are you guys leveraging your kind of.
Youre buying power across the industry.
At all of the kind of have an advantage over over the the competition.
Okay.
When it when it kind of the buy what you're buying.
Let's put it this way we are the largest and sure we're going to try to get the best price every 1 of the what is it a thousand vendors now Paul Ryan Youre going to try to leverage our size do we succeed I guess, sometimes we do.
But also the subsidiaries themselves the business units they start figuring out whether they should cause by the same stuff that their sister companies are buying and when they decide that that also increases the amount of business week of give a particular manufacturer. So that helps again, we don't legislate what the the business units.
The buy because they know their markets better than us, but we like the collaboration among them. So that they can come up with to answer your questions. Let's just buy from 1 vendor to vendor of instead of 3 or 4 and that helps the manufacturer of give us better pricing.
Alright.
As of the things you get with scale.
Makes a ton of sense of cool. Thanks, a lot guys I appreciate it.
Again, if you the question. Please press Star then 1.
Our next question comes from Ryan Merkel from William Blair <unk> Company. Please go on.
Hey, good morning, everyone.
Good morning, Joe.
Stepping back a little bit I'm, just trying to understand why the HVAC market is so strong when I talk to people on the channel everyone of surprised by the strength now obviously high home prices low interest rates right, whether that's all helpful. But do you think work from home and people running air conditioning shore is boosting demand sure.
Sure.
Paul do you have the best sense of that Yeah, you know I think in certain markets. It does you know.
Especially in the north and west perhaps.
Becoming a better force in the north, but you know I think in the South I think.
Just people.
Buying existing homes when they buy an existing home they don't plan it but the end up replacing in the air Conditioner.
At some point during the during the first 12 to 18 months of the existing home purchase.
We're seeing a lot around refrigerant seer changes its impacting it were seeing a lot more technology getting into heat pump growth, which as you know.
Greening up the takings.
Taking some carbon out of the the environment that is creating some demand among consumers.
The price increases as prices have increased.
That's driven some demand from the consumers when they talk to their contractor dealer.
And I think the availability issue I think creates a further demand. So there's probably a to use of a Barry ism theres, probably 14 or 15 different things that I think of creating.
Beyond just people sitting at home and running your air conditioning more you know.
Yeah, I think just to add to that I think 1 of the realities is that the Oems do not sell air conditioning, we did not sell air conditioning.
The contractor advising the home on or is the 1 making the sale.
And a J mentioned earlier about our customer engagement to help that process to engage them in the digital process to do that.
I think as having some effectiveness.
But I've said many times the with contractors, if we see their credit at an all time high it means theyre doing well.
Their confidence level is high I mean is there.
The design and desire to sell more stuff and so higher efficiency stuff is a real thing and so that's what it's.
And the nice thing to see really for 2 years, it's not just of a 1 quarter thing the last 2 years, we've seen that.
The leading indicator if you will in our credit.
And today as it is.
The best we've seen it.
Okay. That's helpful. And then just quickly my follow up I'm not sure. If this was asked yet but you didn't leverage SG&A this quarter maybe.
Maybe just explain why that was just given the blow out top line as you put it and then second half do you think you'll leverage SG&A.
Well.
How how detailed the Barry do you want to get with this.
The fact that.
That we have.
A lot of people working overtime.
Because of a shorthand in certain places.
Whatever it is the first sort of thing it's constructive.
We met the we met the challenge.
The only of not having sufficient product, but in some cases not.
I have a sufficient labor.
I mean, we just did but we had to do.
Is that going to continue of quarters from now that the same circumstances, who knows.
I hope so.
Yes, I may add to that and part of it is we have the commission sales force, we have branch managers, who can make a bonus if they do well.
Leadership throughout the company that is a good chunk of performance based compensation.
All of which needless to say year to date is being earned.
And as part of the cost structure of this year.
That you know obviously is important and earned and comparative to last year Ryan.
You can see the difference in performance. So there was a good chunk of performance based compensation in the numbers this year on.
The accounts for some of that and again, well deserved and well earned.
Okay got it I'll pass it on thanks.
Okay.
Our next question comes from just Polka Winski from Morgan Stanley. Please go ahead Josh.
Hey, good morning, guys.
So I.
I think it was a I think it was Paul or might've been Barry.
It's breaking it may be a faster rate over the last year or so than what folks would have expected.
Maybe thinking about how that rolls out in your own results.
What are your expectation then be volume has more of kind of when to normalize the mix or consumer confidence is so high that mixes is also high and maybe that also has no room to step down like which 1 of those do you feel like is it sort of the bigger surprise and maybe.
Has the long term average to get back to the that's a little lower.
Yeah.
Who wants that 1 Barry Paul a J.
And good luck with it.
Got it.
There's a day.
[laughter] sent to us there's a lot of nuances in that.
Sure.
Well first on on on mix and high efficiency and so on.
70% of our business is equipment.
And it's been 11 straight years of 44 quarters, where mix has improved.
And and.
I don't think there's a reason to think that changes and I think it's it's still far from any long term average debt that goes back you know more than 10 years ago.
And again our technology.
The platform that we're witnessing our sales platform.
On another level, even than just what the market is doing so well.
Those fundamentals to me on that.
The ability to sell increasing efficiency is something that can continue.
And where we're investing a great deal with our customers to help the containment.
And obviously there are some regulatory things on the horizon that will mandate that it continues so I think that's.
So that's how that's how I would feel about it.
First of the supply is again is as it is nuanced there are probably 600 vendors over 100 different product lines in that conversation.
Yeah, My earlier comment, where we see culturally a lot of growth a lot of energy a lot of salesmanship of lot of data and technology pushing those products.
And I think that's that's for us to to enjoy not not not necessarily annualize against the marketplace.
I don't think I don't know if replacement parts are growing in the market I know our business is in the part of that is internal more so than what the market is doing.
Yeah, I mean, it needs to wait on that 1 and easy way to think of that 1 is that our customers sometimes have to go to our competitors as the by products HVAC are products, we can and should have those products available at a competitive price for our customers and that's that's that's the kind of focus and effort that we can bring.
So on the Martin and then just on.
And just because of add some color real quick the market like Miami, where we might have you know.
6 or 7 major equipment district distribution of competitors.
For parts of the supply as we move out of 15 or 20 in Miami.
And so that's the that's the ground game, where I think we're making some progress.
And the growing our business.
Got it Okay and then.
Okay.
I mean, that's the better we're coming up with better measurement systems, Josh as far as Ryan you're able to identify if we're actually making a better penetration looking at attachment rates on equipment looking at debt.
The normal business cycle is looking at the warranty rates.
And warranty population against what are what are what the industry has out there. So we're doing an awful lot of analytic work on this to be able to measure and determine how we can continue to grow in that area.
Yeah.
Okay understood sorry, I had a lot of false starts that I wanted to get make sure everyone had a chance.
<unk>.
On your kind of the competitive environment and availability of it seems like.
Do you guys between you know maybe out of.
Better you know kind of internal.
We're seeing in supply chain practice, and just being more of the 800 pound gorilla from an industry perspective, probably arent as having not having as many of you know stock out issues or availability of just uses.
The smaller folks.
Do you guys think that's giving you sort of a wider aperture on pricing right. Now if you know if you guys can step in with maybe someone else can or a customer that's more of a mercenary type customer rather than watsco dedicated once the product is.
Is that sort of giving you a little bit more boost on the pricing side.
Uh huh.
I'll take a cut of that I I don't believe that Josh. Yes. We are we are big where we're very effective as far as being able to provide our Oems with the with the data that they required to put put their order plans together their build plans together to be able to supply it and I don't think we've been benefited in any way in any special way.
Where does the other distributors that those OEM Celsius.
Uh huh.
No. That's always did not I mean to your to your customers. So to the extent that someone else just doesn't have kind of on the process rigor.
That.
Regardless of whether or not you're purchasing things cheaper that you can price to a customer or maybe a little bit better because they can only get it from you.
Yeah.
No.
Go ahead.
Okay I think that's.
Part of that dynamic is why we believe we're taking share I don't think we're using an upward opportunistically to take advantage of customers and getting an extra few dollars along the way.
That's not how we approach of our customer base.
We talked about the on the author of the company our relationships with our customers are off of long term. This is not a consumer on transactional business. This is day, either the relationships and and how can we help our customers scrub of the long term business.
I totally agree with you on that yes.
Okay.
The next question is a follow up from Steve Tusa from J P. Morgan.
I see I guess I'm not I'm not sure anybody asked us so I'll just.
Try and see if you guys can give some color I mean.
What what do you see for kind of second half growth and are you seeing anything in kind of July here that you'd want to.
Comment on just just trying to kind of.
Get get the the best Crystal Ball view at this stage.
Sorry.
Yes, Steve I'll speak about I think the last half of the year rather than the first 16 business days of July.
[laughter].
And how this morning went right.
No I mean are you can expect a moderation in residential equipment, just because that's common sense you know, it's not going to grow 29% from here on right. So there will be a moderation and how it plays out over the season versus into next year.
It'll be some moderation there has to be at.
At the same time, you know there's absolute strength in commercial.
Strength in our international markets.
Which of which we're in more of a sunk a year ago.
We've talked about price and margin outlook for you know for the next several next several months.
And we've talked about our acquisition additions that we've made to add the growth rates going forward.
And then you can imagine already looking.
Into next year and beyond with our OEM community, having the same conversation about about of growth and share of going forward. So.
It is it is the several moving pieces in <unk>.
And yeah, that's how I would I would I would approach the answer there.
You want to look at it it's what we've done the guy.
For few years and you can see with the the record is we always manage in most cases, we always manage to grow sometimes sort of at a higher rate of growth in others.
But some of it is internally because we do things better internally and some of it is because of the industry is doing something.
So I mean can same store sales be.
You said moderating obviously can same store sales be up you know 5 to 10 in the second half of resi equipment.
So there are moderating.
We're not well so then youre going to be up 30 and in the in the second half for the equipment Oh I I just was curious who said we were monitoring.
Gary.
As you will see that say that Barry.
You said there was no guidance there.
[laughter].
Barry I hear the change that the paradigm.
[laughter].
Barry quiet was that the things can't grow at 30% Forever right Ryan.
Right.
We have that conversation with our leaders and the challenge to them that they put on themselves as well how are we gonna grow wild things flow, which inevitably at some point they can't grow from 30% forever. So they are they are creating programs and they're doing what they want they need to do now the continue to grow regardless of the.
Mr conditions.
Got it and the way I guess I'll ask 1 more 1 more way to ask that do you think the industry will be down at any time and in the second half.
No I don't think so Bob do you have a better handle on yeah. It it probably will.
Sure No I understood.
I don't know [laughter], who knows the answer is who knows exactly.
That's correct, yes for my guess and my guess would be it.
Probably see maybe some of theirs.
The difference between what the what there's a shipment demand and there was a movement demand Yep Yep moving right now is going to remain strong maybe shipments will slow down a little bit and that may not be because of the orders that maybe because of other supply issues of some of the Oems are happy.
Alright, so AHRI couldn't could be down at certain points, but the but the hardy and your sell through is continues to grow but at a slower rate than the 30%, which is you know.
The common sense comment yeah, correct does that go on to summarize that yeah sure yeah.
Okay awesome. Thanks, guys.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Albert some of it.
For any closing remarks.
Well, thanks very much for your continued interest and of our company I Hope you don't disappoint you ever going forward.
And our record in the past.
I hope.
It keeps you interested so thank you again for your interest and look forward to talking to you in the next quarter Bye now.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.
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