Q2 2022 Watsco Inc Earnings Call
Good day and welcome to the Watsco 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 Nomad Chairman and CEO . Please go ahead Sir.
Good morning, everyone.
Well I'll cover from rainy cloudy in Miami, Florida.
This is our second quarter earnings call.
And this is al <unk>, Chairman and CEO and with me is a J, David who is the company's president and Paul Johnston, Barry Logan and Rick Gomez.
Before we start our normal cautionary statement. This conference call has forward looking statements as defined by the FCC 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.
Onto our information watsco delivered another exceptional quarter.
Records were set for virtually every measure of performance.
Earnings per share jumped 33% to a record four point, sorry 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 dollar quarter.
Operating income increased 32% to a record $287 million with margins expanding 180 basis points.
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 in the second quarter of this year.
Now for the first half of this year earnings per share is up 53% on a record $7.83.
On a 22% increase in sales.
Okay.
Looking at current trends so far in July we see meaningful unit growth.
An additional price capture as inflation remains a reality in our industry.
Yeah.
For the year, we expect 2022.
It'll be another year of record performance.
Then looking to 2020 three.
IRA interest rates and perhaps an economic slowdown.
Here's what we think about.
We were reacting creative ways to take advantage of our scale product diversity and technology leadership to sustain growth and build upon our <unk>.
Market share no matter what comes in 2023.
We have also ask our teams to focus on productivity and operating efficiency.
Which had been more difficult to achieve the last two years, given the unprecedented supply chain.
Rotation.
In business, Iraq disruption that has impacted all businesses not just ours.
We are also engaged with our OEM partners and working together to develop forward looking growth initiatives.
Watsco had deep relationships with virtually every domestic and internal international OEM.
And we possess the best most diverse brand portfolio and any distributor in our industry.
More fundamentally there.
There are numerous reasons to be optimistic about our business and our industry in the medium and long term.
Okay.
This morning's press release provides a number of additional data points that we feel support watch goes growth trajectory.
We have immense technology advantage in our marketplace and we are investing to grow that advantage.
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 is the breadth and diversity.
Our products, we sell across dozens of brands.
Sorry, let me say that again.
Our market advantages the breadth breadth and diversity of products, we sell across dozens of brands at hundreds of product categories.
This diversity allows us to offer the full variety of price points.
Required either marketed most any economic environment.
In addition, we have a concentrated position into Sun belt markets.
We're both population migration is greatest and the necessity of H B a C 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 S E E or standards will increase and 2023 across the entire United States.
The price points associated with these new products will be higher and should benefit 'twenty 'twenty three results.
Another very important regulatory change will occur in 'twenty 'twenty five as the industry transforms.
Transitions to new right refrigerants.
Yeah.
Federal mandates are now in place to phase out the current high D. W. P, which means global warming potential.
Then again G W P global warming potential.
Refrigerants used millions of assistance.
Oh, yes, they are developing new products to incorporate the lower G WP refrigerant.
To sum it up there is significant opportunity for homeowners and businesses to upgrade systems that will over time be both efficient and.
And environmentally friendly.
Okay.
We believe our scale technology and financial strength position us extremely well to capture these new market opportunities.
Finally, we're always concern 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.
Yeah.
We are fortunate to be the leader in such a key industry.
As we mentioned we feel there are it will be several important drivers as growth for our company for growth in a couple of years ago.
Yes.
As always we have presented only a small portion of our technology story in todays release.
If you have any interest in learning more let us know and we will schedule time with a Jay and his team.
We are always happy to share more about our progress.
Well with that let's go on to questions and answers.
Yeah.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Tommy Moll with Stephens. Please go ahead.
Good morning, John .
Good morning, and appreciate your taking my questions.
Or.
So maybe no surprise I was hoping to start on gross margins. This morning.
[laughter], so a couple of components here.
I guess, maybe just to start it any update you can give us on some of the digital pricing optimization investments.
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 and in Q3, we'd all love to know that as well.
I think the first part of your question.
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 it will we'll get some some comments on that H O you want to start.
Our first.
First they give you some context you have to understand that we do business with about 1000 of manufacturers and all of them I think it's fair to say all of them I've had probably multiple price increases over the last several quarters and years.
So just the administration.
Putting making sure that our systems are up to date with the latest cost basis.
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 and our pricing tool.
I'm not sure if he could do it certainly not to the way not to the extent that proficiency and <unk>.
And.
Our expertise that we did today so just the administrative burden.
It has been eased by the tool itself Len you can start talking about the opportunity the opportunity is to make sure that we capture.
Additional.
Our price in the marketplace that.
It 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 optimize price by product by category by geography et cetera, and the opportunities are endless and it made just so you know it may not.
It always be going up in price. It may also be going down in price. There are very there are definitely times, where we are out of line with pricing and when we get in line. We can move a product more efficiently and ER and create or I should say are captured demand that's out there when we had the pricing correct.
So I'd say, we're still early days, but the tool because of the tool has really enabled infinite opportunities.
But it's an exciting and important.
Opportunity that we have in front of us.
Alright good.
You want to repeat the second part of your second question. Please.
Sure any 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 the second quarter to third quarter.
Barry you want that.
Sure Tommy Good morning, Oh first.
Again, I'll answer the second part first because its a bit longer term in view.
And then last quarter first quarter conference call, we talked about 27% as a longer term target for gross profit and.
And so therefore.
The amount of that you know target that's above historical historical levels as the structural M. S.
Our strategic and tactical progress we believe we have made on gross profit.
And where we're in an inflationary environment, which we were had been in for the first half of this year.
You know if it can be something more than the 27% and that's precisely what you see in the numbers your date.
Sequentially, it's noisy a debate to be to give a simple answer.
Well thought which all developed 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 AR and the smallest quarter of the year the benefit of that spread is in gross profit and builds our gross profit that's higher.
And that's where the 29% came from it's really it's simply the timing and level of OEM pricing that came into the market.
When it came in.
Relative to our first quarter so.
Yeah, the smoothing or the predictability or the.
Uh huh.
The projection of our gross profit has to look over a longer curve of time than just one quarter I don't I wouldn't I wouldn't want you to take every quarter that we report and and try to.
Get too many inferences out of it just listened 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 and I think the you know the target that I mentioned is whats the more likelihood that there is long term.
All very helpful and very much appreciated.
I did also want to ask.
About SG&A you 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 reevaluate to the extent that business conditions normalize.
Can you give us your current thinking on the potential need to reevaluate there and I guess ultimately what we're what we're all trying to discern is in a in an environment.
Yeah.
Where.
Potentially you you even see some.
Some reversal on input costs, and and maybe even some broader economic headwinds can you still hold a double digit.
Operating income margin.
Gary.
Yeah, Thanks, Tom well first it obviously when you manage the business, we're managing all of the pieces that that end up being double digit EBIT margin or not so so it's a if I focus on SG&A, there's been a complete lack of capability.
Over the last probably 18 months almost two years.
Lack of an ability to sort of find.
Find efficiencies when supply chain was completely.
Disrupted.
Had it exceeding demand.
You know 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 and more customer service more more of everything in order to grow and our market share gains.
Evidence of that accomplishment all of that has to be built through SG&A.
We also are.
Ask our vendors for programs and four for four benefits in economics, so that we could invest more people, we could open up more locations than we have.
And obviously the technology spending has proliferated over the last two years for good reason and with good results.
So now not only built that up [laughter].
Needless to say the message now is where are the efficiencies.
Well, let's go let's pick a nose to the grindstone ask our team to ask or leaders ask our field people ask our branch managers to.
They take a breath, they're still they're still very busy by the way is 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 and are in the creative and entrepreneurial way that that we know is possible.
Virtually every variable cost has increased in line with sales over the last two years.
And remember you know sales are probably up 25%, 30% are in the last 18 months, if I put that in perspective on a same store basis.
And so variable costs will be dealt with them and 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.
If I can this is David let me give you. Another example of how the supply chain of Lowe's I have added to SG&A and <unk> and you can do the math.
As things normalize these SG&A cost should come out as an example is that our vendors and our suppliers.
They may be getting a high quantity of product, but it may not be the right mix of product in the right location. 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 product.
Our location so that we have matched systems that we can fill a customary class four.
And that's a direct result of just the challenges in the supply chain.
So I think normalize you would imagine that some of those additional costs should come out as well.
I appreciate all the insight and I'll turn it back.
Yeah.
The next question will come from Ryan Merkel with WB. Please go ahead good.
Right.
Hey, everyone. Good morning.
First off can you comment on sales trends exiting the quarter and into July just curious if theres been any slowdown in demand.
You mean in the beginning of the third quarter.
Yeah correct yeah.
Oh, yeah, so it's been an.
We've seen a terrific increase in demand.
Let's have Barry or Paul either one.
Give you the numbers.
Oh gosh, okay yeah.
Definitely Ryan we've seen an uptick in in the month of July .
And it's been one in which we've seen a different regions come to life and really give a pop.
The most important are two regions that are really performing well right now or in the southeast and the southwest, but we're seeing substantial increases.
When compared to last year's July .
Barry.
I've said for my career that I want to report in April and through through September half and this quarterly.
Dance that we get on with volatility you know 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 now very strong you know growth in July which is the biggest month of the year by the way forward for our company.
And the question is is it is it some type of a wall we've hit or is it simply a volatility discussion and I you know I believe it's more volatility discussion versus what last year's performance was in the short and the short analysis. The long analysis is that.
Price and units are very strong as we're getting into the later part of.
Getting into the third quarter.
I think we commented the units are up mid single digits the high mid single digits.
And at the beginning of July .
<unk>.
Beginning of July unit sales up mid single digits to high single digits.
Yeah, that's correct.
Okay.
That is very strong.
And then my second question is looking out to 'twenty three with the sea of 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 in the base units, but youre also going to see an increase in 16 and 17 because of the SER two testing.
The question is what could be the price mix benefit in 'twenty three when you put all that together with price carryover.
Oh, Paul I would say right now.
Everybody is kind of scrambling looking at that number trying to figure out exactly what the what the market price will be for the 16 and 17.
You know as far as the baseline products. The the old 15, seer, the new 14.3 share 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 Sears level.
Okay.
So asking in a different way could roughly 70, 580% of your equipment sales be up mid teens in price in 2023 or do we not have enough information to answer that last point you know, Brian If you look at where we are today you know with the you know.
The base products today represent about 75% to 80% of the sales volume.
For the industry market.
And if you assume that that carries over into 2023, and yes, you would see a mid teen growth.
Got it okay. So punch line is price mix in 'twenty, three is going to be pretty meaningful.
Yes. It is.
Perfect. Thanks.
The next question will come from Stephen Volkmann with Jefferies. Please go ahead.
Stephen Hi.
Hi, Good morning, guys. Thanks for taking the question can I can I just follow up on that one.
Because it feels like one risk might be that people who are.
Using very high seer product when they felt flush in Florida, one in case, we're 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 are not seeing that yet, but do you have any views on that.
Go ahead Paul.
Yeah.
Steven Yes.
We have views we have opinions, but obviously, it's very hard to predict you know what the what.
What the consumer is going to do and the elasticity of it there are definitely differences between the high shear and the standards here in the areas of comfort reliability warranty theres a lot of soft differentiators. Besides the energy savings that they accrue.
There was also a second element to it which gets into 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 we have disruptions in electric 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 saying in the past there has been a compression to the minimums here. When we went from 10 seer to to.
12 children from 12 to 14.
In the south so if that were to occur I think you'd probably could lay out some some historical numbers and see if that happens, but that would be just an estimate at this time.
Yeah, I think it's also interesting to note that it's interesting I got to start there up is that.
Part of the I should say a victim of the supply chain lows have been high efficiency systems are simply just not as many available for us to sell.
Our mix is.
As it is at least somewhat.
Affected by our inability to get those products from our Oems and talent in the marketplace today.
Great.
It feels like you're reading my mind agent 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 in.
How do you see that playing out.
Yeah.
Alright, thank you.
Yeah, I think we're getting back to normal you know the the supply chain is good. However, there is a there are disruptions in certain product areas.
Commercial unitary right now very difficult to get any product and that the large commercial products very difficult.
Very long lead times, when you get to just a standard bread and butter product.
We're seeing a pretty good supply chain right now, where we're bringing in the indoor and outdoor are actually coming together for a change.
When we look into the future.
All these manufacturers all of these Oems are going to be changing over to a new product.
Some of them completely redesigned some of the modifications of what they currently sell.
So I guess I'm 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 watsco.
We have we represent just about everybody in the industry.
Super I'll pass it on thank you.
Okay.
The next question will come from Nigel Coe with Wolfe Research. Please go ahead.
Good morning Nigel.
Perhaps you're muted Mr Cope.
Yes, I am thank you very much sorry about that.
Because I think I think good morning again.
Hum.
The [laughter] on the 15% you know kind of mixed up on the new sort of minimum see if units.
Do you think that's going to wash with customers because there's obviously a lot of inflationary pressures right now do.
Have you seen any signs of increasing pushback from the channel.
On pricing.
Yeah.
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 record levels over the last two years with ever increasing prices.
And I think as we moved in move into the new product that's going to have higher efficiency is 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 the replacement of an air conditioning unit.
It's unlike a car or any other other staple that a consumer buys its something that.
There isn't a list price out there that they can go ahead and match Theres not a consumer report that tells them what price should be.
And each job as you recognize as custom and so it has different attributes and different.
Different issues that would affect the price to the consumer I think are particularly in the Sun belt area. When it comes to the new products that we're gonna be showing on the air conditioner side.
Is a necessity you you're not going to live without it. So if you have to replace the units I think most of them. Some are just going to find a way to be able to to afford it and to to do it and the same holds true with a with gas furnaces and heat pumps in the north and the mid Atlantic.
Once again, if it's a 20 below zero in and.
Alberta.
Canada, you're going to be changing out your gas furnace.
In that market.
So.
And if he question I really don't know you know how the consumer's 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.
What the analytics are or what the elasticity is for the consumer.
I think that I'll, just say you know Paul I, just think to add to that and this just adds a layer of Oh.
No that's it.
Another thought to that is the cost of repair today.
It was probably escalated at even a faster rate than.
The inflation rate of new equipment.
First labour and materials out there at the contractor you know my prescribed for repair has gone up obviously materially.
Frigerator, which is used in most repair situations.
Our compressor change out or coil change out or something like that that's multiply it in price over the last couple of years.
And it's only going to get more expensive with the.
The full <unk> of the phase out of that refrigerant occurring.
So the cost of repair is no cakewalk and not a not a party it's something that's become much more expensive as well.
And contractors despise repair if.
If they see a replacement opportunity so.
I think it's.
You know so it'll be interesting times, but I don't think the volatility is as great as well as other consumer products, let's say.
And touch consumer financing Paul Barry.
Yeah.
At the root of how do people pay for these things historically has been cash and credit cards and potentially.
Home equity line.
Financing has it was really only.
Was it financing for these products.
It has only been for elite homeowners and elite contractors that offer the financing.
And versus broad based programs and so on so that's something that we are.
Working on building our on our invention, which is called credit for comfort.
Which is good 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 it's a cascade of a fan.
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.
The long term as consumer financing side of things will be kind of a component.
What will become a component of these calls.
And part of the.
Backbone of what we're doing with technology.
Great. That's that's great perspective, thanks very thankful.
And just my follow on is really you know the perspectives 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 in the trends into July .
No big repair versus replace changes so I'm just wondering why why why now and what do you think normal it looks like whatever that means.
I'm not sure I understood the question.
Sure.
Yes.
Can you can you clarify that.
Yeah, I'm just yeah, sorry, I just wanted to wondering why the perspective today on 2023, just given its.
Some ways away.
Well, because we see the federal government.
Changing the industry and changing we will be selling and changing with consumers.
We'll be faced.
Taste too goodbye.
Uh huh.
And that's a big thing is the regulatory environment.
Plus the ability to move to higher efficiency systems.
Reduce costs.
To the homeowner and contribute to the.
To the to our ability to help with the environment.
With emissions you know every time you move to a high efficiency unit youre removing admissions.
And the planet.
Do things more cooling with less electricity.
And if you produce a lesser electricity 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 onto our finance program now we're not doing the financing we lay that off to a series of different finance company, depending on the credit rating of the consumer.
<unk>.
And that's just beginning.
So.
It's.
It's hopefully I gave you some answers, but not keep asking.
Okay, well I'm not the best very helpful. Thanks very much.
The next question will come from Jeff Hammond with Keybanc capital markets. Please go ahead hi.
Hey, good morning, guys.
Hey, So just wanted to come back to this this gross margin dynamic I appreciate the color around the 27 and it looks like versus you know 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 'twenty three it seems like this.
<unk> environment, whether it be regulatory or or just carry on pricing. It seems like it's with us. So just I guess is the assumption as long as we stay ahead on you know what do we see inflation. We we run ahead of that number and it is inflation settles, we get back to that 27.
Well that's a good accounting question, Barry you want to deal with that.
Yeah, Jeff I think in general you know I think if we if we are if we all had a crystal ball and said what will inflation be a year from now.
And yes, there is some some unique things to our industry, but just general economic inflation, it would be less than than today I mean, we have a pretty immense.
Federal government.
Exacting monetary policy to cease to that correct.
So just in our own kind of a conservative way, we want to say that.
Inflation.
No.
Also it comes back down to some some reasonable level.
The benefit of that and just in a distributed distribution gross profit.
Will also moderate and that's that's a little bit of.
Conservatism that we need to have.
And that's why the 27% is there.
I don't think that.
The pricing actions are hit a wall instantly.
I want there'll still be pricing decision being made across the market across product lines across Oems.
Be a reality for probably the next 12 months.
We're just trying to give a little bit of insight.
Level set the thinking beyond just the current the current year.
Yeah, Okay that remember all you have to remember also half of our revenues in that.
The approximate amount is not equipment.
It's all the other stuff the Keystone.
You need to install the air conditioner to maintain near deserves a lot of supplies a lot a lot of different things and that's a solid business that.
The demand of that is more reliable and that all the equipment.
And that's generally at a higher margin.
Okay, Great and then just back on commercial it looks like you know maybe 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.
Certainly we know that supply constraint is a big player.
Body else have any common center yeah, it's it's been.
The worst Nightmare, you know demand on commercial is up supply is down.
And lead times.
Now for unitary product an applied product, both that's been extended out a bit.
And where I've ever seen them in my history in the industry. So I think our I think that's going to be just a latent demand that we're going to pick up as supply picks up I think those shops will be filled.
But probably at a later date not now.
Okay I appreciate it guys.
Yeah.
The next question will come from David Manthey with Baird. Please go ahead.
Brian Davis.
Hey, good morning, everyone.
And yes.
Could you explain to us.
Youre cautious outlook here is this based purely on the macro economic 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 thats going to be up we talked about the any elasticity 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.
I don't believe we're trying to be negative about 'twenty two 'twenty three.
We're very positive about 2023.
But you did put your finger on a small part of our business as sales to new construction.
Yeah, it's in the newspapers at start ups or downs.
But that is a small part and it's certainly a small part of our margins.
Bad businesses.
Got a small margin for us.
But I think we're pretty positive about 2023.
Did you think that we were not.
Oh, no I just think that.
The way the press release Red and talking about.
Normalizing conditions and things I think people automatically jumped to that means slowing down really more negative growth, but if it didn't that's fine too well Barry wrote Bad thing Barry why are you.
Yeah.
[laughter].
I agree.
Glass is something of interest.
I glanced.
Before the call, which is interesting and that's that if you look at our six months operating profit two years ago versus today.
It's almost two five times greater today.
To put that in perspective, two years ago six months operating profit versus this year's operating profit, it's almost two five times greater.
So so the messaging is is we love the growth rates, we'd love to.
The structural profitability of games.
But in terms of of slower slower is not a bad thing slower could mean growth that's in more in line with our historical trend not you know two and a half times you know the current thing two years from now you know.
So it's a it's trying to pull the reins a bit on.
On reality and expectations.
Yes.
Also in the backdrop over the macro economy, let me ask it. This way do you think we're going to be.
In record territory in 2020 three.
I think we'll be in record territory in 2023.
So the rest of the year okay.
For the year, Yeah, all right Yeah, I mean, we're spelling out all the things we think are going to drive the mad the regulatory thing is a big deal, but Barry saying that the growth rate of the industry is going to slow because where we were in an extraordinary period for the last two years, but that doesn't mean, it's going to slow its going to go to a normal.
I'm not going to go where I expect some decrease in demand for all the factors that we mentioned in terms of normality.
No we were very positive about 23, okay, and if I could throw one more 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.
I'm looking at myself I know I'm going to continue aging.
We've still got some migration.
Nation 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 are in Texas, and Florida and the mid Atlantic.
We also see climate change and 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.
Great. That's helpful color out myself I have to summarize my way, which is [laughter]. This extreme growth market environment can't last forever, because its too extreme but no matter what the market conditions are we expect to grow we think theres a lot of tailwind behind R. R.
Our industry and then as a company. We think we've made the investments that will ensure a growth for many years to come on the long term.
Well, thank you for clarifying Barry's comment there.
[laughter].
[laughter] yeah.
We're very positive not negative about 'twenty 'twenty or beyond.
Got it.
And second one hopefully.
Sneak this in here as it relates to Barry's comment about.
Yes.
In line with sales growth over the past couple of years.
Given how much of that 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. That's a very good question why don't we try a day somebody there.
Maybe I can comment on that or.
All three of you Bury a J and Greg how about Rex Yeah, Yeah, Rick Yeah Rick.
Good morning, Dave.
Yes.
Yeah.
Well, yeah, I do think that there is a a a they're they're multi multiple facets to the SG&A question.
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.
These are carrier it we believe.
Already talked about freight and inner branch 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 more normal growth environment.
So there is a delay.
There is a good understanding of what's variable how does it how does it moderate and how do we expect it to behave in future periods based on.
Based on different growth algorithms.
The the 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 in 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 you know, what we can do to make them more profitable and more efficient.
And of course, we look at things internally not just you know in in terms of volume and price, but we look at it in terms of.
Just what I referred to is as the stock right. It's it's.
Its branches. It's people. It's you know trucks, it's things that you know its square footage those things that we can measure almost independent of the inflationary environment and that's what where we said in the press release, we challenge our leaders to make all of those categories more productive going forward.
Alright, Thanks, Rick Thanks, everyone and.
In other words, we have a lot of opportunity to get more efficient.
And we know it.
Because what's happened in the last two years, we were all scrambling and everybody is scrambling cost us a lot.
But that scrambling, it's going to decrease as the.
Oems catch up.
We still are short and high efficiency and it's going to it's kind of a.
Normalized as things normalize the SG&A and will normalize to something that <unk> as a percentage of sales lower than what it is today, it's our expectation.
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 margin oriented that's that's really only been in the hands of.
You know the the masses in the company over the last 12 to 18 months.
And there is additional technology now being deployed to further that warehouse optimization.
So it is still very or it is we are earlier in our journey on the technology front for some of that internal technology, that's really aimed at productivity.
Terrific. Thank you all.
Yeah.
The next question will come from Steve Tusa with J P. Morgan. Please go ahead.
Hey, guys good morning.
Good morning, Good morning, I guess, a a J needs to help Barry right. These press releases from here on out yeah.
[laughter].
And it actually works and how are we going to tease barrier for that.
Right that's right that's the word.
That's definitely worth it [laughter].
I didn't know you had that kind of humor.
Seriously.
No I I I I, just it's it's a sign of a good CEO to point the finger at the guys that work for you like Barry.
In your press release.
[laughter], Yeah, that's right Youre right.
[laughter] you guys mentioned July and you mentioned volatility I mean, what did you and look like because we've seen the Hardy data we've seen AHRI data.
What what did you and look like for for units for you guys.
Mr. Logan Boy Junior and its I would I would say June dollars.
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 than in July .
Okay. So, but the July comment was a unit comment or a dollar comment.
Sure.
Oh, so do units up mid singles. So what what were you what are you, saying on units and dollars for July again.
Well he doesn't know what it was in July he just knows the dollar.
I'll also carefully I mean for sure Blake.
Virginia I know your ear throughout the ear true up in June and Al commented earlier July units were up mid to high single digits, Yeah, Okay got it alright.
That's helpful and so on this kind of a the great gross margin commentary you guys have talked about what's normalized.
We can see what happened in the first half in the second quarter. So that's kind of a normalized number that you should trend.
Along.
Is 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 they be you know cause one Q2 to Q. There. There is some volatility there is there continued volatility as we move forward in the next couple of quarters on that and would that go below the 27 normalized at some point.
Wow.
Who wants that one.
[laughter] I'm, what I'm pointing to Berry.
[laughter] al Al it's going to come back around you if you're if you're not if you're not careful.
<unk> background.
It's a it's like.
But I think it's about 128 press release by the way just for the fun of the math.
[laughter] I'll stand by my long term.
[laughter] the obvious answer is it.
We're very focused on gross profit we have tools that are helping us and we want to do 27%. We wanted to do better can we predict it I'm not sure we can but we feel pretty pretty comfort comfortable on that number going forward or better.
Okay, Okay, I mean that could be ups and downs, but we're very focused on margins.
I'd like to.
I wanted to speculate this is pure speculation my goal is to get it to 15% EBIT margin.
Eventually.
Got it Okay and then one last one are we close to the end of the Oh EMS residential equipment price increases.
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 we'll see a price increase then right on those on the on the new on the new ones that might not be.
But not a like for like on the on the existing one.
Yeah don't forget Steve that a lot of half the United States.
We will be unable to sell lower efficiency.
Air Conditioners Yep Yep.
So that's an inventory shrink but that stuff that we will be selling is the new stuff and theyre coming at higher prices, we already know that.
Right right.
Right.
Great. Thanks, a lot guys appreciate it.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Albert <unk> for any closing remarks. Please go ahead.
Well, thanks very much for your continued interest in watsco.
We try to keep it light R. R.
Our conversations.
But this is a serious.
Our leadership team.
And we hope you are.
<unk> have enjoyed.
Our story.
And we hope to continue giving you. Good news is as the quarters go on so thanks again for your interest Bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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