Good day, and welcome to the Watsco Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Albert Nahmad, Chairman and CEO. Please go ahead, sir.

Morning, everyone. Welcome from rainy, cloudy Miami, Florida. This is our second quarter earnings call, and this is Al Nahmad, Chairman and CEO. With me is A.J. Nahmad, who is the company's President; Paul Johnston, Barry Logan, and Rick Gomez. Before we start our cautionary statement, this conference call has forward-looking statements as defined by SEC laws and regulations 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 $4.93 per share, which is a record for the quarter. Sales grew 15% to a record $2.13 billion, which is our first $2 billion quarter. Operating income increased 32% to a record $287 million, with margins expanding 180 basis points to a record 13.5%. We are particularly pleased with these results, given the strong comparisons against the second quarter last year. Last year, same-store sales were up 29%, and earnings per share were up 64%. That's the comparison that we were up against this last quarter, the second quarter of this year. Now for the first half of this year, earnings per share is up 53% to a record $7.83 on a 22% increase in sales. Looking at current trends so far in July, we see meaningful unit growth and additional price capture as inflation remains a reality in our industry. For the year, we expect 2022 will be another year of record performance. Regarding 2023, higher interest rates and perhaps an economic slowdown are on our minds. We are reacting in creative ways to take advantage of our scale, product diversity, and technology leadership to sustain growth and build upon our growing market share no matter what comes in 2023. We have also asked our teams to focus on productivity and operating efficiencies, which have been more difficult to achieve over the last two years, given the unprecedented supply chain, transportation, and business disruption that have impacted all businesses, not just ours. We're also engaged with our OEM partners and working together to develop forward-looking growth initiatives. Watsco has deep relationships with virtually every domestic and international OEM. We possess the best, most diverse brand portfolio of any distributor in our industry. More fundamentally, there are numerous reasons to be optimistic about our business and our industry in the medium and long term. This morning's press release provides a number of additional data points that we feel support Watsco's growth trajectory. We have an immense technology advantage in our marketplace, and we are investing to grow that advantage. Our technology investments are paying dividends in the form of higher customer engagement, reduced attrition, and substantial market share gains. Our market advantage is the breadth and diversity of products we sell across dozens of brands and hundreds of product categories. This diversity allows us to offer the full variety of price points required in a market in most, if not all, economic environments. In addition, we have a concentrated position in Sunbelt markets, where both population migration is greatest and the necessity of HVAC products is the most absolute. Now turning to something very important: the regulatory front. We have several important federal regulatory changes coming that will provide opportunities for growth. The minimum federal SEER standards will increase in 2023 across the entire United States. The price points associated with these new products will be higher and should benefit 2023. Another very important regulatory change will occur in 2025 as the industry transforms to new refrigerants. Federal mandates are now in place to phase out the current high GWP (Global Warming Potential) refrigerants in millions of systems. OEMs are developing new products to incorporate lower GWP refrigerants. To sum it up, there are significant opportunities for homeowners and businesses to upgrade systems that will be both efficient and environmentally friendly. We believe our scale, technology, and financial strength position us extremely well to capture these new market opportunities. Finally, we 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 funding investments to grow our business. We're fortunate to be the leader in such a key industry. As we mentioned, we feel there are and will be several important drivers for forward growth in our company in the years ahead. As always, we have presented only a small portion of our technology story in today's release. If you have any interest in learning more, let us know, and we will schedule time with A.J. and his team. We are always happy to share more about our progress. But with that, let's go on to questions and answers.

We will now begin the question-and-answer session. Please note that the first question will come from Tommy Moll with Stephens. Please go ahead.

Morning, Tom.

Good morning, and I appreciate you taking my questions.

Of course.

So, maybe no surprise. I was hoping to start on gross margins this morning. So, a couple components here. I guess maybe just to start, any update you can give us on some of the digital pricing optimization investment you've made that can impact that gross margin? And then, as a follow-up, any drivers you could call out, particularly from a sequential basis from first quarter to second quarter? And if anyone's willing to hazard a guess on whether that margin might be flat, up or down in Q3, we'd all love to know that as well.

I think the first part of your question is very well placed, because we do have technology that helps us with that. The second part of your question is a little more intense, and we'll get some comments on that. A.J., do you want to start?

Sure. First, to give you some context, you have to understand that we do business with about a thousand manufacturers and all of them have had probably multiple price increases over the last several quarters and years. So, just the administration of ensuring that our systems are up-to-date with the latest cost basis from each of these suppliers and making sure we have the right cost and price in the marketplace is enormous. Before we had the technology we do now in our pricing tool, I'm not sure we could do it, certainly not to the extent of proficiency and expertise that we do today. The administrative burden has been eased by the tool itself. Then you can start talking about the opportunity. The opportunity is to ensure that we capture the additional price in the marketplace that needs to be passed along to our customers, and to their customers, and to be reflective of the inflationary environment. Our tools enable that, allowing us to slice and dice analytics to find opportunities to maximize or, I should say, optimize price by product, by category, by geography, etc. The opportunities are endless. Just so you know, it may not always be a price increase; it may also involve price decreases. There are definitely times where we're out of line with pricing, and when we get in line, we can move product more efficiently and capture demand that's out there when we have the pricing correct. I would say we're still in the early days with the tool because it enables infinite opportunities, but it's an exciting and important opportunity that we have in front of us.

Very good. Could you repeat the second part of your question, please?

Sure. Any context, qualitative or quantitative, on the gross margin from first quarter to second quarter and, to the extent you can give any insight on second quarter to third quarter?

Barry, do you want that?

Sure. Tommy, good morning. First, again, I'll answer the second part first, because it's a bit longer term. Last quarter, in the first quarter conference call, we talked about 27% as a longer-term target for gross profit. The amount of that target above historical levels is the structural, strategic, and tactical progress we've made on gross profit. In an inflationary environment, which we have been in for the first half of this year, it can be something more than the 27%, and that's precisely what you see in the numbers year-to-date. Sequentially, it's noisy to give a simple thought. The noise is that in the first quarter, with pricing actions by the OEMs when we flip inventory for the first 90 days in the smallest quarter of the year, the benefit of that spread is in gross profit and builds a gross profit that's higher. That's where the 29% came from. It's really just the timing and level of OEM pricing that came into the market. The smoothing, predictability, or projection of gross profit has to look over a longer curve of time than just one quarter. I wouldn't want you to take every quarter that we report and try to get too many inferences out of it. Just listen to the long-term target and the structural elements of what we've been doing. If there's more inflation on the road, it can be improved. If there's a lack of inflation, then I think the target I mentioned is the more likely event in the long term.

All very helpful, and very much appreciated. I did also want to ask about SG&A. You highlighted that there have been some factors in play recently and that you may need to reevaluate to the extent that business conditions normalize. Can you give us your current thinking on the potential need to reevaluate there? Ultimately, what we're all trying to discern is in an environment where you might even see some reversal on input costs and maybe some broader economic headwinds, can you still hold a double-digit operating income margin?

Barry?

Yeah, thanks Tommy. Well, first, obviously, when you manage the business, you're managing all the pieces that end up being double-digit, either margin or not. So, if I focus on SG&A, there's been a complete lack of capability over the last probably 18 months, almost two years, to find efficiencies when the supply chain was completely disrupted. You had exceeding demand in terms of chasing demand in the marketplace. There were competitive factors that we wanted to take advantage of, so we hired more people, brought in more customer service, more of everything in order to grow, and our market share gains are evidence of that accomplishment. All of that has to be balanced through SG&A. We also asked our vendors for programs and benefits and economics to invest more people. We could open more locations than we have. Obviously, technology spending has proliferated over the last two years for good reason and with good results. Now that we've built that up, needless to say, the message now is where are the efficiencies? Let's put our noses to the grindstone, ask our teams, ask our leaders, ask our field people, ask our branch managers to take a breath. They're still very busy, by the way; it's still a very busy season and business is still very good. But when we look beyond the horizon, SG&A has to be handled in a creative and entrepreneurial way that we know is possible. Virtually every variable cost has increased in line with sales over the last two years. Sales are probably up 25% to 30% over the last 18 months on a same-store basis. Whatever that variable picture looks like in the next 12 months will be dealt with, and then, you have a bunch of structural costs that have been frankly built in a very inefficient environment that will become more efficient as time goes on.

This is A.J. Let me provide another example of how the supply chain issues have impacted our SG&A. As things return to normal, these SG&A costs should decrease. For instance, our vendors and suppliers may deliver a large quantity of products, but they might not be the right mix or in the correct locations. We could have more indoor units than outdoor units, or the opposite in a specific area. We have spent millions moving products between our locations to meet customer demands. This is a direct consequence of the challenges within the supply chain. As conditions normalize, it is expected that some of those extra costs will also reduce.

Appreciate all the insight, and I'll turn it back.

The next question will come from Ryan Merkel with WB. Please go ahead.

Morning, Ryan.

Hey, everyone. Good morning. First off, can you comment on sales trends exiting the quarter and into July? Just curious if there's been any slowdown in demand.

You mean in the beginning of the third quarter?

Yeah. Correct.

Yes. We've seen a terrific increase in demand. Let's have Barry or Paul give you the numbers.

Go ahead, Paul.

Definitely, Ryan, we've seen an uptick in the month of July. It's been one in which we've seen different regions come to life and really give a pop. The most important two regions that are really performing well right now are the Southeast and the Southwest, but we're seeing substantial increases even compared to last year's July.

Barry, you were going to add.

I said from my career that I want to report in April and through September half, and this quarterly dance that we get on with volatility would go away. That's I think what we're seeing. We're seeing very strong comps that we were up against in the second quarter. We're seeing very strong growth in July, which is the biggest month of the year, by the way, for our company. The question is, is it some type of wall we've hit or is it simply a volatility discussion? I believe it's more a volatility discussion versus what last year's performance was in the short analysis. The longer analysis is that pricing and units are very strong as we're getting into the later part of the third quarter.

Got it. Thanks.

I think we commented the units are up mid-single digits to high single digits in the beginning of July.

Beginning of July unit sales up mid-single digits to high single digits?

Yes, correct.

Okay. That is very strong. And then, my second question is looking out to 2023 with the SEER change. I think there's some misunderstanding about sort of the impact. If you guys could unpack it, it would be very helpful. So, my understanding is you're going to see an increase on the base units, but you're also going to see an increase on SEER 16 and 17 because of the SEER 2 testing. So, my question is what could be the price mix benefit in 2023 when you put all that together with price carryover?

Paul?

I would say, right now, everybody is kind of scrambling looking at that number, trying to figure out exactly what the market price will be for the 16s and 17s. As far as the baseline products, the old 15 SEER and the new 14.3 SEER products are coming in. I would say that's going to start in the mid-teens up from what we currently have today at the 14 SEER level.

Okay. So, asking in a different way, could roughly 75% to 80% of your equipment sales be up mid-teens in price in 2023, or do we not have enough information to answer that at this point?

Ryan, if you look at where we are today, the base products today represent about 75% to 80% of the sales volume for the industry market. If you assume that carries over into 2023, then yes, you would see mid-teen growth.

Got it. Okay. So, the punchline is price mix in 2023 is going to be pretty meaningful.

Yes, it is.

Perfect. I'll pass it on. Thanks.

The next question will come from Stephen Volkman with Jeffries. Please go ahead.

Morning, Steven.

Hi. Good morning, guys. Thanks for taking the question. Can I just follow up on that one? Because it feels like one risk might be that people who were choosing very high SEER product when they felt flush and their 401ks were big and all that might choose instead closer down to the minimum. I gather you're not seeing that yet, but do you have any views on that?

Go ahead, Paul.

Okay, Steven. Yeah, we have views. We have opinions. But obviously, it's very hard to predict what the consumer is going to do in terms of elasticity. There are definite differences between the high SEER and the standard SEER in the areas of comfort, reliability, and warranty. There are a lot of soft differentiators, besides the energy savings they accrue. There's also a second element to it which gets into both local and state rebates to the consumer. We're getting into a situation where utilities are becoming more aggressive in their rebates as we have disruptions in electric supply in the marketplace. If you did just a straight calculation and said, would there be a compression? I think we could go back in history and say, in the past, there has been a compression to the minimum SEER when we went from 10 SEER to 12 SEER and from 12 to 14 in the south. If that were to occur, I think you'd probably see some historical numbers to evaluate that, but that would be just an estimate at this time.

It’s also interesting to note that part of the supply chain challenges has been with high-efficiency systems. There simply aren’t as many available for us to sell. Therefore, our product mix is somewhat affected by our inability to obtain those products from our OEMs and sell them in the marketplace today.

Great. I think you were reading my mind, A.J., because my follow-up was about supply chain. I was wondering if you could comment whether we are kind of back to normal, or if that’s overstating it, and how you see that playing out.

I think we're getting back to normal. The supply chain is good. However, there are disruptions in certain product areas, specifically commercial unitary, right now, very difficult to get any product in that. The large commercial products have very long lead times. When you get to just the standard bread and butter product, we're seeing a pretty good supply chain right now where we're bringing in the indoor and outdoor products actually coming together for a change. Looking into the future, all these manufacturers and OEMs will be changing over to a new product. Some of them may completely redesign; others may modify what they currently sell. In my heart, I think that we'll probably experience some moderate disruptions as they go through the changeover to the new product line for 2023. Each will perform in different manners. The good news about Watsco is we represent just about everybody in the industry.

Super. I'll pass it on. Thank you.

The next question will come from Nigel Coe with Wolfe Research. Please go ahead.

Morning, Nigel.

Yes, I am. Thank you very much. Sorry about that, everyone. Good. I'll say good morning again. Just on the 15% kind of mix up on the new sort of minimum SEER of units. Do you think that's going to wash with customers? There's obviously a lot of inflation pressures right now. Are you seeing any signs of increasing pushback from the channel on pricing?

Well, to date, we have not really seen any pushback on pricing. Demand remains strong. If you look at the industry itself, we're performing at record levels over the last two years despite increasing prices. As we move into the new product, it will have higher efficiency and other beneficial attributes for the consumer. I wish I could read into what the consumer's mind is when it comes to the cost of replacing an air conditioning unit. Unlike a car or any staple that a consumer buys, there isn't a list price out there that they can match. Each job, as you recognize, is custom, with different attributes and issues that affect the price. In the Sunbelt area, when it comes to the new products, it is a necessity; you're not going to live without it. If you have to replace a unit, I think most consumers will find a way to afford it and do it. The same holds true for gas furnaces and heat pumps in the north and Mid-Atlantic. It's a bit of an iffy question. I don't really know how the consumer's going to react. There's no good tests that we can put on it analytically to determine what the analytics are or what the elasticity is for the consumer.

I think, Paul, just to add to that, a layer of thought is that the cost of repair today has probably escalated at an even faster rate than the inflation rate of new equipment. Labor and materials that the contractor might prescribe for a repair have gone up materially. Refrigerant, which is used in most repair situations, has multiplied in price over the last couple of years. It's only going to get more expensive as we phase out that refrigerant. The cost of repair is no cakewalk; it's become much more expensive as well. Contractors despise repairs if they see a replacement opportunity.

And touch on consumer financing, Barry.

Historically, consumer payments for these things have been cash and credit cards or a small home equity line, but explicit financing has really only been for elite homeowners and contractors that offer it through specific finance companies. We are working on building our invention, which is called CreditForComfort, becoming available to all of our customers and a much broader group of consumer capability. It's not just one finance company; it's a cascade of finance companies, so that's training, effort, launch, and adoption. It's a curve that we're very early on. The long-term goal of consumer financing will become a substantial component of what we’re doing with technology.

Great. That's great perspective. Thanks, Barry. Thanks, Paul. Then just my follow-on is really the perspective around 2023. I know it's a long way away, but just curious why now. It doesn’t feel like you've seen a real break in the trend into July, no big repair versus replace changes. So, just wondering why now and what do you think normal looks like?

I'm not sure I understood the question. Can you clarify that?

Yeah. I'm just sorry, I'm just wondering why the perspective today on 2023 just given it's still some ways away.

Because we see the federal government changing the industry and changing what we'll be selling and changing what consumers will be faced to buy. The regulatory environment and the ability to move to higher efficiency systems and reduce costs to the homeowner will significantly contribute to our ability to help with emissions. Every time you move to a high-efficiency unit, you're removing emissions from the planet because we're producing more cooling with less electricity. If you produce less electricity, you're producing fewer emissions. There are a lot of factors here, and none of them are negative, other than the earlier question of how a consumer can afford this. We're very motivated to help with that with our consumer financing. We believe we have the best offer now to help the contractor bring the homeowner or business owner onto a finance program. We're not doing the financing; we lay that off to different finance companies depending on the credit rating of the consumer. Hopefully, I gave you some answers, but I wouldn't keep asking.

Okay. Well, that's very helpful. Thank you very much.

The next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hi, Jeff.

Hey, good morning, guys. I just want to come back to this gross dynamic margin. I appreciate the color around the 27%. It looks like versus a few years ago, that's a nice 250 basis point benefit through kind of structural changes. Looking into the second half and 2023, it seems like this inflationary environment, whether it be regulatory or just carry-on pricing, seems like it's with us. I guess, is the assumption that as long as we stay ahead on where we see inflation, we run ahead of that number? As inflation settles, we'll get back to that 27%?

Well, that's a good accounting question. Barry, do you want to deal with that?

Yeah. Jeff, I think in general, if we all had a crystal ball and said what will inflation be in a year from now, yes, there's some unique things to our industry. Just general economic inflation will be less than today. We have a pretty huge federal government exacting monetary policy that sees to that, correct? In our conservative way, we want to say that as inflation comes down to a reasonable level, the benefit in distribution gross profit will moderate. That's a little bit of conservatism we need to have and that's why the 27% is there. The pricing actions won’t hit a wall instantly. There will still be pricing decisions being made across the market, across product lines, across OEMs. That will be a reality for probably the next 12 months. We're just trying to provide some insight and level set the thinking beyond just the current year.

Okay.

Remember also half our revenues are not equipment; it’s all the other stuff you need to install and maintain air conditioners. That’s a solid business. The demand for that is more reliable than equipment demand, and generally at a higher margin.

Okay. Great. Back on commercial, looks like maybe flattish in the quarter and maybe down on volume. Is that just simply a function of supply constraint? What are you seeing on the demand side?

Certainly, we know the supply constraint is a big player. Anyone else have any comments on that?

Yeah. The demand on commercial is up, but supply is down. Lead times for unitary and applied products have been extended beyond what I've ever seen in my history in the industry. I think that's going to be just latent demand we're going to pick up as supply picks up. Those shops should be filled, but probably at a later date; not now.

Okay. Appreciate it, guys.

The next question will come from David Manthey with Baird. Please go ahead.

Morning, David.

Hey. Good morning, everyone. Al, could you explain your cautious outlook? Is this based purely on macroeconomic data, or are you seeing some kind of forward-looking indicators that indicate slowing demand? I agree with the 2023 outlook, but when we're talking about pricing, it sounds like that’s going to be up. We discussed the inelasticity of replacement demand. Is the minority of your business, which is new construction demand, the piece you're focusing on as it relates to the 2023 outlook?

I don't believe we're trying to be negative on 2023. We're very positive about 2023. You did put your finger on a small part of our business, which is sales to new construction. It's in the newspapers that startups are down, but that is a small part and a small margin for us. I think we're pretty positive about 2023. Did you think we were not?

No. I just think that the way the press release read and talking about normalizing conditions leads people to jump to that means slowing or negative growth. If it didn't, that's fine too.

Well, Barry wrote that, didn't you, Barry?

I looked at some information before the call indicating that the six-month operating profit has nearly tripled compared to two years ago. To clarify, this year's six-month operating profit is almost 2.5 times greater than it was two years ago. We're enthusiastic about the growth rates and the improvements in structural profitability. However, slower growth isn't necessarily negative. It can simply mean that growth is aligning more closely with historical trends, rather than projecting that it will be 2.5 times greater in two years. We aim to manage both reality and expectations while considering the current macroeconomic environment.

Let me ask it this way. Do you think we're going to be in record territories in 2023?

I think we'll be in record territory in 2023.

It's good to hear. Okay.

For the year, yeah. We're selling out all the things we think will drive demand. The regulatory thing is a big deal. Barry is saying the growth rate of the industry will slow since we had an extraordinary period over the last two years, but we don't expect some decrease in demand for the factors we've mentioned in terms of normalcy. No, we’re very positive about 2023.

If I could throw one more thing in there. The same dynamics that create demand in our industry will still be in effect. We have an aging population. Urbanization continues to grow as people move to cities that we like in Texas, Florida, and the Mid-Atlantic. We also see climate change, which will impact our business, as well as a driver for efficiencies. Those are the four demand creators we've had for the last 30 to 40 years, and they'll continue in 2023.

Great. That's helpful color.

I have to summarize it my way: this extreme growth market environment can't last forever because it's too extreme. But no matter what the market conditions are, we expect to grow. We think there are a lot of tailwinds behind our industry. As a company, we’ve made investments that will ensure growth for many years to come in the long term.

Thank you for clarifying Barry's comment there, A.J.

We should edit that one.

Yeah. Great. Thank you for that.

We're very positive. We're not negative for 2023 or beyond.

Okay. Got it. Okay. As it relates to Barry's comment about SG&A growing in line with sales growth over the past couple of years, given how much of that revenue growth is due to price, is that seen as disappointing at all? Are there some expenses 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.J., Barry, and Rick to comment on that?

Rick? How about Rick?

Morning, Dave.

Good morning.

There are several aspects to consider regarding SG&A. To give some context on the year-to-date situation, a significant portion of the increase in year-to-date SG&A, nearly half, has come from variable categories. We've previously discussed freight, inter-branch freight, commissions, and incentive compensation. These elements tend to self-regulate in a slower growth environment, which we may see in 2023. The more complex issue involves fixed costs. We have made investments to support higher business levels and to drive the market share gains we've experienced over the last two to three years. Now, we need to evaluate those investments to determine where they are beneficial and how we can enhance their profitability and efficiency. Our analysis will not only focus on volume and price, but also on measurable factors such as branches, personnel, trucks, and other elements that operate somewhat independently of inflationary pressures. This is what we referenced in the press release when we challenged our leaders to improve productivity in all of these areas moving forward.

All right. Thanks, Rick. Thanks, everyone.

In other words, we have a great opportunity to get more efficient, and we know it. In the last two years, we were all scrambling, and that cost us a lot. But that scrambling is going to decrease as OEMs catch up. We are still short on high efficiency, and things will normalize. As they normalize, SG&A will normalize to a lower percentage of sales than what it is today, which is our expectation.

I would also add one more thing: on the technology front, we are still young in our internal-facing technologies. We’ve talked about the pricing technology which is more margin-oriented, and that's only been in the hands of the masses in our company for the last 12 to 18 months. We are rolling out additional technology to further optimize warehouses, and we are still very early in our journey in terms of these internal technologies aimed at productivity.

Terrific. Thank you all.

The next question will come from Steve Tusa with J.P. Morgan. Please go ahead.

Hey, guys. Good morning.

Morning, Steve.

Morning.

I guess A.J. needs to help Barry write these press releases from here on out.

Yeah. But it actually works. Now we get to tease Barry for the next several weeks.

Right. That’s right.

You guys mentioned July and you mentioned volatility. What did June look like? Because we've seen the HARDI data and the AHRI data. What did June look like for units for you guys?

Mr. Logan?

I would say the revenue in June was a bit better than the units for the same month. I don't have the specific details, but June was a stronger month compared to the others, and that positive trend has continued into July.

Okay. But the July comment was a unit comment or a dollar comment?

Both.

So, what are you indicating regarding units and dollars for July again?

Well, he doesn't know what it was in units for July. He just knows the dollars.

I'll say carefully. Yes, units were up in June. Al commented earlier that July units were up mid to high single digits.

Yeah. Okay. Got it. All right. That's helpful. On this gross margin commentary, you guys have talked about what's normalized. We can see what happened in the first half and the second quarter. If that's kind of a normalized number that you should trend along, is there a quarter here where the inflationary dynamics change that you would go below that number for a period of time? Will there be continued volatility as we move forward over the next couple of quarters? Would that go below the 27% normalized at some point?

Who wants to handle that?

The obvious answer is we're focused on gross profit. We want to do 27%. We want to do better. Can we predict it? I'm not sure we can, but we feel pretty comfortable on that number going forward or better.

Okay.

There could be ups and downs, but we're very focused on margins. I’d like to speculate and this is pure speculation. My goal is to get it to a 15% EBIT margin eventually.

Got it. And then one last one. Are we close to the end of the OEM's residential equipment price increases?

No.

Yeah, I think we're very close to the end of that as we introduce the new products coming in. Probably in the fourth quarter, we’ll see a price increase then.

Right on the new ones, but not a like-for-like on the existing ones?

No, no.

Don’t forget that half the United States will be unable to sell lower efficiency air conditioners.

Yeah.

That's an inventory trick, but the stuff we will be selling is the new stuff, and they're coming at higher prices. We already know that.

Right. Right. Okay. Great. Thanks a lot, guys. I appreciate it.

All right.

This concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks. Please go ahead.

Well, thanks very much for your continued interest in Watsco. We try to keep our conversations light, but this is a serious leadership team. We hope you have enjoyed our story and continue getting good news 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.