Watsco Inc Q2 FY2025 Earnings Call

Good day, and welcome to the Watsco Second Quarter of 2025 Earnings Conference Call. Please also note that this event is being recorded today. I would now like to turn the conference over to Albert Nahmad, CEO and Chairman. Please go ahead.

Good morning, everyone. Welcome to our second quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President. Paul Johnston, Barry Logan and Rick Gilman. Before we start our normal cautionary statement, this conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the safe harbor provisions of laws. Ultimate results may differ materially for the forward-looking statements. Watsco delivered healthy second quarter results in soft market conditions, I should say, in soft market conditions. 2025 marks a year of significant product transition to next-generation equipment containing A2L refrigerants. The transition affects roughly 55% of our historical product sales. This transition affects our inventories, our supply chain, staffing levels in our branches, and other aspects of our business. Regulatory changes have historically been good for our business and good for our customers; we expect that transition to be no different than what has happened in the past. The changes are substantial and complete, and we'll look forward to operations of a simpler business in 2026. Let me turn to second quarter highlights. Sales declined 4%, like in double-digit pricing gains for the new equipment, offset by lower volumes. We had a late start to the summer season. Sales for residential new construction and international markets remain subdued. On the plus side, Watsco achieved record gross profit margins. Our performance yielded an increase in EBIT and expanded EBIT margins despite lower sales. Our results benefitted from OEM pricing actions, and our pricing technology platform called Pricefx also contributed. Gross margins remain a focus. There is much potential to improve over time. SG&A increased 6% as we incurred extra costs during the transition. We also added 10 new locations from recent acquisitions. Our balance sheet remains solid. We have a strong cash position and no debt. We continue to invest in innovation and technology to separate us from our competitors. Watsco's technology journey began 15 years ago, and we have made terrific progress. For example, e-commerce continues to grow and is now a $2.5 billion business or 34% of our sales. Mobile apps have now 70,000 users and grew 17% versus last year. The annual volume of products sold through OnCall Air, which is our digital selling platform for customer contractors, increased 19% to $1.6 billion. It's a great assist to our customers. But we are not standing still in terms of ideas and making further investments. We are building on or adding new initiatives to drive growth and to delight our customers. Examples include a new technology-driven sales platform being developed to capture larger national customers; we're talking about national customers here. This would be incremental to Watsco's core replacement business and is expected to be launched in 2026. We have accelerated the adoption of our pricing platform, Pricefx in the neighborhood. Our goal is to reach a 30% gross profit margin. We have launched an initiative to grow the parts of the supply segment of our business, which today is roughly 30% of sales and can be much larger over time. Additionally, we launched 2 AI platforms, one internal and one external, to harness our data. Artificial intelligence offers the potential to further transform our customer experience, improve operating efficiency, and create new data-driven growth strategies. This is an exciting time, and these are just a few of the many initiatives underway. Now we will expand on these themes at an investor event in Miami that will occur after temperatures have cooled a bit. Stay tuned for additional details. Finally, we believe our culture of innovation, along with our scale, entrepreneur culture, and capacity to invest are unmatched in our industry. With that, let's turn to Q&A.

And our first question will come from Ryan Merkel with William Blair.

My first question is just on volumes in the quarter were a little bit worse than I was expecting. I know you mentioned weather, A2L, new construction. I would just love to hear from you what happened there? And then more importantly, are you seeing trends improve in July?

I'm going to ask both Paul and Barry to respond to that.

Yes. Revenues did not meet our expectations as we entered Q2. We experienced a varied marketplace where April showed strong performance, but May was particularly weak due to weather conditions in the north. June saw a rebound. Residential new construction is estimated to be down by 15% to 20%, while replacement remains relatively strong. We did not witness significant repair activity at the start of the quarter, but it picked up towards the end and has continued into July, although it hasn't been enough to compensate for the decrease in unit sales.

I mean, on international sales.

Yes, I'll comment on that. One of the exposures we discussed in the first quarter that persisted into the second quarter was related to our international operations, particularly in Mexico. Mexico is likely the most unpredictable market for us. Although it comprises a small portion of our business, it significantly impacts our margins. Mexico was down, costing us about $0.10 per share for the quarter and $0.20 per share year-to-date. However, it showed growth in June and continued to improve in July. So, while it has been a challenging market, it has been performing better over the past couple of months. Regarding July, I would say the situation has improved. August is projected to be even stronger than July based on our expectations. Therefore, while July showed improvement compared to June, we need this positive trend to continue throughout the year. The encouraging aspect is that we can control margins, pricing, and our ability to support new product introductions for our customers. Our solid balance sheet enables us to manage this extraordinary product transition this year. The building of inventories is a customer-oriented strategy to assist them in navigating this market. We have successfully captured new pricing on over half of the products we sell to counter price inflation and establish the right margins. We are satisfied with what we can manage and will remain patient with the factors we cannot control. This may also be more relevant for discussion in 2026. The entire industry, along with every OEM we supply products for, has been navigating an intense product cycle for the past two to three years. We are curious about when this phase will evolve into growth, market share development, and product expansion, as well as the fundamental strategies that we excel in. While this may develop further next year, we are looking forward to it.

Yes. That's fair. Okay. Since you mentioned gross margin, that was the other metric that was really strong this quarter. My sense is it's both price-cost and initiatives. But my question is, I don't want us to extrapolate that 29% into the back half. So just how sustainable that is that was 2Q kind of temporary due to price-cost timing?

Go ahead, Barry.

Yes, I believe there is clearly a mathematical advantage to margins when OEMs increased prices in April and May. Last quarter, we mentioned that OEMs faced some inflationary pressures from tariffs, raw materials, and other factors, in addition to price increases for their new products. The early inflationary pricing this quarter helped enhance our margin. However, this advantage will diminish in the third and fourth quarters. Three years ago, I suggested that 27% would be a minimum benchmark, and I still stand by that. I now expect to achieve at least 27% for the latter half of the year, but we won't see the same pricing benefits in the second half that we had in the first half of this year. My assumption is that our performance will fall somewhere in between, and the market will ultimately determine the outcome. I believe we have a chance to exceed our benchmark, but we won't experience the extraordinary pricing benefits we did this quarter.

That's great. Better than I expected...

Just want to add. I mean, this is A.J. just real quickly. I mean, there is the benefit from the OEM price increases, but also the efforts we're making; our price optimization and the leadership of those teams and the pricing teams, that's also working. So it's a combination of both, but we continue to put points on the board in terms of the pricing efforts that we're taking internally.

Let me add that as we move our product mix, which I mentioned in the opening statements, towards parts and supplies. And that's what we're focused on with our technology. That, by its nature, carries a higher margin than equipment sales. So our product mix, hopefully, sometime later this year or into next year will improve margins as parts and supplies carry a higher margin.

And our next question will come from Brett Linzey with Mizuho.

Maybe just a follow-up on the last point there. So if you could maybe just unpack the year-over-year gross margin contribution. Is there any way to delineate that between the pricing optimization tools versus the parts mix versus some of that raw pricing just in the marketplace in the quarter?

That's an interesting question. Who wants to deal with that?

Yes, Brett, I'll address that. This is Rick. It's a combination of both art and science. When we analyze the quarter and the year, we notice a gross margin enhancement of about 50 to 60 basis points that can be linked to our raw selling margin. Essentially, this refers to the daily operations of a distributor, focusing on our buying and selling prices. Without considering inflation, gross margins would have been in the high 27s, and while inflation plays a role, it cannot be relied upon indefinitely. This pattern has remained consistent over the past couple of years, leading to approximately 200 basis points of gross margin expansion due to our pricing optimization and the integration of more technology in our pricing strategies. It's important to recognize that the pricing complexity in our industry typically favors distributors. Each SKU is priced differently for each customer, and while we aim for optimization, we are far from it. There's still significant potential for improvement. Additionally, during this time, we've gained market share, increasing by about 200 to 250 basis points over the last three years, primarily thanks to technology. This means that our technology initiatives related to margins have not hindered our ability to acquire customers and grow in the market.

That's very helpful. I appreciate that. And then just a follow-up on the cylinder shortage. It sounds like you guys think it abates by the second half. I know some of the peers think it does persist into the second half. So maybe what was the impact, do you think, in the quarter from the shortage situation? And then are you assuming that some of that does carry into H2?

Yes, it's Paul. We experienced an allocation issue with refrigerant. The OEMs responded by overcharging the units to reduce the need for refrigerant during field installations. As our allocations have increased over time, this has become less of a concern. We expect to be off allocation by August. It was definitely frustrating to go through this, but I don't believe it was the main reason the market was slower than expected.

Yes. Just an editorial on that, the like-for-like SKUs that we're selling now, A2L versus the prior is the 10% difference in price and a speed bump on the canisters or refrigerant is that a speed bump. The transition itself, as we look forward, again, to that word serenity I used earlier, we're looking forward to it.

And our next question will come from Tommy Moll with Stephens.

I wanted to start on inventory. Maybe you could characterize for us the investment there versus what you would have expected to need for the transition. Just in dollar terms, is it about what you would have soft circled or maybe a little elevated? Anything you can do to frame that for us? And then also how you think it might trend over the next couple of quarters?

The honest answer is that it's more than we had hoped for. Some of that is due to lower industry demand than we expected. We reached a peak of about $2 billion, but now we are focused on addressing the situation and have already lost $200 million in inventory investment during the third quarter. Our inventory is at $1.8 billion, and as we transition to new products, we need both old and new equipment. We plan to phase out the old equipment before the year ends, which will help reduce inventory investment. It's a challenging time, but I am committed to increasing our inventory turnover.

Yes. On a raw number basis, we had double inventory. We had about 5% of the total inventory was 410A, and then we had the more expensive A2L product in there. So we probably had a 15% rise just between what we had in 410A left over and what we experienced when we have price increase. The balance of it is exactly what Al said, the demand just wasn't there to be able to take the inventory back down that you're going to see come down at the end of the third quarter.

As a follow-up, I wanted to ask about the M&A environment and pipeline. It hasn't gotten a ton of their time lately, but how can you characterize that for us?

That's a very good question. We are eager to see how the owners of distribution businesses in HVAC respond to the current weak market. They might decide to do nothing, maintain the status quo, or consider pursuing mergers and acquisitions. We have established a strong reputation with independent distributors due to our careful approach towards building relationships post-acquisition with existing leadership. While I cannot guarantee that any specific actions will take place, we are hopeful. We have a robust balance sheet that allows us to seize opportunities as they arise. There is one potential opportunity we are evaluating, which seems promising, but it's still under review.

Yes. I would say rest assured, we're having as many of those conversations as we can. We're super ambitious, and you have the balance sheet to support anything you want if we can manage to muster up. So hopefully, it can be an exciting period in M&A.

And our next question will come from David Manthey with Baird.

I was wondering if you had any thoughts on consumer preference during this product transition, like if you are still seeing a premium on the R-410 systems. Additionally, as people are purchasing the A2L, are they leaning towards one end or the other of the good, better, best SEER?

That's an interesting question. I wonder who in our team can respond to that. Paul? Are you the one, Paul? You always are.

Yes. The industry really hasn't popped as far as high-efficiency product. It's still at the entry level. I mean we're at basically using the old SEER rating, we're at above 15 SEER for minimum efficiency. So it's high-efficiency product. We really haven't seen a change in the direction of the industry; it's still very much sliding along the idea that it's going to be whatever the minimum efficiency is. That represents probably 85% of the market. That has not changed. And when you get into the brands that we're selling, the brands have been consistent throughout the year, and they continue to hold steady. We're seeing the Carrier brand and the Rheem brand and the Goodman brands all doing their job and holding up their share of the business. We're not seeing a migration to a lower branded product, no.

And David, just to add to that for the front of it, if I look at brands, products, markets, customers, geographies, north and south east and west, we're selling close to 20 brands in the first half of the year is very consistent amongst that collection of data points. So nothing stands out, Dave. I don't think this has been disruptive to what kind of the baseline products being sold is going on.

Yes. The exciting aspect is OnCall Air. When our customers use the tool we've developed, which we refer to as a sales engine, they tend to sell high-efficiency systems at a significantly higher rate—around 70% or 75% of the time, contractors using OnCall Air are selling these systems. This is impactful because it benefits consumers with a superior product, and it results in larger sales for contractors and for us as well. It’s a win-win-win situation.

It sounds good. My follow-up, it's the first time we've seen other do better than the equipment in a long time. And as Paul said, the Residential New Construction is not helping. I assume all the duct work and thermostats and things in the other category. So should we not read into this that there's a stronger fix versus replace trend this quarter? Or is it, I don't know, commodities or I'm just making this up. Any thoughts on that?

It's pretty small. When you take a look at the entire marketplace, you just take compressors. The normal demand for compressors in the U.S. was about 1.2 million to 1.3 million, and the balance of them go warranty because you have a 5- and 10-year warranty on most of the equipment. If you take a look at the equipment side, it's 7 million to 8 million units. For the offset of a down market on the unit side through additional parts, yes, it's going to help our gross margin. But no, it's not going to help the top line. It's not going to help a revenue line. The ratio is just too great between what parts represent versus equipment. Are we seeing an uptick? Yes, we started seeing an uptick in June, which historically is the month in which you're going to see that up; it's continued into July, but we really haven't seen a radical increase in units. We've seen an increase in dollars more than we have units.

Let's be clear. Our sales for the new quarter are relatively stable, showing only a small, low-digit increase. This does not indicate a significant double-digit growth.

No.

Yes. When we talk about unit growth of compressors and coils year-to-date, it is in the single digits. It was not a significant transition to that. It could be a result of us selling more compressors in the market. Carrier mentioned this directly, referencing conversations with 150 independent distributors. It represents an opportunity to sell more parts, but the wholesale trend is not yet reflected in the numbers.

As somebody mentioned earlier, the M&A, we're very eager to do more M&A. Some kind of opportunities arise when you have these kinds of markets; I'm sure hoping for it.

Our next question will come from Jeffrey Hammond with KeyBanc Capital Markets.

Is this real Al or AI Al?

There's a combination. You have to figure that.

I know that's the real Al. Just to clarify on the flattish sales comment, was that parts for July? Or is that overall?

Overall.

Can you discuss your target for inventory turns? I know you were running at about 4.5 turns a year before COVID and the regulatory changes, but now it seems to be around 3 to 3.5. Where do you see this going and over what time frame?

Well, first of all, let me compliment you on the data. You're right about those turns. I'd like to get to 5 at some point in time, given all the technology we're investing in.

If you think about pre-COVID, we were at 4.5%. We didn't have the technology investment in inventory systems and the management systems that we currently have. So as we come out of it, I think Al's goal of 5 is very attainable.

We have what we call the Dream plan. We may have mentioned it before. Actually, Dream plan 2 because Dream plan 1 was achieved after 3 years of effort and Dream plan 2 is new, and it may take 3 years to do that. Dream plan 2 is $10 billion in revenue, 30% in gross profit margin, and 5x on the inventory turn. And those are the targets that we're focused on.

I remember when it was 10% growth and 10% margins for $100; you guys lost that one.

Believe it or not, that was 20 years ago.

Hell of a history last one here today.

For those in their 20s listening, Jeff is correct. It was 10 and 10 equals 100. We gathered our management team around that idea. Many thought Al was crazy. Clearly, we've surpassed that point some time ago. We reinforced that cultural concept about a year ago and brought everyone together for the initiatives you may not be asking about today, but will as we develop them, which are based on the Dream plan 2 concept. If we had 75 other Watsco core managers on this call, you could ask them about it as well. I know that culturally, these types of things happen, and we enjoy it.

Yes. And culturally, I mean, really, the takeaway is that we're super ambitious, and that's why we're investing in these big goals that we expect to hit in time.

The truth is that we also have an equity culture that really inspires people to achieve and to meet the goals set by senior management, which means what is the equity culture? Many, many employees on Watsco shares either through a 401(k) or through a different stock plans. We like that. We like the ownership culture throughout the organization. It's very unique and it's very extensive. That ownership culture drives their desire to meet goals, I think, and I've always used it; it's been working; and I expect it to continue working.

And our next question will come from Patrick Baumann with JPMorgan.

Maybe I was just curious if you could provide some examples of the large enterprise institutional customers you cite as offering emerging opportunities for growth and what exactly are you doing to go after them?

Sure. Barry?

Go ahead, I would let AJ answer that.

I'll start by mentioning that we've hinted at this in our press release, and we invite you to come to Miami to experience it firsthand. There are macro trends in our industry, particularly with private equity looking to acquire and consolidate contractors. Alongside this, home warranty companies and other institutional customers are emerging. We're seeing multi-location contractors who operate in various states such as Florida, Texas, and Tennessee. Given our size and scale, we aim to become the preferred vendor and the most appealing place for these customers to purchase products. However, we currently lack a unified experience for them to fully utilize our extensive offerings. That's what we're working on with Watsco 1, which will provide a single interface for these institutional contractors to procure the products they need across multiple locations whenever they require them.

Interesting. Do you see selling to larger national account contractors as different, particularly regarding their buying capacity? Is that something you might consider a challenge for your gross margin in the long run?

Of course, that's one of the elements.

I would say yes, but we also have the opportunity to sell many more parts and supplies, which we discussed earlier, have a higher gross margin profile.

Right. That's why I think the answer is not so straightforward, Pat. Today, when we consider those large institutional accounts, we're mainly selling them equipment in large quantities. Expanding that offering means we are taking a customer and increasing the variety of products we sell to them, which typically enhances our margins in the long run.

That makes sense. Okay...

Just Pat, I'm just going to say this again for the more or the front of it. A great home services business you could invest in the last 50 years is Rollins; if you don't know the company, look it up. I mean, technology deployed at Rollins yielded 10% higher EBIT margins for their business over time, right? The question is, in our partnership with any customer of any size, do we have a business model? An ecosystem that can help them grow, help them price products, help them operate their business 24/7. Part of the visibility of what we've done for most smaller contractors, the question is, is that a playable technology for larger accounts and larger contractors? It's not about just selling more stuff; it's about helping any size customer operate their business more profitably through us. Products just happen to be the ones they'll scale with to do that with. This is as much of a technology play as it is a product or any other kind of label you might put on it.

Sounds interesting and exciting. Maybe just switching gears, my next question on the operating cost side. I think you said something in the release about targeting cost efficiencies for the rest of the year. Could you provide any color on, I guess, the 6% growth rate in the second quarter of SG&A expense? You mentioned the cost of the A2L transition. I don't know how that kind of made its way into SG&A, but if you can give color on that? And then can you bend that growth rate in the second half with some of the cost efficiencies you're targeting?

Sure, Pat. I'll start with the 6% growth. In our release, we mentioned that some of this is due to acquisitions and opening new locations, with about 25% of the 6% attributed to that. Core SG&A growth is around 4.5%, which is still higher than expected for a down quarter. This is our starting point to assess the situation. In the daily operations of a branch during a transition, having more inventory requires more staff to manage it, more trucks delivering it, and leads to suboptimal conditions. This transition affected every one of our approximately 650 domestic locations in the U.S., causing inefficiencies in labor and logistics. We believe we can reduce these inefficiencies by the end of the year, and our leadership is currently addressing this. An additional factor that should help is that about 5% to 7% of our inventory consists of 410A products, indicating that we've received most of the new inventory and worked through the old stock. This should allow the branches to return to normal operations and increase efficiency in the latter half of the year.

Yes. Just to say it a little my way, as we sell through 410A products, we need to make sure that we have system matchups that are selling in locations. So there's a lot of transferring products within our network to make sure that we have the right systems in place that are sellable in a market where they are selling, if that makes sense. So there's some extra costs that come into that as well.

And our next question will come from Damian Karas with UBS.

I'm curious how you're thinking about pricing through the rest of the year. On the equipment side, our price is pretty much set for the rest of the year, and you're just going to continue to get that benefit of the higher value mix flowing through top line. Do you foresee any changes on your parts and commodity supplies with respect to price and just thinking about further metals inflation and tariffs?

I don't think on the equipment side, we're going to see a lot of price increases going forward. On the non-equipment side, Friday is copper day; 50% tariffs start on copper. We've already seen about a 10% increase in some of those products that are heavily endowed with copper. So it's just a matter of wait and see on some of the non-equipment type product. I think the equipment is pretty much in place, though.

Understood...

I want to emphasize that we're focusing on costs, specifically the costs associated with our products and equipment. We don't anticipate significant changes from our OEM partners. When it comes to pricing, which reflects what we charge our customers, our tooling and technology allow for varying prices for different customers, products, and regions, which adds complexity but also creates opportunities. Our tooling helps us analyze trends, patterns, and anomalies, enabling us to set appropriate prices across segments. We conduct various pricing strategies that allow us to track the effects of changes in customer pricing, whether it's by segment or specific products. This data informs our decisions to either reinforce those changes or explore further opportunities. Therefore, pricing remains a key area of opportunity, clarifying the distinction between costing and pricing.

Got it. That's helpful. And I know this is never an easy task, but if you had to guesstimate, if you will, how much of a headwind to volumes in the second quarter do you think are attributable to weather and canister shortage versus weaker housing and underlying market demand? I'm just trying to get a sense for what underlying demand might look like as you move past the more transient issues.

Yes. I don't know if...

I don't think the canisters have anything to do with sales in the second half of the year. As far as the refrigerant we received, I think it's going to be what the consumer feels like, what the weather patterns will be, how we're able to react and meet the inventory demands that the consumer or the contractor needs to handle. I think it's just going to be blocking and tackling in the second half.

Yes. I mean I think it's all been said, but this has got to be the noisiest year in HVAC ever between the tariffs and the weather and consumer confidence, the canister shortages, homebuilding changes, and interest rates. Trading homes isn't happening as frequently. I mean there's just so many things going on at macro levels, most of which are out of our control. So it's a lot of noise in the industry, and our job is to win in any environment and emerge bigger, stronger, and more profitable, taking more share from our competitors. I like where we sit in that equation because of our scale, our balance sheet, and our willingness and ability to invest in technology. I'm very, very pleased to be Watsco given all this noise.

And our next question will come from Nigel Coe with Wolfe Research.

I think you mentioned 410A was 60% or thereabouts for the quarter. I'm just curious how that trended or maybe where that's trending right now real time. Any concerns that you're holding too much 410A inventory, just given the demand weakness, or are you confident you'll be done with that transition this quarter?

I'm chuckling because that's very much on my mind and yes, we're doing something about it so that we don't have that risk. Paul, you can answer in some detail if you'd like.

Yes, it's less than 5% of our inventory at the present time. Where we're really working our butts off is to be able to get the right combinations that AJ mentioned before; you've got to have an indoor unit to go with the outdoor unit. As you sell the inventory down, the pond gets lower; you end up with an indoor unit sitting in one city and you end up with the outdoor unit in another. We're putting those pieces together, which is going to be a drag on SG&A with freight for a period of time here. But I think each one of our companies hears about it continuously that we need to reduce, and we need to keep the focus on 410A to get rid of it and focus on selling the A2L product that we've got.

Does that mean you're encouraging the sell-through of that process to make it happen?

That's not how we work; we deal with the market on a decentralized basis, with local decisions made at our various locations.

Nigel, I want to quickly add that the A2L product is progressing very well. We finished the quarter in June with over 80% sell-through of A2L. This is due to the decreasing inventory of 410A and the effective adaptation of contractors to this product, resulting in more than 80% of our sell-through, as you would expect.

Okay. That's a great color. And then my follow-up is what we've seen from you and from your suppliers is tremendously strong price holding, which is good news, but obviously, volumes are incredibly weak. What are you hearing from your contractors? Are they asking for some incentives here to try and stimulate some movements? Or are they content to just wait for rates to turn and perhaps demand picks up? Are you starting to get more inbounds on price reductions, discounts, or incentives?

I don't think we're really getting a lot of feedback on getting lower prices in the market. There's no elasticity to this market. If we drop the price, 2% or 3%, it's going to stimulate a 10% or 12% increase in volume; it isn't going to happen. The contractor always wants the lowest price, the best price in the marketplace, so they can compete fairly. But I don't think we're getting a lot of pushback right now from most of the contractors on the price.

And our next question will come from Sam Snyder with North Coast Research.

Looking forward for an excuse to come down to Miami paid for by my...

You did hear it loud and clear, right.

Yes.

Let's wait for it to cool down. I will welcome you when you come.

I wanted to follow up sort of on the same topic, but any sort of sizable shift to R-32 based systems? And if so, is that a temporary thing or more permanent in your view?

That's only 1 manufacturer. Daikin, which we represent very proudly with our Goodman and Amana alliance is R-32; the rest of the industry is 454. We've seen excellent response from Daikin to help us with the 32. There hasn't been a shortage of 32. When you get into the 454, it's been Carrier, Rheem, and American Standard; all of them sell 454 units. I would remind everybody that 454 is roughly 70% R-32. It's a blend of 32 plus 1234yf.

And our next question will come from Chris Dankert with Loop Capital Markets.

I guess circling back to Watsco 1, you guys sound excited. It sounds like it is a pretty big opportunity. Is there any way to get a bigger than a bread box sense here? I mean, are we talking about serving 500 customer locations, 5,000? Or is it too early to kind of get into that type of scaling?

A better way to approach this is to consider our existing sales of parts and supplies. I'm hesitant to speculate too much, but we should look at potential margin improvements. This segment represents a significant portion of our business, accounting for 30% of $7.5 billion. While I won't speculate on how much we could improve our margins, any percentage gained from that figure would be substantial.

Makes sense. And I guess maybe just to touch on the AI a little bit here. Can you give us maybe some examples of what the use cases are for Ask.Watsco internally? How is this kind of helping your associates? Is this inventory positioning? Is it warranty data? What's the real use case here?

There are so many. How much time do we have? It's helping marketing folks design, content and publish content. It's helping our software engineers write code and publish and push more technology faster. It's helping our business unit leaders and their teams sort through data and understand trends, patterns, and anomalies. It's helping our customer service folks get through more cases more quickly with more accurate answers and therefore, helping our customers at a greater scale or greater rate, increasing customer satisfaction. I can go on and on and on. Like I can be said in the press release, there are about 2,100 people a week internally who are using these tools; the way they are using it are more and more creative and fast.

Next question comes from Chris Snyder with Morgan Stanley.

I wanted to follow up on the 410A in inventory. I think you guys had, was less than 5% of your inventory. Do you have any sense for what that number could look like across your distributor competitors?

No. I don't think we really have any good intelligence on that.

We try not to focus on that; it's not significant. However, it's being phased out. We don't really care.

Chris, there are a couple of data points. I mean, I think one peer of ours that also distributes the product gave a data point on that in terms of what their sell-through is, and it was pretty high. The other data point, these are all anecdotal. This is not science. It's aggregating anecdotes is when we are talking to M&A targets, what do they tell us about their philosophy and their positioning. As a reminder, most of the stuff was built prior to December 31 and shipped in the first quarter. Someone would have to make a pretty big bet on inventory and would have to really leverage their balance sheet to do that. Our sense, just by having these conversations in the channel with the M&A targets is that they're largely phasing out of 410A at about the same pace we are.

I appreciate that. If I could maybe follow up on a different sort of inventory question. I guess it's kind of surprising that volumes remain down materially. It seems like in July with the weather picking up. Does that change the way you guys think about how much inventory is downstream at your customers? Could they have been holding extra stock? And perhaps that's why the sell-through has been softer?

I would say some of the bigger contractors may have some inventory. Inventory at the contractor level is not really material to our industry. It's being held at the distribution point, not at the contractor point. So I don't think it's a big deal with the contractor. And I would also remember that in Florida, it's either hot or hotter. It's not just hot all the time. So we have not had a cold summer down here. We have not had a cold summer in Texas, where the weather really impacts us is up North, where you've got a chance out of every third year that you're going to have a hotter-than-normal summer or a normal summer or a lower than normal summer. We are definitely seeing a lot of regional differences in the volume based on weather. But in the South, we're not seeing much movement because it's hot in Florida or hot in Texas; it's always hot.

And this concludes the question-and-answer session. I'd like to turn the call back over to Albert Nahmad for any closing remarks.

Well, thank you for your interest. I'd love the questions; that shows a lot of interest and I hope we've answered your questions fully. If not, please contact us on your own, and we will respond to whatever questions you may still have. Other than that, we look forward to having you visit us in the cold months that are coming, and we'll give you more detail. Thank you. Bye-bye.

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