Good day, and welcome to the Watsco Second Quarter of 2025 Earnings Conference Call. [Operator Instructions] 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 and a soft market conditions, I should say, in soft market conditions. 2025 marks a year of significant product transition to next-generation equipment containing A2L refrigerants. The transition affects roughly 55% of our historical product sales. This transition affects our inventories, our supply chain, staffing levels in our branches and other aspects of our business. Regulatory changes have historically been good for our business and good for our customers we expect that transition to be no different than has happened in the past. The changes are substantial and complete, and we'll look forward to operations of simpler business in 2026. Let me turn to second quarter highlights. Sales declined 4%, like 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 benefited from OEM pricing actions our pricing technology platform called Pricefx also contributed. Gross margins remain a focus. There is much potential to improve over time. SG&A increased 6% as we incurred extra cost during the transition. We also added 10 new locations from recent acquisitions. Our balance sheet remains solid. We have a strong…

[Operator Instructions] And our first question here 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. 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 were not as strong as we anticipated going into Q2. What we saw was a kind of a lumpy picture in the marketplace where April came in strong, May ended up being very weak, mainly because of the weather patterns in the north. And then in June, they came back again. And it was pretty much -- RNC is probably -- our new construction -- Residential New Construction is probably down 15% to 20%. Replacement is still holding fairly strong. We didn't really see a lot of repair in the beginning of the quarter, which we saw towards the end of the quarter and continues into July but not enough to offset the unit sales that were certainly down.

I mean, on international sales.

Yes, I'll comment on that. Also on one of the exposures we talked about in the first quarter that repeated itself in the second quarter was our international, which is Mexico. Mexico is probably the most volatile market. It's a small part of our business, but a big contributor from a margin point of view. But Mexico was down -- well, let's put it this way, it cost us about $0.10 a share in the quarter, $0.20 a share year-to-date. And June, it grew and July, it's grown since then. So I'll take kind of 1 market that's been irritating, which seems to be a lot better in the last couple of months. As far as July goes, Ryan, I would say it's better. August is bigger than July in our forward-looking commentary. So if I say that the July is better than what we saw in June, that's okay, but it needs to extend itself and extrapolate itself as the year goes on. The good news is that, in general, what we can control is margin, pricing and wherewithal of our business to support all these new products in the market with our customers. I'm glad we have our balance sheet to do that with because it's been a pretty extraordinary product change this year. You can see the building of inventories, that's a customer-focused effort to help our customers get going in this market. The margin speaks to capturing new pricing on, as we say, over half the products we sold -- we sell, we had to capture price inflation since that price and get off on the right track in margins. And needless to say, that's been accomplished. So we like what we can control. We'll be patient about what we can't control. And I think also, maybe this is more of a 2026 discussion. But the entire industry, every OEM we sell products for have been through an extreme product cycle probably for the last 2 or 3 years. And at what point does that serenity play itself out in terms of growth and market share development and product expansion, the blocking and tackling that I think is particularly good for us and that we're good at. So maybe that's more of a next year event, but we're kind of looking forward to it, quite honestly.

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 think there is obviously an algebraic benefit to margin when OEMs raised prices in April and May, we talked last quarter that OEMs had face some inflationary realities going on with tariffs and raw materials and so on, on top of the like-for-like price increase on the new product, they introduced inflationary pricing early in the quarter. That clearly helped build a bigger margin this quarter. And the benefit of that kind of slides off into the third quarter and fourth quarter. But I'm the one that probably, 3 years ago, talked about 27% as a floor, as a benchmark, and I stand by that obviously. And if I say now 27% plus, I would expect that for the last half of the year, but we won't have the benefit of those pricing actions that you see in the first half of this year. So somewhere in between would be my conjecture and the market will play out and determine what it is. But so I think we have a chance to beat our benchmark and -- but not have the benefit that we saw as extraordinarily this quarter in terms of pricing.

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 to as parts and supplies carry 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 take a stab at that. This is Rick. This is directional because there's a lot of art and a lot of science to this as well and -- but it's not all science. So when we look at the quarter, there was -- and when we look at the year as well, pretty consistent, there's about 50 to 60 basis points gross margin enhancement that we can attribute to that raw selling margin, which is basically the day-to-day job of a distributor in the market is what are you buying for and what are you selling for? And so gross margins would have been in the high 27s absent any of that inflation and the inflation helps, but it's not something that you can underwrite perpetually, obviously. So that's what it's amounted to. By the way, that's been pretty consistent. If I look back maybe 2 or 3 years in the data. We've been at that -- we can aggregate and say that there's been about 200 basis points of gross margin expansion attributable to this pricing optimization and bringing more technology to how we price. Keep in mind that the complexity of price in the industry is something that generally benefits a distributor. What I mean by that is that virtually every SKU has a different price to every customer. And so to imagine that we are optimized, well, it's the opposite we're far from optimized. And that's why we think there's so much room still to go. And oh, by the way, just to finish the thought is that during that period of time, we've also gained market share. We have about 200 to 250 basis points of incremental market share over that 3-year period, if I measure it. So that's mainly attributable to all the technology. And my point there is that everything that we're doing on the technology side with margin has not borrowed from customer acquisition and market growth at the end.

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, I think -- it's Paul, what we had was we had a an allocation situation where we were being allocated refrigerant. What the OEMs did was they came through and did an overcharge in the units so that they didn't require as much field installation type refrigerant. And so it was -- it's become less and less of a concern as time goes on as our allocations continue to increase. We feel good that sometime in August, we should be off of allocation. And I think it's -- it was very irritating. It was very disturbing that we had to go through that. But I don't think that really is the total cause of why the market was slower than what it was.

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. And so 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?

Well, the honest answer is that it's more than we had hoped for. And some of that is because we expected not to have the unusual demand -- industry demand the lower industry demand. So we peaked at about $2 billion, but we are now very focused on what to do about it, and we've lost in terms of inventory investment, $200 million so far in the third quarter, we're down to $1.8 billion plus this transition on product, you have to have the old and you have to have the new on the equipment side, and we'll transition out of the old before the end of the year, and that will help reduce the inventory investment. That's a very good question. I'm very dedicated to increasing our inventory turn. And it's been a rough time to do that, but I think that.

Go ahead.

Yes. On a raw number basis, we had double inventory. We had about 5% of the total inventory was 4.10%, and then we had the more expensive A2L product in there. So we probably had a 15% rise just between what we had in 4.10% 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, 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, eager to see what owners of the distribution businesses in HVAC are going to do with this existing very soft market. They may do nothing. They may continue or they may say, well, now it's time to do something in terms of an M&A. And of course, we have a great reputation with independent distributors because the way we treat sellers, we're very careful about relationship build continuing post-acquisition with the existing leadership in the business acquired. So I can't say it's going to happen, but I'm sure hoping we have a very, very strong balance sheet. We could take advantage of opportunities as they come that I cannot -- I can only tell you that, well, I can't disclose it, but there is one that we think without disclosing much more than that, that is upside, and we'll see how that turns out. It's still under study.

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 -- are you continuing to see a premium on the R-410 systems? And then as people are buying the A2L, are they gravitating to 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. So we really haven't seen a change in the 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. And that represents probably 85% of the market. That has not changed. And then 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, and 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. And I don't think this has been disruptive to what kind of the baseline products being sold is going on.

Yes. The exciting anomaly though, and I think it's in our press release is on call here. When our customers are using the tool that we've created for them, which we call a sales engine, they are selling high-efficiency systems at a much higher rate, like the inverse amount, meaning I think it's like 70% or 75% of the time a contractor selling -- using OnCall Air, they're selling high-efficiency systems. So when we can help influence that through that tool, that's powerful because the consumer gets a better product, those contracts or make a bigger ticket as do we. So it's a win-win-win.

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 a 10-year warranty and most of the equipment. If you take a look at the equipment side, it's 7 million to 8 million units. So 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 not mislead either. Our sales in the new quarter are not -- they're pretty flattish, small incremental low-digit increase. They're not -- It's nothing -- does not signify a major double-digit increase yet.

No.

Yes. When we talk about unit growth of compressors and coil, things like that, year-to-date is single digit. It's not -- it was not an avalanche of transition to that. It could be us just selling more compressors in the market. I think you heard Carrier talk yesterday very directly about that. And they're talking to 150 independent distributors when they're answering your question to that. So it's obviously an opportunity to sell more parts, but the wholesale trend is not something that I think is quite in the numbers yet.

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 kind 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.

And then just on -- back to inventories, can you just maybe talk about where you want to ultimately get your turns to? I know you were kind of running 4.5 turns a year, pre-COVID and pre all these regulatory changes and now you're kind of 3 to 3.5. And kind of where you see that happening 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 I'm not going to put a time limit on this, but I'd like to get the [ 5 ]. At some point in time, given all the technology we're investing in it, I'd like to get the [ 5 ].

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 that's the -- those are the targets that we're focused on.

I remember when it was 10% growth in -- and 10% margins for $100 [indiscernible] you guys [ lose you ] that one.

Believe it or not, that was 20 years ago.

Hell of a history last one here today.

For those 20-something-year-old listening to us, Jeff is right. It was called it it's called 10 and 10 equals 100. We got our management team together and rallied around that. Many of them thought Al was out of his mind. And obviously, we've blown past that some time ago. So we reinstituted that cultural kind of concept about 6 months ago, actually a year ago and got everyone together in some of the initiatives that you're not asking about today that you will ask about as we develop them is built on that Dream plan 2 concept and if we got -- had 75 other Watsco core managers on this call, you would be able to ask them about it, not just ask us. I just know that culturally, those kind of things go on and we have fun with 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.

And 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. And we like that. We like the ownership culture throughout the organization. It's very unique and it's very extensive. And so that ownership culture drives their desire to meet goals, I think, and I've always used it, and 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 like and what exactly are you doing to go after them?

Sure. Barry?

Go ahead, I would let AJ answer that.

I'll jump in first. And we teased some of this in our press release and also teased that we want you guys to come down in Miami and spend time with us and see it and hear it and feel it more succinctly, but it's -- there are macro trends going on in our industry, including private equity trying to buy up and consolidate contractors. And between that and home warranty companies and other institutional type customers, they're emerging and have emerged, I would call it multi-location contractors you may have some business in Florida, some in Texas, some in Tennessee, you name it. And with our size and scale, we should be able to -- we should be the preferred vendor, we should be the most exciting place for them to buy product, but we don't necessarily have a unified experience for them to take advantage of our whole offering and our whole scale. And that's what we're building. We call it Watsco 1, and it'll be exactly that. It will be 1 interface for these large institutional-type contractors to buy and secure the products that they need for many of our locations whenever they need it.

Interesting. Is..

It doesn't -- this is a huge, huge undertaking. It doesn't sound that way just using words. But we are a very decentralized system. And to aggregate to meet -- to aggregate our inventories and our pricing systems and all our support systems to meet the needs of large national customer. That is -- it takes a lot of initiatives, and we're investing to compare all those tools to do that, but it should have a very significant impact once we've accomplished it. Because no one else has these capabilities.

A follow-up to that. Would you see selling to like a larger national account contractor, any different than -- I guess, you said it is. But like in terms of like they're buying capacity, is that something that you would see as a headwind for your gross margin over time?

Of course, that's one of the elements.

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

Right. That's why I think it's not so -- the answer is not so linear, Pat. It's because today, when we look at those big institutional-type accounts, we're largely selling them equipment and we're selling them equipment in bulk. And so to broaden that offering means we're taking all else equal, we're taking a customer and broadening the mix of products we sell them and that's generally accretive to margin at the end of the day.

That makes sense. Okay...

Just Pat, I'm just going to say this again for the more or the front of it. I mean, 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? So 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. So 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? And it's not about just selling more stuff, it's about helping any kind of size customer, operate our business more profitably through us. Products just happen to be the ones they'll scale with to do that with. So 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, one, the 6% growth rate in the second quarter of SG&A expense. You mentioned 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 take a stab at the -- so first, let's take -- let's start with the 6%. And we said in the release that we made some acquisitions. We've opened some new locations. So about 25% of that 6% is attributable to that. So you can think of core SG&A growth, if we call it that, more in the 4.5% range, which is still higher than it should be in a down quarter, but that's kind of our starting point as we think about it. And then when you think about just the day-to-day life in a branch during a transition, if we have more inventory, it means that we've received more inventory. It means you need more people receiving that inventory it means that you have more trucks coming to your locations. It means that you're not optimizing what you have. It's not business as usual in the day-to-day life of a branch during such a large-scale transition and to underscore something we said earlier and mentioned in the release, this impacted every domestic location we have in the U.S., about 650 of them. So that's where there was some inefficiency as I would say, in the labor and the logistics side. And do we think we can bring that down and bring it more into balance in the end of the year? The answer is yes. Our leaders are working on that right now. One of the things that should naturally help that is that when we look at our inventory today, about 5% to 7% of that inventory is 410A product, which means we've largely received all the new product we're going to get. And we've largely worked out of all the old stuff, and that means that the branch can get back to kind of its routine and should be a little bit more efficient in the back 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. And 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 nonequipment 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 would just say let's just make sure when we I think what we're talking about is costs. We're getting cost -- the cost of our products and our equipment products. I don't think we're expecting much change from our OEM partners. But on price, meaning our price to our customers, that's what the tooling and the technology enables is because every different customer has a different price on every product we sell in every region in every market, that complexity is opportunity because with our tooling, we can study where there are trends and patterns and anomalies and outliers and segments that should be priced appropriately. And so we run different icon plays where we can measure and track when we make a change in a customer's price or a customer segmentation price or a cohort of customers pricing on different products. We can take that to market. We can measure and track and we can see the impacts and either double down or go on to the next place. So pricing will always be opportunity just to clarify the costing versus pricing.

Got it. 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 are going to be like, how we're able to react and meet the inventory demands that the consumer need or that the contractor needs to handle the consumer 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 and the canister shortages and the homebuilding changes and interest rates and 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 and stronger and more profitable and take more share from our competitors, and that's -- I like where we sit in that equation because of our scale, because of our balance sheet, because of 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. And any concerns that you're holding too much 410A inventory, just given the demand weakness and -- 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. And Paul, you can answer in some detail if you'd like.

Yes, it's less than 5% of our inventory at the pleasant 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. And 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. So 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 hear about it continuously that we need to reduce and we need to keep the focus on 410A, get rid of it and focused in on being able to sell the A2L product that we've got.

Does that mean that -- sorry. Does that mean you're incentivizing that sell-through of that -- sorry, sorry for cutting off there, but does that mean you're incentivizing that process to make that happen?

That's not how we work -- we deal with the market on a decentralized basis -- those are local decisions made the locations that we have.

And Nigel, I would just add to -- just to add very quickly in terms of the progression of A2L, it's progressing very, very well. I mean we ended the -- we exited the quarter in June with more than 80% sell-through the A2L product. And so that's a function of obviously diminishing inventory of 410A. It's also a function of contractors transitioning and adapting well to the product. at this point, it's greater than 80% of our sell-through, as you'd 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, price is 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 or discounts or incentives?

I don't think we're really getting a lot of feedback on getting lower prices in the market. There's not elasticity to this market. If we drop the price, 2% or 3%, it's going to is going to stimulate a 10% or 12% increase in volume. It isn't going to happen. So I think 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.

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 close down. That was -- well, welcome you when you're coming.

Yes. No. So look, just focusing on the mix shift, which seemed to benefit margin. on parts. I was wondering if the shift was in part at all due to the canister shortage where you have people do more repairs for the time being?

Most of the canister shortage occurred in the first and the first and the second quarter. And it was something that we worked our way through. We made it through it. Now as I said, we're seeing a lot more inventory coming in. It's going out as quickly as it comes in. I see it stopping sometime in early August. Early August is, what, 2 weeks away? So I don't think it's really playing on demand right now as heavily as it was before. I don't see any bubble happening on repair versus replace because of canisters.

Got it. Okay. And then just a real quick 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. So what we've seen is we've seen excellent response from Daikin to be able 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, American Standard all of them sell 454 units. And I would remind everybody that 454 is roughly 70% R-32. It's a blend of 32 plus 1234yf.

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

I guess circling back to Watsco 1, you guys sound excited a sound that it was 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?

Well, maybe a better way to approach is what is our existing sales of parts and supplies. And where do we think we can -- I don't want to speculate too much. What kind of margin improvement do we think we can get from that. It's a very big chunk of our business, 30%, 30% of $7.5 billion. How much of that could we improve our margins on I'm not going to speculate, but there will be an improvement -- you take any percent of that number and it's meaningful.

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? I mean how is this kind of helping your associates? Is this inventory positioning? Is it warranty data? What's the real use case here?

There's 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 and patterns and anomalies. It's helping our customer service folks get to more -- get through more cases more quickly with more accurate answers and therefore, helping our customers at a greater scale or greater rate and increasing customer satisfaction. I can go on and on and on. And like I can be said in the press release, there's about 2,100 people a week internally who are using these tools or the tool and the ways that they're using it are more and more creative and fast

So I mean, really is holistic then.

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.

And we try not to figure that. That's irrelevant. But we -- it's being phased out. We don't really care.

Yes. Chris, there's a couple of data points. I mean I think 1 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. And as a reminder, most of the stuff was built prior to December 31 and shipped in the first quarter. So someone would have to make a pretty big bet on inventory and would have to really leverage their balance sheet to do that. And so 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. And 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 -- it's not just hot all the time -- so we've not had a cold summer down here. We've not had a cold summer in Texas, where the weather really impacts us is up North, where we've got 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. And so we are definitely seeing a lot of regional differences in the volume based on weather. But in the South, we're not really 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 and that shows a lot of interest and I hope we've answered your questions fully and if not, please contact us on your own, and we will respond to whatever questions you may still have. And 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.