Core Insights - Watsco, Inc. will hold an investor meeting on December 11, 2025, to discuss its technology and growth strategy [1] - The company has transformed the HVAC/R distribution landscape through advanced technologies, enhancing customer experience and gaining market share [2] - Watsco is focused on sustaining its competitive advantage in the $74 billion HVAC/R distribution market through new platform launches and investments [3] Company Overview - Watsco is the largest distributor in the fragmented $74 billion North American HVAC products market, achieving an 18% compounded annual total-shareholder return since 1989 through organic growth and acquisitions [4] - The company has a solid financial position and a culture of innovation, enabling long-term growth investments, including industry-leading technology platforms [5] Technology and Innovation - More than 70,000 contractors, installers, and technicians engage with Watsco's platforms, leading to improved growth and lower attrition [5] - The company is advancing AI-driven initiatives to leverage extensive data assets, enhancing customer experience and operational efficiencies [5]

Core Points - Watsco, Inc. will host its third quarter 2025 conference call on October 29, 2025, at 10:00 a.m. EDT, with prepared remarks followed by a Q&A session [1] - The earnings results will be released before the market opens on the same day, and a replay of the conference call will be available on the company's website [2] Company Overview - Watsco is the largest distributor in the $74 billion North American HVAC market, achieving an 18% compounded annual total-shareholder return since entering distribution in 1989 through strong organic growth and over 70 acquisitions [4] - The company has a solid financial position and a culture of innovation, enabling investments in long-term growth and industry-leading technology platforms, engaging over 70,000 contractors, installers, and technicians [5] - Watsco is advancing AI-driven initiatives to leverage extensive data assets, enhancing customer experience and improving efficiencies, positioning the company to capture market share as contractors adopt digital tools and data-driven solutions [5]

Core Insights - Peter Lynch, a legendary fund manager, achieved an annualized return of 29.2% while managing the Fidelity Magellan Fund from 1977 to 1990, growing it from $18 million to $14 billion [5][6]. - Lynch emphasizes the importance of understanding what one is buying and suggests that investors should write down their reasons for purchasing a stock before buying it [7][10]. - He warns that the real danger in investing is not market volatility but being scared away by it, noting that the average stock on the NYSE experiences a 100% annual volatility [8][9]. Investment Philosophy - Lynch's key investment principle is to know what one is buying; if an investor cannot explain their investment to an 11-year-old in a minute, they should not buy it [10][81]. - He believes that successful investing is not about predicting the future but understanding the present and relying on diligence, common sense, and real-world observation [13][110]. - Lynch advises investors to write a script before buying stocks, detailing why they are buying and why the stock is undervalued [84][91]. Market Insights - Lynch acknowledges the current high valuations in the market, with the S&P 500 trading at a 22x P/E ratio, which he does not consider catastrophic [11]. - He expresses skepticism about the AI hype, stating he has not invested in any AI stocks and only recently learned how to pronounce "Nvidia" [10][161]. - Lynch reflects on the market's tendency to overlook companies that are undervalued or in distress but have potential for recovery, suggesting that these can be lucrative investment opportunities [170][171]. Personal Experience and Lessons - Lynch shares his journey from being a caddy to becoming a successful analyst at Fidelity, highlighting the importance of real-world experience in understanding investments [32][39]. - He recounts the pressure of managing funds for many American families and how he navigated market downturns by maintaining confidence in his investments [22][24]. - Lynch emphasizes that ordinary investors can succeed by applying diligence and common sense, rather than relying solely on complex models or predictions [172][174].

Group 1 - The residential HVAC market is experiencing significant changes, with various updates from OEMs and industry data indicating cross currents in the market [1] - There is a historical context regarding the transition from refrigerant 410A, which is being phased out, leading to inventory adjustments by distributors to meet customer demand [2]

Summary of Watsco Inc. Conference Call Industry Overview - The HVAC industry is experiencing significant changes, particularly with the transition from 410A refrigerant to newer alternatives like 454, impacting sales and inventory levels [6][41] - Industry shipments were up 22% in July of the previous year, but the current year shows a decline in demand, with units down approximately 10-12% year-to-date [6][12] - The demand structure has shifted, with new housing construction and multifamily projects seeing a decline, particularly in Florida, which constitutes 20% of Watsco's business [18][19] Company Performance - Watsco Inc. reported a 24% increase in inventory while sales were down 4% in the second quarter [25] - The company is focused on managing inventory levels to align with current market demand, aiming to reduce inventory by the end of the year [29] - The average price of products sold has increased by about 12%, contributing to stable margins despite declining unit sales [18][29] Key Challenges - The company faces challenges related to consumer spending, with indications that consumers are less willing to invest in home improvements, leading to a preference for repairs over replacements [21][22] - There is a concern about the cyclical nature of the business, with the current environment suggesting a potential trough in consumer activity [23] Strategic Initiatives - Watsco is working closely with OEM partners to develop strategies for growth, leveraging their market share and capital to support OEMs in expanding their business [28][71] - The company is focused on maintaining price stability and protecting margins while navigating the complexities of inventory management and product transitions [17][20] Future Outlook - The company anticipates a more favorable environment for growth in the upcoming year, contingent on improved economic conditions and consumer confidence [22][71] - Watsco's long history of dividend payments, averaging a 10-11% compounded rate over the last 15 years, is tied more to cash flow than EPS, allowing for flexibility in dividend increases even in a down market [63][69] Additional Insights - The transition from 410A to newer refrigerants has created an artificial writedown risk for distributors holding excess inventory, but Watsco has managed this risk conservatively [41][42] - The light commercial segment remains stable, with potential for growth depending on economic conditions and interest rates [48][50] - Watsco's extensive branch network allows for efficient inventory management, reducing the need for dealers to hold excess stock [52] This summary encapsulates the key points discussed during the conference call, highlighting the current state of the HVAC industry, Watsco's performance, challenges, strategic initiatives, and future outlook.

Company Overview - Watsco operates the largest distribution network for heating, air conditioning, and refrigeration (HVAC/R) products across the U.S., Canada, Mexico, and Puerto Rico, with exports to Latin America and the Caribbean [2] - The company has 701 locations that serve over 375,000 contractors, technicians, and installers annually [2] Market Focus - Watsco focuses on the replacement market, which is growing due to aging systems, the introduction of energy-efficient models, and the essential nature of HVAC products in homes and businesses [3] - Approximately 102 million HVAC systems in the U.S. are over 10 years old and operate below current efficiency standards, presenting a significant opportunity for Watsco [3] Environmental Impact - Watsco has contributed to reducing CO2e emissions by an estimated 24.5 million metric tons from January 1, 2020, to June 30, 2025, through the sale of higher-efficiency replacement HVAC systems [4] - This reduction is equivalent to removing 5.7 million gas-powered vehicles from the road annually [4] Upcoming Events - Barry S. Logan, Executive Vice President of Watsco, is scheduled to present at the 13th Annual Morgan Stanley Laguna Conference on September 11, 2025 [1]

Core Insights - Watsco's international revenue performance is crucial for assessing its financial resilience and growth prospects [1][2][3] Group 1: International Revenue Performance - In the last quarter, Watsco's total revenue was $2.06 billion, a decline of 3.6% year-over-year [4] - Canada contributed $93.71 million, representing 4.5% of total revenue, which was a surprise of -3.83% compared to the consensus estimate [5] - Latin America and the Caribbean generated $94.35 million, accounting for 4.6% of total revenue, with a surprise of -16.51% against projections [6] Group 2: Future Revenue Projections - Analysts expect Watsco to report $2.21 billion in total revenue for the current fiscal quarter, an increase of 2.3% year-over-year [7] - For the full year, total revenue is projected at $7.64 billion, reflecting a 0.3% increase from the previous year [8] - Expected contributions from Canada and Latin America and the Caribbean for the full year are $370.31 million (4.9%) and $404.53 million (5.3%), respectively [8] Group 3: Market Dynamics and Stock Performance - Watsco's reliance on foreign markets presents both opportunities and challenges, necessitating close monitoring of international revenue trends [9] - The company's stock has underperformed, losing 12.6% over the past month compared to a 2.7% increase in the S&P 500 [14] - Over the past three months, Watsco's shares declined 16.5%, while the S&P 500 rose by 13.2% [14]

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Condensed Consolidated Unaudited Financial Statements](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) This section presents Watsco, Inc.'s condensed consolidated unaudited financial statements, including statements of income, comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes [Condensed Consolidated Unaudited Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Income) Condensed Consolidated Unaudited Statements of Income (Q2 & H1 2025 vs 2024, in thousands) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | :------ | :------ | | Revenues | $2,062,442 | $2,139,328 | $3,593,528 | $3,704,319 | | Cost of sales | $1,458,954 | $1,559,568 | $2,560,417 | $2,693,934 | | Gross profit | $603,488 | $579,760 | $1,033,111 | $1,010,385 | | Operating income | $271,869 | $268,803 | $384,057 | $395,340 | | Net income | $216,768 | $214,651 | $311,308 | $318,913 | | Net income attributable to Watsco, Inc. | $183,613 | $181,410 | $263,674 | $268,414 | | Basic EPS | $4.53 | $4.50 | $6.52 | $6.71 | | Diluted EPS | $4.52 | $4.49 | $6.50 | $6.69 | [Condensed Consolidated Unaudited Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Comprehensive%20Income) Condensed Consolidated Unaudited Statements of Comprehensive Income (Q2 & H1 2025 vs 2024, in thousands) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | :------ | :------ | | Net income | $216,768 | $214,651 | $311,308 | $318,913 | | Foreign currency translation adjustment | $15,770 | $(3,336) | $16,018 | $(11,336) | | Comprehensive income | $232,538 | $211,315 | $327,326 | $307,577 | | Comprehensive income attributable to Watsco, Inc. | $193,971 | $179,110 | $274,196 | $260,575 | [Condensed Consolidated Unaudited Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Unaudited%20Balance%20Sheets) Condensed Consolidated Unaudited Balance Sheets (June 30, 2025 vs Dec 31, 2024, in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :---------------- | | **ASSETS** | | | | Cash and cash equivalents | $292,978 | $526,271 | | Short-term cash investments | — | $255,669 | | Accounts receivable, net | $1,015,738 | $877,935 | | Inventories, net | $1,952,842 | $1,385,436 | | Total current assets | $3,299,718 | $3,079,981 | | Total assets | $4,729,513 | $4,479,523 | | **LIABILITIES AND SHAREHOLDERS' EQUITY** | | | | Total current liabilities | $1,070,916 | $983,901 | | Total long-term obligations | $338,669 | $337,190 | | Total Watsco, Inc. shareholders' equity | $2,760,442 | $2,656,990 | | Total shareholders' equity | $3,221,819 | $3,064,238 | [Condensed Consolidated Unaudited Statements of Shareholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Shareholders%27%20Equity) Key Changes in Shareholders' Equity (H1 2025 vs 2024, in thousands) | Metric | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | | Net income | $263,674 | $268,414 | | Other comprehensive income (loss) | $10,522 | $(7,839) | | Dividends declared and paid on common stock | $(230,497) | $(205,568) | | Share-based compensation | $18,900 | $18,857 | | Total Shareholders' Equity (End of Period) | $3,221,819 | $3,044,190 | [Condensed Consolidated Unaudited Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Cash%20Flows) Condensed Consolidated Unaudited Statements of Cash Flows (H1 2025 vs 2024, in thousands) | Metric | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | | Net cash (used in) provided by operating activities | $(185,090) | $161,441 | | Net cash provided by (used in) investing activities | $222,252 | $(217,315) | | Net cash (used in) provided by financing activities | $(274,233) | $73,810 | | Net (decrease) increase in cash and cash equivalents | $(233,293) | $14,742 | | Cash and cash equivalents at end of period | $292,978 | $224,854 | [Notes to Condensed Consolidated Unaudited Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) [1. BASIS OF PRESENTATION](index=10&type=section&id=1.%20BASIS%20OF%20PRESENTATION) Watsco, Inc. is the largest HVAC/R distributor in North America, incorporated in Florida in 1956, with financial statements prepared under U.S. GAAP, reflecting seasonal sales and equity method investments - Watsco, Inc. is the **largest distributor of air conditioning, heating, and refrigeration equipment and related parts and supplies (HVAC/R) in North America**[22](index=22&type=chunk) - The condensed consolidated unaudited financial statements include Watsco and its wholly owned subsidiaries, five U.S. joint ventures (80% controlling interest) and one Canadian joint venture (60% controlling interest) with Carrier Global Corporation, and a 38.4% equity method investment in Russell Sigler, Inc. (RSI)[23](index=23&type=chunk) - Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal, with demand for AC highest in Q2/Q3 and heating equipment in Q1/Q4, influenced by weather patterns[24](index=24&type=chunk) [2. REVENUES](index=11&type=section&id=2.%20REVENUES) Revenues are disaggregated by primary geographical regions and major product lines, with the United States accounting for the majority and HVAC equipment consistently representing 68% of sales Revenues Disaggregated by Region and Product Line (Q2 & H1 2025 vs 2024) | Category | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :-------------------------- | :------ | :------ | :------ | :------ | | **Primary Geographical Regions:** | | | | | | United States | $1,874,385 | $1,926,499 | $3,252,018 | $3,325,185 | | Canada | $93,707 | $95,697 | $170,120 | $175,495 | | Latin America and the Caribbean | $94,350 | $117,132 | $171,390 | $203,639 | | **Major Product Lines (% of Sales):** | | | | | | HVAC equipment | 68% | 70% | 68% | 68% | | Other HVAC products | 28% | 26% | 28% | 28% | | Commercial refrigeration products | 4% | 4% | 4% | 4% | [3. EARNINGS PER SHARE](index=11&type=section&id=3.%20EARNINGS%20PER%20SHARE) Basic and diluted earnings per share calculations are provided for common stock, showing a slight decrease in H1 2025 compared to the prior year Basic and Diluted Earnings Per Share (Q2 & H1 2025 vs 2024) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :------------------------------------ | :------ | :------ | :------ | :------ | | Net income attributable to Watsco, Inc. shareholders | $183,613 | $181,410 | $263,674 | $268,414 | | Weighted-average common shares outstanding - Basic | 37,825,623 | 37,512,105 | 37,789,116 | 37,193,827 | | Basic earnings per share for common stock | $4.53 | $4.50 | $6.52 | $6.71 | | Weighted-average common shares outstanding - Diluted | 37,899,430 | 37,627,637 | 37,876,470 | 37,313,593 | | Diluted earnings per share for common stock | $4.52 | $4.49 | $6.50 | $6.69 | [4. OTHER COMPREHENSIVE INCOME (LOSS)](index=12&type=section&id=4.%20OTHER%20COMPREHENSIVE%20INCOME%20(LOSS)) Other comprehensive income (loss) primarily consists of foreign currency translation adjustments, showing a positive adjustment of **$10,522 thousand** in H1 2025, a significant improvement from the prior year's loss Foreign Currency Translation Adjustment (H1 2025 vs 2024, in thousands) | Metric | H1 2025 | H1 2024 | | :-------------------- | :------ | :------ | | Beginning balance | $(59,893) | $(42,331) | | Current period other comprehensive income (loss) | $10,522 | $(7,839) | | Ending balance | $(49,371) | $(50,170) | [5. ACQUISITIONS](index=12&type=section&id=5.%20ACQUISITIONS) Watsco completed three acquisitions in the first half of 2025, including Southern Ice Equipment Distributors, Inc., Hawkins HVAC Distributors, Inc., and W.L. Lashley & Associates, Inc., involving cash and common stock consideration and resulting in goodwill recognition - On May 1, 2025, acquired Southern Ice Equipment Distributors, Inc. (SIE) for **$14.25 million cash** and **7,400 shares of Common stock** ($3.413 million fair value), recognizing **$7.832 million in goodwill**[34](index=34&type=chunk) - On April 1, 2025, acquired Hawkins HVAC Distributors, Inc. (Hawkins) for **$2.53 million cash**[35](index=35&type=chunk) - On January 3, 2025, Carrier Enterprise I acquired W.L. Lashley & Associates, Inc. (Lashley) for **$3.662 million cash**, **1,036 shares of Common stock** ($0.493 million fair value), and **$0.838 million for debt repayment**, recognizing **$3.064 million in goodwill**[36](index=36&type=chunk) [6. DERIVATIVES](index=12&type=section&id=6.%20DERIVATIVES) Watsco uses foreign currency forward and option contracts as economic hedges, recognizing a **$(743) thousand loss** in H1 2025 compared to a **$1,596 thousand gain** in H1 2024 - Recognized (losses) gains from foreign currency forward and option contracts not designated as hedging instruments[41](index=41&type=chunk) - Q2 2025: **$(590) thousand loss**[41](index=41&type=chunk) - Q2 2024: **$1,743 thousand gain**[41](index=41&type=chunk) - H1 2025: **$(743) thousand loss**[41](index=41&type=chunk) - H1 2024: **$1,596 thousand gain**[41](index=41&type=chunk) [7. FAIR VALUE MEASUREMENTS](index=13&type=section&id=7.%20FAIR%20VALUE%20MEASUREMENTS) The company measures certain assets and liabilities at fair value, categorizing them into Level 1, Level 2, and Level 3 based on input observability, with private equity securities totaling **$2.906 million** and derivative financial instrument liabilities at **$51 thousand** as of June 30, 2025 Fair Value Measurements at June 30, 2025 (in thousands) | Balance Sheet Location | Total | Level 1 | Level 2 | Level 3 | | :--------------------- | :---- | :------ | :------ | :------ | | **Assets:** | | | | | | Equity securities | $1,714 | $1,714 | — | — | | Private equity securities | $2,906 | — | — | $2,906 | | **Liabilities:** | | | | | | Derivative financial instruments (Accrued expenses & other current liabilities) | $51 | — | $51 | — | [8. SHAREHOLDERS' EQUITY](index=13&type=section&id=8.%20SHAREHOLDERS%27%20EQUITY) Watsco operates a Dividend Reinvestment Plan (DRIP) and an At-the-Market (ATM) Offering Program, with cash dividends of **$3.00 per share** in Q2 2025 and **$5.70 per share** for H1 2025 - Dividend Reinvestment Plan (DRIP) was implemented on March 29, 2024, allowing shareholders to reinvest cash dividends, with **30,495 shares issued** under DRIP during the six months ended June 30, 2025[45](index=45&type=chunk)[47](index=47&type=chunk) - The 2024 At-the-Market (ATM) Program allows for the issuance and sale of Common stock up to **$400.0 million**, with **$400.0 million available** at June 30, 2025[50](index=50&type=chunk) - Cash dividends paid on common stock[51](index=51&type=chunk) - Q2 2025: **$3.00 per share**[51](index=51&type=chunk) - H1 2025: **$5.70 per share**[51](index=51&type=chunk) [9. COMMITMENTS AND CONTINGENCIES](index=14&type=section&id=9.%20COMMITMENTS%20AND%20CONTINGENCIES) Watsco is involved in incidental litigation and maintains self-insurance reserves for casualty and health benefit programs, with reserves totaling **$5.450 million** at June 30, 2025 - Self-insurance reserves for casualty and health benefit programs were **$5.450 million** at June 30, 2025, and **$6.247 million** at December 31, 2024[58](index=58&type=chunk) [10. RELATED PARTY TRANSACTIONS](index=15&type=section&id=10.%20RELATED%20PARTY%20TRANSACTIONS) The company has significant related party transactions, primarily with Carrier and its affiliates, accounting for **59% of inventory purchases** in Q2 2025 and **62% for H1 2025** - Purchases from Carrier and its affiliates comprised **59% of inventory purchases** in Q2 2025 and **62% for H1 2025**[59](index=59&type=chunk) - Sales to Carrier and its affiliates were approximately **$6 million** for Q2 2025 and **$25 million** for H1 2025[59](index=59&type=chunk) - Legal fees paid to Greenberg Traurig, P.A., where a Board member is a Senior Chairman, were **$87 thousand** for Q2 2025 and **$109 thousand** for H1 2025[60](index=60&type=chunk) [11. SEGMENT REPORTING](index=15&type=section&id=11.%20SEGMENT%20REPORTING) Watsco operates as a single operating and reporting segment, focusing exclusively on HVAC/R distribution - Watsco has one operating and reporting segment: **HVAC/R distribution**, focusing exclusively on the distribution of air conditioning, heating, and refrigeration equipment and related parts and supplies[61](index=61&type=chunk) [12. SUBSEQUENT EVENT](index=15&type=section&id=12.%20SUBSEQUENT%20EVENT) The "One Big Beautiful Bill" was signed into law on July 4, 2025, introducing significant federal tax law changes, which Watsco is evaluating for potential impacts - The 'One Big Beautiful Bill' was signed into law on July 4, 2025, including significant changes to federal tax law, such as the permanent extension of certain Tax Cuts and Jobs Act provisions and modifications to the international tax framework[63](index=63&type=chunk) - Watsco is evaluating the provisions of the new law and potential impacts on its consolidated financial statements, but does not expect any material impacts[63](index=63&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Watsco's financial condition and results of operations, including forward-looking statements, company overview, industry and regulatory factors, critical accounting estimates, and a detailed analysis of financial performance and liquidity [Forward-Looking Statements](index=16&type=section&id=Forward-Looking%20Statements) Forward-looking statements are subject to various risks and uncertainties, including economic conditions, competitive factors, supply chain issues, and regulatory changes - Forward-looking statements are subject to risks and uncertainties, including general economic conditions, competitive factors, supplier concentration, commodity costs, consumer spending, housing activity, liquidity access, seasonality, weather patterns, regulatory changes, interest rates, inflation, foreign currency fluctuations, international risks, and cybersecurity[65](index=65&type=chunk)[69](index=69&type=chunk) [Company Overview](index=16&type=section&id=Company%20Overview) Watsco is North America's largest HVAC/R equipment and supplies distributor, operating from 701 locations, with revenues primarily from HVAC/R sales and seasonal demand patterns - Watsco is the **largest distributor of HVAC/R equipment and supplies in North America**, operating from **701 locations** in 43 U.S. States, Canada, Mexico, and Puerto Rico as of June 30, 2025[68](index=68&type=chunk)[85](index=85&type=chunk) - Revenues primarily consist of sales of HVAC/R equipment and related parts and supplies, with selling, general and administrative expenses largely variable and correlating to sales[70](index=70&type=chunk) - Sales of residential central air conditioners, heating equipment, and parts and supplies are seasonal, with demand for AC highest in Q2/Q3 and heating equipment in Q1/Q4, influenced by weather and economic conditions[71](index=71&type=chunk) [Industry and Regulatory Factors](index=17&type=section&id=Industry%20and%20Regulatory%20Factors) The company faces inflationary pressures from tariffs and is transitioning to lower-GWP refrigerants due to the AIM Act, while the "One Big Beautiful Bill" eliminated IRA tax credits for HVAC systems after December 31, 2025 - Tariffs on HVAC equipment and components sourced from China and Mexico expose the company to inflationary pressures, mitigated by pricing actions and focus on the replacement market[72](index=72&type=chunk) - The American Innovation and Manufacturing Act of 2020 (AIM Act) mandates an **85% phasedown of HFC refrigerants** over 15 years, restricting high-GWP refrigerants in new HVAC systems after December 31, 2024, prompting Watsco to transition inventory to lower-GWP A2L Systems[76](index=76&type=chunk) - The 'One Big Beautiful Bill,' signed July 4, 2025, eliminated the U.S. Inflation Reduction Act of 2022 (IRA) tax credits for HVAC systems after December 31, 2025[78](index=78&type=chunk) [Critical Accounting Estimates](index=18&type=section&id=Critical%20Accounting%20Estimates) No significant changes occurred during the quarter ended June 30, 2025, to the critical accounting estimates previously disclosed - No significant changes occurred during the quarter ended June 30, 2025, to the critical accounting estimates disclosed in the 2024 Annual Report on Form 10-K[80](index=80&type=chunk) [New Accounting Standards](index=18&type=section&id=New%20Accounting%20Standards) Refer to Note 1 for a discussion of recently adopted and to be adopted accounting standards - Refer to Note 1 to the condensed consolidated unaudited financial statements for a discussion of recently adopted and to be adopted accounting standards[81](index=81&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) Income Statement as a Percentage of Revenues (Q2 & H1 2025 vs 2024) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :------------------------------------ | :------ | :------ | :------ | :------ | | Revenues | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of sales | 70.7% | 72.9% | 71.3% | 72.7% | | Gross profit | 29.3% | 27.1% | 28.7% | 27.3% | | Selling, general and administrative expenses | 16.4% | 14.9% | 18.4% | 17.0% | | Operating income | 13.2% | 12.6% | 10.7% | 10.7% | | Net income attributable to Watsco, Inc. | 8.9% | 8.5% | 7.3% | 7.2% | [Second Quarter of 2025 Compared to Second Quarter of 2024](index=19&type=section&id=Second%20Quarter%20of%202025%20Compared%20to%20Second%20Quarter%20of%202024) In Q2 2025, revenues decreased by **4% to $2,062.4 million**, with HVAC equipment sales declining **6%** due to temperate weather and A2L product transition impacts, while gross profit improved by **4% to $603.5 million** and net income attributable to Watsco, Inc. increased **1% to $183.6 million** Q2 2025 Revenue Performance (in millions) | Metric | 2025 | 2024 | Change | % Change | | :---------------- | :----- | :----- | :----- | :------- | | Revenues | $2,062.4 | $2,139.3 | $(76.9) | (4%) | | Same-store sales | $2,044.7 | $2,132.2 | $(87.5) | (4%) | - HVAC equipment sales decreased **6%** in Q2 2025, reflecting a **7% decrease in residential products** (6% U.S., 20% international) and a **5% decrease in commercial HVAC equipment** (5% U.S., 4% international)[88](index=88&type=chunk) - Sales of ducted residential compressor-bearing systems decreased **8%**, driven by a **16% decrease in unit volume** and an **8% increase in average selling price**, primarily due to temperate weather, lower home building activity, and A2L product transition impacts[88](index=88&type=chunk) Q2 2025 Gross Profit and SG&A (in millions) | Metric | 2025 | 2024 | Change | % Change | | :------------------------------------ | :----- | :----- | :----- | :------- | | Gross profit | $603.5 | $579.8 | $23.7 | 4% | | Gross margin | 29.3% | 27.1% | | | | Selling, general and administrative expenses | $339.0 | $319.0 | $20.0 | 6% | | SG&A as a percentage of revenues | 16.4% | 14.9% | | | - Net income attributable to Watsco, Inc. for Q2 2025 increased **$2.2 million**, or **1%**, compared to Q2 2024[94](index=94&type=chunk) [First Half of 2025 Compared to First Half of 2024](index=21&type=section&id=First%20Half%20of%202025%20Compared%20to%20First%20Half%20of%202024) For H1 2025, revenues decreased by **3% to $3,593.5 million**, with HVAC equipment sales down **4%**, while gross profit increased **2% to $1,033.1 million** and net income attributable to Watsco, Inc. decreased **2% to $263.7 million** H1 2025 Revenue Performance (in millions) | Metric | 2025 | 2024 | Change | % Change | | :---------------- | :------- | :------- | :------- | :------- | | Revenues | $3,593.5 | $3,704.3 | $(110.8) | (3%) | | Same-store sales | $3,567.4 | $3,691.9 | $(124.5) | (3%) | - HVAC equipment sales decreased **4%** in H1 2025, reflecting a **3% decrease in residential products** (3% U.S., 13% international) and an **8% decrease in commercial HVAC equipment** (7% U.S., 9% international)[96](index=96&type=chunk) - Sales of ducted residential compressor-bearing systems decreased **5%**, reflecting a **12% decrease in unit volume** and a **7% increase in average selling price**[96](index=96&type=chunk) H1 2025 Gross Profit and SG&A (in millions) | Metric | 2025 | 2024 | Change | % Change | | :------------------------------------ | :------- | :------- | :------- | :------- | | Gross profit | $1,033.1 | $1,010.4 | $22.7 | 2% | | Gross margin | 28.7% | 27.3% | | | | Selling, general and administrative expenses | $661.6 | $628.6 | $33.0 | 5% | | SG&A as a percentage of revenues | 18.4% | 17.0% | | | - Net income attributable to Watsco, Inc. for H1 2025 decreased **$4.7 million**, or **2%**, compared to H1 2024[103](index=103&type=chunk) [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) Watsco had **$293.0 million** in cash and cash equivalents as of June 30, 2025, with working capital increasing to **$2,228.8 million** due to higher inventory and accounts receivable, while operating cash flow decreased significantly - As of June 30, 2025, Watsco had **$293.0 million in cash and cash equivalents**, with **$94.8 million** held by foreign subsidiaries[106](index=106&type=chunk) - Working capital increased to **$2,228.8 million** at June 30, 2025, from **$2,096.1 million** at December 31, 2024, driven by higher inventory balances (seasonal ramp-up and A2L product transition) and accounts receivable, offset by lower cash and short-term investments[109](index=109&type=chunk) Cash Flow Activity (H1 2025 vs 2024, in millions) | Cash Flow Activity | 2025 | 2024 | Change | | :------------------------------------ | :----- | :----- | :----- | | Operating activities | $(185.1) | $161.4 | $(346.5) | | Investing activities | $222.3 | $(217.3) | $439.6 | | Financing activities | $(274.2) | $73.8 | $(348.0) | - Net cash used in operating activities was higher primarily due to increased inventory balances (seasonal ramp-up and A2L product transition) and timing of vendor payments[111](index=111&type=chunk) - Net cash provided by investing activities increased due to proceeds from matured certificates of deposit[112](index=112&type=chunk) - Net cash used in financing activities increased due to **$281.8 million net proceeds** from Common stock sale in March 2024 (under 2021 ATM Program) and distributions to non-controlling interest in 2025[113](index=113&type=chunk)[117](index=117&type=chunk) - The company maintains an unsecured, five-year **$600.0 million syndicated multicurrency revolving credit agreement**, with no outstanding balance at June 30, 2025[114](index=114&type=chunk)[115](index=115&type=chunk) - The 2024 ATM Program allows for the issuance and sale of Common stock up to **$400.0 million**, with the full amount available at June 30, 2025[118](index=118&type=chunk) - Watsco's joint venture, Carrier Enterprise I, has a **38.4% ownership in RSI**, with the valuation of RSI Shareholders' common stock approximately **$460.0 million** at June 30, 2025, and Carrier Enterprise I having the obligation to purchase these shares under certain conditions[119](index=119&type=chunk)[120](index=120&type=chunk) - Acquisitions in H1 2025 included Southern Ice Equipment Distributors, Inc. (**$14.3 million cash** + 7,400 shares), Hawkins HVAC Distributors, Inc. (**$2.5 million cash**), and W.L. Lashley & Associates, Inc. (**$3.7 million cash** + 1,036 shares + debt repayment)[123](index=123&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk) - Cash dividends of **$5.70 per share** were paid on common stock during the six months ended June 30, 2025, with a quarterly dividend of **$3.00 per share** declared on July 1, 2025[129](index=129&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) There have been no material changes to the information regarding market risk from the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to market risk information compared to the Annual Report on Form 10-K for the year ended December 31, 2024[133](index=133&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2025, concluding they were effective, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of June 30, 2025[135](index=135&type=chunk) - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended June 30, 2025[136](index=136&type=chunk) [PART II. OTHER INFORMATION](index=27&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) Information regarding legal proceedings is incorporated by reference from Note 9 to the condensed consolidated unaudited financial statements - Information on legal proceedings is incorporated by reference from Note 9 of the financial statements[138](index=138&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to risk factors compared to the Annual Report on Form 10-K for the year ended December 31, 2024[139](index=139&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) On May 1, 2025, Watsco issued **7,400 shares of Common stock** as partial consideration for the acquisition of Southern Ice Equipment Distributors, Inc. (SIE), relying on the exemption from registration contained in Section 4(a)(2) of the Securities Act - On May 1, 2025, **7,400 shares of Common stock** were issued to the seller as partial consideration for the acquisition of Southern Ice Equipment Distributors, Inc. (SIE)[140](index=140&type=chunk) - The shares were issued under the exemption from registration in Section 4(a)(2) of the Securities Act, with the seller representing itself as an 'accredited investor' acquiring shares for investment[141](index=141&type=chunk) [Item 5. Other Information](index=27&type=section&id=Item%205.%20Other%20Information) During the quarter ended June 30, 2025, no officers or directors adopted or terminated any Rule 10b5-1 trading arrangements - No officers or directors adopted or terminated any Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025[142](index=142&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including certifications from the CEO, EVP, and CFO, as well as Inline XBRL documents - Exhibits include certifications (31.1, 31.2, 31.3, 32.1) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[144](index=144&type=chunk) [SIGNATURE](index=29&type=section&id=SIGNATURE) The report is formally signed on behalf of Watsco, Inc. by Ana M. Menendez, Chief Financial Officer, on August 8, 2025 - The report was signed by Ana M. Menendez, Chief Financial Officer, on behalf of Watsco, Inc. on August 8, 2025[146](index=146&type=chunk)

PART I. FINANCIAL INFORMATION [Item 1. Condensed Consolidated Unaudited Financial Statements](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) The financial statements for Q2 and H1 2025 show mixed revenue and net income trends, with increased assets driven by inventory and negative operating cash flow in H1 [Condensed Consolidated Unaudited Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Income) Q2 2025 revenues decreased 3.6% to **$2.06 billion** with net income up 1.2%, while H1 2025 revenues fell 3.0% to **$3.59 billion** with net income down 1.8% Consolidated Statements of Income Highlights (In thousands, except per share data) | Metric | Q2 2025 (in thousands) | Q2 2024 (in thousands) | YoY Change | H1 2025 (in thousands) | H1 2024 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $2,062,442 | $2,139,328 | -3.6% | $3,593,528 | $3,704,319 | -3.0% | | **Gross Profit** | $603,488 | $579,760 | +4.1% | $1,033,111 | $1,010,385 | +2.2% | | **Operating Income** | $271,869 | $268,803 | +1.1% | $384,057 | $395,340 | -2.9% | | **Net Income Attributable to Watsco, Inc.** | $183,613 | $181,410 | +1.2% | $263,674 | $268,414 | -1.8% | | **Diluted EPS** | $4.52 | $4.49 | +0.7% | $6.50 | $6.69 | -2.8% | [Condensed Consolidated Unaudited Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Unaudited%20Balance%20Sheets) Total assets increased to **$4.73 billion** by June 30, 2025, primarily due to a significant rise in inventories to **$1.95 billion** Balance Sheet Summary (In thousands) | Account | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :--- | :--- | :--- | | **Total Current Assets** | $3,299,718 | $3,079,981 | | Cash and cash equivalents | $292,978 | $526,271 | | Inventories, net | $1,952,842 | $1,385,436 | | **Total Assets** | **$4,729,513** | **$4,479,523** | | **Total Current Liabilities** | $1,070,916 | $983,901 | | **Total Liabilities** | $1,507,694 | $1,415,285 | | **Total Shareholders' Equity** | $3,221,819 | $3,064,238 | [Condensed Consolidated Unaudited Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Unaudited%20Statements%20of%20Cash%20Flows) H1 2025 saw a **$185.1 million** net cash outflow from operations, primarily due to increased inventories, contrasting with a prior year inflow Cash Flow Summary - Six Months Ended June 30 (In thousands) | Cash Flow Category | 2025 (in thousands) | 2024 (in thousands) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(185,090) | $161,441 | | Net cash provided by (used in) investing activities | $222,252 | $(217,315) | | Net cash (used in) provided by financing activities | $(274,233) | $73,810 | | **Net (decrease) increase in cash** | **$(233,293)** | **$14,742** | [Notes to Condensed Consolidated Unaudited Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Unaudited%20Financial%20Statements) Notes detail presentation, revenue disaggregation (primarily U.S. and HVAC), recent acquisitions (SIE, Hawkins, Lashley), and significant related party inventory purchases from Carrier - The company operates as the **largest distributor** of HVAC/R equipment in North America and consolidates several joint ventures with Carrier Global Corporation[22](index=22&type=chunk)[23](index=23&type=chunk) Revenue by Geography - Six Months Ended June 30 (In thousands) | Region | 2025 (in thousands) | 2024 (in thousands) | | :--- | :--- | :--- | | United States | $3,252,018 | $3,325,185 | | Canada | $170,120 | $175,495 | | Latin America and the Caribbean | $171,390 | $203,639 | | **Total** | **$3,593,528** | **$3,704,319** | - In the first half of 2025, the company acquired **Southern Ice Equipment Distributors, Inc. (SIE)**, **Hawkins HVAC Distributors, Inc.**, and **W.L. Lashley & Associates, Inc.**[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) - Purchases from Carrier and its affiliates constituted **62%** of all inventory purchases during the first six months of 2025[59](index=59&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Q2 2025 revenue declined 4% due to lower HVAC unit volumes, yet gross margin improved by 220 basis points, while H1 2025 operating cash flow was significantly impacted by inventory build for the A2L transition [Company Overview and Market Trends](index=16&type=section&id=Company%20Overview%20and%20Market%20Trends) Watsco, North America's largest HVAC/R distributor, manages seasonal demand, trade policies, and the regulatory transition to A2L refrigerants, while promoting energy-efficient systems - Watsco is the **largest distributor** of HVAC/R products in North America, operating from **701 locations** across the U.S., Canada, Mexico, and Puerto Rico as of June 30, 2025[68](index=68&type=chunk) - The company is managing the phasedown of HFC refrigerants, transitioning its inventory to new lower-GWP **A2L Systems** while continuing to sell existing **410A Systems** as permitted by regulations through 2025[76](index=76&type=chunk) - A new law signed on July 4, 2025, **eliminated the IRA's tax credits** for HVAC systems, making them unavailable after **December 31, 2025**[78](index=78&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) Q2 2025 revenues decreased 4% to **$2.06 billion** with gross margin expanding **220 basis points**, while H1 2025 revenues fell 3% to **$3.59 billion** with gross margin up **140 basis points** Q2 2025 vs Q2 2024 Performance (in millions) | Metric | Q2 2025 (in millions) | Q2 2024 (in millions) | Change (in millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $2,062.4 | $2,139.3 | $(76.9) | -4% | | **Gross Profit** | $603.5 | $579.8 | $23.7 | 4% | | Gross Margin | 29.3% | 27.1% | +220 bps | - | | **SG&A** | $339.0 | $319.0 | $20.0 | 6% | - Q2 2025 HVAC equipment sales decreased **6%**, reflecting a **7%** drop in residential products and a **5%** drop in commercial products[88](index=88&type=chunk) - Sales of ducted residential systems fell **8%**, driven by a **16%** decrease in unit volume, partially offset by an **8%** increase in average selling price[88](index=88&type=chunk) H1 2025 vs H1 2024 Performance (in millions) | Metric | H1 2025 (in millions) | H1 2024 (in millions) | Change (in millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | **Revenues** | $3,593.5 | $3,704.3 | $(110.8) | -3% | | **Gross Profit** | $1,033.1 | $1,010.4 | $22.7 | 2% | | Gross Margin | 28.7% | 27.3% | +140 bps | - | | **SG&A** | $661.6 | $628.6 | $33.0 | 5% | [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is strong with **$293.0 million** cash and an undrawn **$600 million** credit facility, despite increased working capital due to inventory build for seasonal demand and A2L transition - Primary sources of liquidity are cash from operations and a **$600 million** revolving credit agreement, which had no outstanding balance at June 30, 2025[104](index=104&type=chunk)[115](index=115&type=chunk) Cash Flow Summary - Six Months Ended June 30 (in millions) | Cash Flow Category | 2025 (in millions) | 2024 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Operating Activities | $(185.1) | $161.4 | $(346.5) | | Investing Activities | $222.3 | $(217.3) | $439.6 | | Financing Activities | $(274.2) | $73.8 | $(348.0) | - The company maintains an At-the-Market (ATM) offering program, with **$400 million** available for sale under the 2024 ATM Program as of June 30, 2025[118](index=118&type=chunk) - Cash dividends of **$5.70 per share** were paid during the six months ended June 30, 2025, compared to **$5.15** in the same period of 2024[129](index=129&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) No material changes to market risk disclosures were reported compared to the 2024 Annual Report on Form 10-K - There were no material changes to market risk disclosures during the quarter[133](index=133&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[135](index=135&type=chunk) - No changes occurred in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[136](index=136&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in incidental litigation but does not anticipate a material adverse effect on its financial condition or operations, as detailed in Note 9 - The company refers to Note 9 of its financial statements for information on legal proceedings, stating that it does not expect any material adverse effect from current litigation[138](index=138&type=chunk)[56](index=56&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported compared to the company's 2024 Annual Report on Form 10-K - Risk factors for the quarter ended June 30, 2025, do not differ materially from those in the 2024 Annual Report on Form 10-K[139](index=139&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) On May 1, 2025, **7,400 shares** of unregistered Common stock were issued as partial consideration for the SIE acquisition, exempt under Section 4(a)(2) of the Securities Act - On May 1, 2025, Watsco issued **7,400 shares** of unregistered Common stock as part of the consideration for the acquisition of SIE[140](index=140&type=chunk) - The issuance was exempt from registration under Section 4(a)(2) of the Securities Act, as the seller was an accredited investor acquiring the shares for investment purposes[141](index=141&type=chunk) [Item 5. Other Information](index=27&type=section&id=Item%205.%20Other%20Information) No officers or directors adopted or terminated Rule 10b5-1 trading plans or other non-Rule 10b5-1 arrangements during Q2 2025 - No officers or directors adopted or terminated any Rule 10b5-1 trading plans during the quarter ended June 30, 2025[142](index=142&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - The report includes certifications from the CEO, EVP, and CFO as required by Sections 302 and 906 of the Sarbanes-Oxley Act[144](index=144&type=chunk)

Financial Data and Key Metrics Changes - Sales declined by 4% despite double-digit pricing gains for new equipment, offset by lower volumes [6][7] - Gross profit margins reached record levels, leading to an increase in EBIT and expanded EBIT margins [7][8] - SG&A expenses increased by 6% due to transition costs and the addition of 10 new locations from recent acquisitions [8][9] - The company maintains a strong cash position with no debt [9] Business Line Data and Key Metrics Changes - Residential new construction and international markets remain subdued, with residential new construction down by 15% to 20% [19] - E-commerce sales grew to $2.5 billion, representing 34% of total sales, with mobile app users increasing by 17% year-over-year [9][10] - The annual volume of products sold through OnCallAir increased by 19% to $1.6 billion [10] Market Data and Key Metrics Changes - International sales, particularly in Mexico, were volatile and negatively impacted earnings by approximately $0.10 per share in the quarter [22] - The company expects improvements in July and August, indicating a better market outlook [23] Company Strategy and Development Direction - The company is focused on transitioning to next-generation equipment with A2L refrigerants, affecting about 55% of historical product sales [5][6] - A new technology-driven sales platform is being developed to capture larger national customers, expected to launch in 2026 [10][11] - The company aims to grow the parts and supply segment, which currently represents about 30% of sales [11] Management's Comments on Operating Environment and Future Outlook - Management acknowledges a soft market but remains optimistic about future growth and market share development [25][26] - The company is focused on improving gross margins and inventory turns, with a goal of reaching 30% gross profit margin [11][84] - Management emphasizes the importance of innovation and technology in maintaining competitive advantage [12][93] Other Important Information - The company is actively pursuing M&A opportunities, leveraging its strong balance sheet [55][56] - Management is committed to improving inventory management and reducing excess inventory levels [50][53] Q&A Session Summary Question: What happened to volumes in the quarter? - Management noted that volumes were weaker than expected due to weather patterns and a decline in residential new construction, but saw improvements in July [19][20] Question: How sustainable are the gross margins? - Management indicated that while the current gross margin of 29% is strong, it may not be sustainable in the second half of the year due to the absence of pricing benefits seen in the first half [27][28] Question: What is the impact of the canister shortage? - Management stated that the canister shortage was less of a concern now and that they expect to be off allocation by August [40][41] Question: How is the inventory investment trending? - The company reported a significant inventory investment due to the transition, but is focused on improving inventory turns moving forward [50][52] Question: What are the thoughts on consumer preferences during the product transition? - Management observed that the market remains focused on minimum efficiency products, with no significant shift towards high-efficiency systems [61][62] Question: Are there any incentives being requested by contractors? - Management indicated that contractors are not pushing for lower prices, as there is no elasticity in the market [146]