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Edited Transcript of WSO earnings conference call or presentation 18-Jul-19 2:00pm GMT

Q2 2019 Watsco Inc Earnings Call

COCONUT GROVE Jul 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Watsco Inc earnings conference call or presentation Thursday, July 18, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron J. Nahmad

Watsco, Inc. - President & Director

* Albert H. Nahmad

Watsco, Inc. - Chairman & CEO

* Barry S. Logan

Watsco, Inc. - Senior VP & Secretary

* Paul W. Johnston

Watsco, Inc. - EVP

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Conference Call Participants

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* Blake Anthony Hirschman

Stephens Inc., Research Division - Research Analyst

* Brett Logan Linzey

Vertical Research Partners, LLC - VP

* Christopher M. Dankert

Longbow Research LLC - Research Analyst

* David John Manthey

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Patrick Michael Baumann

JP Morgan Chase & Co, Research Division - Analyst

* Robert Douglas Barry

The Buckingham Research Group Incorporated - Research Analyst

* Ryan James Merkel

William Blair & Company L.L.C., Research Division - Research Analyst

* Stephen Edward Volkmann

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Welcome to the Watsco Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Albert Nahmad, CEO and Chairman of the Board. Please go ahead, sir.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [2]

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Thank you, Marco. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President; and Paul Johnston, Executive Vice President; and Barry Logan, our Senior Vice President.

As always, before we start, our cautionary statement. This conference call has forward-looking statements as defined by SEC laws, and this conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements.

Let's get onto the quarter. Watsco produced another record quarter. Today, we also announced our agreement to purchase Peirce-Phelps, a longstanding HVAC distributor based in Philadelphia. That company was founded in 1926 and has been Carrier's sole distributor in Pennsylvania, New Jersey and Delaware for 75 years. This acquisition will expand our network into these markets. Peirce-Phelps' current annual sales are approximately $206 million, serving more than 9,000 customers from 19 locations and a wide product offerings of equipment, parts and supplies. As important -- or more important, this business is led by 4 Peirce brothers, who are third-generation owners. We look forward to working with them as they continue to operate the business and we apply our "buy and build" approach.

Here is what that means. We start with buying or joint venturing with a great business. We keep the name and the team. We honor the culture and empower the leadership. We ask the leadership for an aggressive growth plan, and we help them achieve it. We motivate the team with long-term equity and build an ownership culture. And we collaborate with big ideas, technology, capital, M&A opportunities and provide support in any way needed.

In addition to the Peirce transaction, we also completed a number of transactions during the quarter as summarized in the press release. These are all positive incremental steps to grow our business and put our capital to work.

Looking at the long term, we believe it is opportune time for M&A as the technology wave in our industry builds momentum. We offer successful owners like the Peirce Brothers the most complete spectrum of technology tools to modernize their business.

Now in terms of results for the quarter, sales and earnings strength during the first 2 months of the quarter were disrupted in June by cooler wetter weather, and that's something, wetter weather in certain markets. July growth trends have improved, and we believe growth rates in the second half of the year will improve and produce another record year for our company.

Operational efficiencies continue in the quarter as evidenced by our moderate SG&A growth rate in existing locations. We also continue to make investments. We opened 8 locations during this last year to add density to existing markets, and we have continued to develop, launch and drive adoption of a variety of customer-focused technologies to better serve our contractor customers. Over the long term, we believe these innovations will transform the way business is done in our industry.

Now moving on to our balance sheet and cash flow. Our financial position remains conservative and strong. We have a ratio of 12% debt-to-total capitalization. That's, again, a 12% debt-to-total cap. We've generated record cash flow during the first half and we, again, target cash flow to exceed net income in 2019.

In terms of analysis of our financial results, our press release provides important detail about our performance. I will not recite those details in my prepared remarks. We'll be happy to provide more color during Q&A.

One last thing is our renewed invitation to visit us in Miami and learn more about our technology journey. You will gain insight to our culture and many innovations that are underway. We hope you will come and visit and learn more. With that, A.J., Paul, Barry and I are happy to answer questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Brett Linzey of Vertical Research Partners.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [2]

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Just wanted to come back to some of the key Sunbelt states, obviously, a barometer for the growth of the total business. How did some of the key states perform, particularly, Florida, in the quarter? And then any big outliers within that mix?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [3]

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Well, we don't want to alert the competition too much, but Barry, go ahead and give it a shot.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [4]

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Sure. Well, first, as we said in the press release, there was cooler wetter weather in certain markets. And what that really means is between the Mississippi and Rockies, we have a big presence in Texas North and call it that region of the country is where we saw the particular weakness. If I go to our largest market, we mentioned in the first quarter, we had growth. That growth accelerated in the second quarter, and we're seeing stronger growth since. So just to have some fun, the fling -- the flamingo is still very much alive and well and growing. So that really is the story in the quarter, is that, that geography between the Mississippi and Rockies. And it is what it is. And again, it has an impact on short-term performance, certainly not long-term performance.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [5]

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Okay. And then maybe just shifting gears to the Peirce deal. Just really about the strategic rationale. I mean, is this an asset that Watsco believes has a similar margin profile some of the Carrier JVs did? And then maybe just separately, how has the Peirce locations been growing organically for the past 3 to 5 years?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [6]

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Barry, you want to take that?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [7]

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Sure. Well, first, I would say a better-than-average margin versus what we had experienced 10 years ago when we acquired Carrier Enterprise. And that's part of it, being an independent distributor and simply thinking that way as entrepreneurs. So better than average than in the past. Certainly opportunity to improve margin to the Watsco levels that we have achieved since then. So somewhere in between, let's put it that way.

From a growth point of view, boy, we have -- we were given a 20-year chart of organic growth and very strong growth rates over the years, and again, highly entrepreneurial group of 4 brothers. And so it's only, as we say, buy a great company. The evidence is in the long-term growth rates that they have had.

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Operator [8]

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And our next question today comes from Ryan Merkel of William Blair.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [9]

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So first, let's dig into the other HVAC products and the commercial refrigeration, down again, it's been weak, I think, for a couple of quarters. Just what's going on there? And more importantly, any signs that, that could start to improve and grow again in the second half?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [10]

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Let's go to Paul Johnston.

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Paul W. Johnston, Watsco, Inc. - EVP [11]

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Yes. Okay. Ryan, yes, it was -- when you look at the individual components of the non-HVAC equipment categories that we sell in, lot of softness in some of the commodities, more related to demand as some of the slowdown that Barry indicated that was happening between west of the Mississippi and the Rockies impacted some of the installed products that we would normally sell. And then, there is a softness that we experienced in the first quarter, continued in the second quarter, but it's leveled out on some of the refrigerant, lot of different reasons why that -- the price is soft right now, but at least it's stabilized at this point. So longer term, I don't see this as being a continuous trend when you look at beyond the commodities, but when you look at the part sales, parts sales were strong in the second quarter, and we were heartened by that.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [12]

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Okay. And just a quick follow-up on the commercial refrigeration. So are you saying that refrigeration prices that are primarily the issue? The equipment and the parts that you sell in that business, is that actually growing?

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Paul W. Johnston, Watsco, Inc. - EVP [13]

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The equipment pricing is stable and has grown. The commodity side of it is the weakness, yes.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [14]

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Okay. And then just a follow-up on gross margins, down year-over-year. I'm guessing that's a function of lower equipment selling margins and possibly mix, but maybe provide some color there, if you would?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [15]

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Barry, you covered that in your writings to me. Go ahead.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [16]

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Sure. Well, selling margin, which is simply our markup on all products is flat year-over-year and equipment up slightly. And so that speaks to the pricing and margins on equipment still ticking up, so that's a good sign. Some of the weakness is in the non-equipment, which Paul described, and you can hear a little bit of the angst in the voice short term about pricing of refrigerants and things like that. And overall, if equipment is growing at a faster rate than non-equipment, there is a little bit of mix, just simply, and how that algebra works out. When you said mix of equipment, again, mix of equipment has been up all year long fractionally, not materially, that trend continued in the second quarter, but it's really the mix of equipment versus non-equipment that's in the algebra.

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Operator [17]

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And our next question today comes from Stephen Volkmann of Jefferies LLC.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [18]

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Maybe just back to the M&A. I'm curious about -- you've obviously stepped it up a little bit. I'm curious if the pipeline is more full, if there's some reason you think more deals can get done in this type of environment?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [19]

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We have expressed such an attitude in the prepared remarks. We do have more interest from sellers -- potential sellers, some great companies.

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Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [20]

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And that's driven by sort of a desire for getting on board with the technology? Or is there something else in their businesses that's feeling more challenging to them?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [21]

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Hard to answer the last part of that question, but I can tell you that from our perspective, there are 2 things that should attract a great company. That is, first, our culture. We don't disrupt great companies, quite the opposite. We're not cost cutters. We're not going to flip anything in 5 years. None of that exists in our culture. And we're very respectful of people that sell to us or have joint ventured with us. That's also unusual in the M&A world.

Now with respect to technology, well, that is not a secret in the industry anymore. We lead it, the innovation. The adoption, we've expressed over and over again, will take a long time, but we're in it for the long term. But if a distributor -- successful distributor wants to take advantage of what we have, we certainly offer it to them. And I think that will be a continuing attraction. Culture and technology should be a continuing attraction and stepping up.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [22]

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And I'll just add to that, Al. I think with Peirce, we can't have Brian on the phone with us this morning, Brian Peirce being the leader of the company, but a 94-year-old company decided to sell to us, and I think a big motivator was technology and is technology moving forward. And again, at a point in time, where we can open things up, I think it would be good to get the perspective of someone like Brian Peirce who, by the way, is the current Chairman of HARDI. So from a leadership point of view, we have an industry leader making that decision. So it's something that is certainly part of the ingredients, families still have to decide it's a good time for the family, but...

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [23]

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And I'm going to hold you to that, Barry, since you run our M&A. You better get more done.

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Aaron J. Nahmad, Watsco, Inc. - President & Director [24]

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This is A.J. I'll just add. We've been talking about technology for a long time. You guys asked good questions about that, but I really encourage you to come see us in Miami, spend time with us, let us take you through the fundamentals. Because when you do that, when you meet the team, you understand how big of a deal this is and how impactful it has been and how much an it ensures our viability going forward. And those are the conversations that we're having with some of these targets like the Peirce brothers who understand that technology is a real thing, that it's something that they need for their business, that they are going to have to be very challenged to do on their own, but a nice landing place to do it with Watsco and not only because of the technology, but because of the culture. So again, I encourage you to come down and see it firsthand to anybody on the call.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [25]

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I wouldn't come in August though.

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Aaron J. Nahmad, Watsco, Inc. - President & Director [26]

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No, that's not a good time to go, obviously, there's humidity.

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Operator [27]

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And our next question today comes from David Manthey of Baird.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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First off, you provided the same-store sales figure of plus 1% versus a 3% reported revenue number. I was wondering if you can give us that same-store figure by each of the 3 product segments?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [29]

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Barry, do you want to do that?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [30]

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Yes. Dave, I think it's a very similar relationship in terms of the overall to each of the pieces.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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Okay. All right.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [32]

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The same math.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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Okay. And second, should we assume that price mix is a low single digit type contributor to the overall growth?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [34]

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Barry?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [35]

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Yes, there is price in the market still. And if you look at the residential pricing, which is the primary driver, it was up 3%. A moderate amount of price and a moderate amount of unit growth.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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Got it. Okay. And then when you say the momentum rebounded in July, I'm wondering if you can be a little more specific on what things looked like in the month of June for you and then sort of month-to-date July growth rate?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [37]

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We're not going to disclose that. We're just giving you a sense of things. We're not going to put any numbers on it, rates or anything. We're just giving you a sense.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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Right. I had to ask though.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [39]

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I like that.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [40]

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Finally, it seems like -- I've been getting more questions from investors on SG&A leverage. Can you just broadly talk about the major actions you've taken on OpEx? And then as you look at the $196 million of SG&A, is there any way you can talk to us about how much of that is kind of same-store versus the contribution from acquisitions, greenfields, et cetera, just to give us an idea where that number is shaking out year-over-year?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [41]

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Well, we've reported previously that we've got -- we're getting more efficient with the employees, that continues, the cost of employment. But don't get too stuck on growth of SG&A, especially the investment in technology. Because we are who we are, the industry leader, not only in size and technology, a lot of people are coming, knocking on our door with fascinating innovations. And as the guy who runs technology, A.J. Nahmad, had said, we have no desire to limit our investment in technology. Things are going to change, and they could change dramatically in terms of spending for technology. But I also believe that we're getting more efficient with the non-technology cost. And I hope we reflected that in the numbers or if you need more color on that, Barry can add to that.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [42]

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Yes, I would say, looking at the year-to-date, Dave, so we're looking at a longer period just to evaluate your question and up 1% on a same-store basis for year-to-date - technology spending accounts for much of that. You can certainly imagine there is still inflationary risk going on with facilities and rent and some of the other line items, offset largely by the productivity stuff that we've talked about. So that's how I would talk about 3 variables with a 1% year-to-date increase in SG&A. And it is a sea change over the last 3 or 4 years if we put it in context. So there is definite progress, all at once are doing something silly we're not going to do, but we want to make progress and we obviously have. So if you do the -- again, the math between same -- the SG&A growth rate without new stores versus new stores, you can impute the cost of the new stores and DASCO being part of that equation too.

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Operator [43]

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(Operator Instructions) Today's next question comes from Jeffrey Hammond of KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [44]

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So just on the new store openings, did I -- I didn't see a mention like last quarter. Are those kind of all new kind of running through this quarter and it seems like a step up and so how should we think about that prospectively? And where are you adding stores?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [45]

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We won't answer the last part of the question because of competition, but we will tell you that's for the last 12 months, the 8 stores that we have greenfielded, but we've added quite a few through acquisition of DASCO and now with Peirce-Phelps.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [46]

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And Jeff, we did certainly talk about same-store SG&A in the last -- in the first quarter, there was a discussion of that in the quarter.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [47]

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Okay. So just to be clear, the 17 new stores, 9 are acquired and 8 are greenfield?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [48]

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That's correct.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [49]

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Okay. And then just I noticed at least in my model that the minority interest number was materially lower than how I was thinking about it. And I just didn't know if there is anything going on within the Carrier Enterprise business that they might have been seeing a little more margin pressure dropping through?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [50]

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Yes, Jeff, the answer is no. If you look -- in the quarter, the actual reported results, minority interest is down about $600,000. And that is where the benefit of owning Homans 100% shows up. So as we purchased the 20% in Homans that we didn't own, that was early in June, and there is a benefit to -- that's where the benefit of that transaction shows up.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [51]

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Okay. And when did Homans close?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [52]

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Beginning in June.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [53]

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Okay, great. And then just last question. So you've done DASCO and now Peirce and a couple of these other maybe smaller ones. Is there a way to think about the accretion opportunity as you look over the next 12 months and enroll these in, clearly you're bringing going good businesses in and your financing costs are low, that would be helpful?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [54]

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Barry, you want to look at the future?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [55]

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Sure. Well, we certainly -- they certainly are accretive on their face in terms of just historical EBIT, and you mentioned the word smaller. Brian Peirce would take offense to that because they're #15 out of 1,300 in the industry, so just to put in perspective for that transaction. The real accretion, if you will, is not just the math at the day of transaction, it's what we've talked about and the Watsco way, how can we help the Peirce brothers double the size of the business and help the DASCO team double the size of the business. And that's where we've seen the benefit of really the acquisition itself. Yes, the math works today, but it's really the next step. And over the next few years, that's very critical to what's going on.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [56]

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Okay. I was actually referencing the Sigler and the Homans as the smaller ones, but --

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Operator [57]

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And our next question today comes from Robert Barry of Buckingham Research.

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Robert Douglas Barry, The Buckingham Research Group Incorporated - Research Analyst [58]

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I guess I wanted to just circle back to an earlier question about SG&A and really just broaden that to ask you about op margin. I mean, I think you've acknowledged in the last few quarters that given some growth investment, there hasn't really been much op margin expansion in the last few years, but it seemed like there is going to be a more concerted effort to get some this year? I mean, what's the latest thought there? I know you want to still grow the business or invest to grow the business, but do you think that you can expand the operating margin this year?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [59]

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Mr. Logan?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [60]

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Again, every distribution model of every kind forevermore is going to be dependent on a measure of sales growth to produce long-term margin expansion. Otherwise, they're probably cutting their business up short-term, for short-term reasons. So the sales growth year-to-date, obviously, same-store sales growth of 1% didn't achieve that result of higher EBIT margin. But again for the rest of the year, we certainly see improved growth. We see improved -- we only have visibility to really the month of July, but we have some confidence about the rest of the year in terms of expanding margin. Longer term, it will still take reasonable sales growth to drive the longer-term margin expansion that everyone looks for. And the rate of investment in technology is still going to increase, but not at the same rate that it did the last 3 or 4 years. And so that opportunity is still there. And short term, we can wring our hands over it. Longer term, we're not.

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Robert Douglas Barry, The Buckingham Research Group Incorporated - Research Analyst [61]

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Got it. This growth in adding stores, just organically outside of acquisitions, is that something that you'd see picking up or moderating?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [62]

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It gives me an opportunity to discuss how we deal with that. Watsco is a very decentralized model. And meaning that, opening locations is not considered or even decided at headquarters. People in the field decide what they need and they implement it. So wherever they see a need, they just do it. Can we forecast what they might be doing? We can't because we're not making those decisions for them, they're just doing it on their own and they're very optimistic orientated. And we do like a methodology being very decentralized because that gives them an opportunity in the field that we at headquarters could not see.

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Robert Douglas Barry, The Buckingham Research Group Incorporated - Research Analyst [63]

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Got it, got it. I just had one last one, kind of a minor item on the SG&A front. I think last year, in the third quarter, you actually had a spike in SG&A growth because there was a variable comp true-up. I think that was worth about $6 million. Is it fair to assume that would not reoccur this year and maybe we could even see same-store SG&A down in 3Q?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [64]

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I wouldn't forecast the future, but Barry, go ahead and answer the past.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [65]

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Sure. Yes, there were some second half hits and that are in the SG&A that were disclosed. And again, time will tell in terms of performance. Performance-driven comp, we wanted to go up in the third quarter because it will be driven by performance. In fact, I wouldn't get too surgical about whether SG&A is up or down. I think it's an opportunity to have a better third quarter, but I think, predicting some type of decline is probably not the right thing.

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Operator [66]

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And our next question today comes from Chris Dankert of Longbow Research.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [67]

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I guess back to start off the year, Paul had kind of somewhat previewed that you were working with suppliers on some growth initiatives internally. I guess -- and you'd kind of mentioned once you got into the selling season you're already on the beaches, you could talk about that a bit more. Is that part of the DMI you announced? Or just any other color there would be really appreciated.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [68]

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Mr. Johnson?

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Paul W. Johnston, Watsco, Inc. - EVP [69]

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Yes, I guess -- rephrase your question for me, again, if you would, so I can clearly understand what you're asking.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [70]

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Sure. Sure. Just at the start of the year, you guys are talking about doing more with suppliers to try and help take share, but just any kind of color on those initiatives would be great.

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Paul W. Johnston, Watsco, Inc. - EVP [71]

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Oh, yes. That's just our DNA, working with our suppliers to try to increase share. We had a number of programs in the first quarter. We continued it in the second quarter. Unfortunately, the weather in the -- didn't cooperate with us quite the way we wanted to and hopefully, in the third quarter, we'll start seeing some fruits of those efforts.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [72]

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Are we talking about more like advertising, marketing, things along of that nature? Or we -- is it more, again, on the tax side of things, just any...

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Paul W. Johnston, Watsco, Inc. - EVP [73]

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It's on all of the above. It's on whatever the customer -- it's getting very customer focused, looking at market segments, looking at specific customers, national accounts, builders, looking at the advertising, it's pretty much across the board depending on what the product category is.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [74]

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Got it, got it. And then just secondly here, any update on Latin America? I know that was a bit of a struggle in the first quarter. Just any update there would be helpful.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [75]

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Yes, I think we can do that. Barry, tell them about the second quarter performance.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [76]

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Sure. Again, we got into mid-single-digit growth in Latin America for the second quarter...

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [77]

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Say it again, mid-single-digit growth.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [78]

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Mid-single-digit growth in the second quarter. And again progress as the year has gone on, for sure. And second half of the year, we're -- is an opportunity probably for some profit growth where last year was rather severe in terms of results.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [79]

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Got it. Glad to hear we've turned the corner there, guys.

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Operator [80]

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And the next question comes from Blake Hirschman of Stephens Inc.

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Blake Anthony Hirschman, Stephens Inc., Research Division - Research Analyst [81]

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Just a quick one for me. There has been more and more distributors pointing to incremental price cost issues kind of looking forward. It doesn't seem like it's been much of a factor for you guys, but just wanted to get a quick update there.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [82]

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Barry, can you field that?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [83]

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Sure, again, selling margin, as I mentioned earlier, is the purest determination of that question, and are we marking out products in an efficient way year-over-year with a lot of price actions, a lot of moving pieces that have gone on. And again, in the quarter and year-to-date, we've seen a slight pickup in selling margin. So that's a good feeling, given all the price actions that have gone on.

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Operator [84]

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And our next question comes from Patrick Baumann of JPMorgan.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [85]

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Just had a few questions, and I apologize if some of these have been asked, I dialed in just a little bit late. Did you comment on your regional sales trends, if certain regions were stronger than others?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [86]

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Well, we commented what we've thought the wet and cool markets. Barry, you want to advise him about that.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [87]

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Yes, we did comment earlier. And the commentary was that, again, this kind of stripe between the Mississippi and Rockies is where we had the big weather impact in June. If I look Florida and east coast, again, positive growth unencumbered by any kind of wet weather. It's really that central part of the country that was impacted. And then -- and with Texas, for example, it's a big market for us. That's where the short-term impact probably affected us the largest.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [88]

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Understood. That makes a lot of sense. And then did you comment on price mix contributions as part of that 3% HVAC equipment growth?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [89]

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Yes, we said earlier, there's a little bit of both.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [90]

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Okay. That's helpful. And then on Peirce-Phelps, it sounds like it hasn't closed yet, is that right? And then also, did you disclose how much you paid and anything on margins? Just trying to nail down expected accretion to net earnings and the related timing of that?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [91]

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Well, there are consents and approvals that are required in order to close. We expect that to happen in the third quarter. We commented that the margin profile is better than, let's say, the historical joint venture margins that we started with 10 years ago with Carrier, but still less than Watsco's, somewhere in between. So opportunity to grow.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [92]

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And just remind me, what were those historical JV margins? I don't recall those formats, I'm sorry.

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [93]

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You'll find an 8-K in 2009 that says 3% margin was what we acquired when we acquired Carrier Enterprise.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [94]

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That was good. I like that.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [95]

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And then the -- on the inventories in the balance sheet, looks like up in the second quarter. Anything unusual with regard -- I mean, I guess, they're always up in the second quarter, but seemed like they were up a little bit more. Anything unusual there?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [96]

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We just want to be ready. There were some freight -- there were some delivery issues, and we've got the strength with our balance sheet to take it in earlier in order to be ready for the season.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [97]

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So there are delivery issues this year? Or are you talking about last year?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [98]

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They were earlier this year.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [99]

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Understood, understood. And then, last one for me, sorry, I'd a bunch of questions, I apologize.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [100]

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Take your time. We are in no hurry, take your time.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [101]

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So the SG&A growth for the year, do you still expect it to be slower than the rate of sales growth, I guess, maybe in the second half maybe or for the year, however you want to comment. I believe, last quarter you talked about it growing at maybe half the rate of sales, but obviously this quarter was -- you had some issues in June with the top line, which were not your fault, but just curious if you have an update on that.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [102]

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Mr. Logan?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [103]

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I'm sorry, I really lost -- I lost you at some point. So go ahead and repeat it.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [104]

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You don't have to be in a hurry. Just relax, and we'll give you all the time you want.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [105]

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The main question is SG&A growth for this year. Do you expect the growth rate in SG&A to be slower than the rate of growth in sales still? And about how much would you kind of target?

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Barry S. Logan, Watsco, Inc. - Senior VP & Secretary [106]

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Again, one we're in control of. One is, is how much money are we spending. In the first half of the year, SG&A on a same-store basis is up 1%. Any level of sales growth in the second half beyond that will derive that equation that you're asking about, but sales growth has to occur for that to happen. So I think there is some confidence there, but still dependent on the sales growth as I said earlier.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [107]

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Okay. And I'm sorry, I do have one last one. Just in terms of the competitive situation from other distributors, Lennox had some issues with their plant in Marshalltown earlier -- or last year. I'm just curious if you're seeing any change in like competitive behavior with regard to them trying to recapture market share that maybe they lost because of production being down?

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [108]

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I'll see if I can give you my thoughts on that. Lennox is a great company, and the leadership has done outstanding since they joined the business. Are they taking share back, I couldn't tell you, but I can tell you fundamentally, they are a great company.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [109]

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Congratulations on the acquisition, guys.

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Operator [110]

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And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to Albert Nahmad, CEO and Chairman of the Board for any closing remarks.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [111]

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Marco, thanks for monitoring this. Are you going to be back the next quarter too?

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Operator [112]

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Let's hope so.

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Albert H. Nahmad, Watsco, Inc. - Chairman & CEO [113]

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All right. Thanks, everybody, for listening and look forward to talking to you in the next quarter. Bye-bye now.

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Operator [114]

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Thank you. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.