Watsco, Inc. (WSO) Q2 2022 Results - Earnings Call
Watsco, Inc. (NYSE:WSO) Q2 2022 Earnings Conference Call July 26, 2022 10:00 AM ET
Company Participants
Albert Nahmad - Chairman and Chief Executive Officer
Aaron Nahmad - President
Barry Logan - Executive Vice President, Planning & Strategy and Secretary
Paul Johnston - Executive Vice President
Rick Gomez - Vice President, Corporate Development
Conference Call Participants
Tommy Moll - Stephens
Ryan Merkel - William Blair & Company
Stephen Volkman - Jeffries
Nigel Coe - Wolfe Research
Jeffrey Hammond - KeyBanc Capital Markets
David Manthey - Baird
Stephen Tusa - J.P. Morgan
Operator
Good day, and welcome to the Watsco Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Mr. Albert Nahmad, Chairman and CEO. Please go ahead, sir.
Albert Nahmad
Morning, everyone. Welcome from rainy cloudy, Miami, Florida. This is our second quarter earnings call and this is Al Nahmad, Chairman and CEO. And with me is A.J. Nahmad, who is the company's President; Paul Johnston, Barry Logan and Rick Gomez.
Before we start our cautionary statement, this conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the Safe Harbor provisions of these various laws, ultimate results may differ materially from the forward-looking statements.
Onto our information. Watsco delivered another exceptional quarter. Records were set for virtually every measure of performance. Earning per share jumped 33% to a record four point -- sorry -- to a record $4.93 per share. That's a record $4.93 per share for the quarter. Sales grew 15% to a record $2.13 billion, which is our first $2 billion quarter. Operating income increased 32% to a record $287 million with margins expanding 180 basis points to a record 13.5%.
We are particularly pleased with these results, given the strong comparisons against the second quarter last year. Now that was a heck of a quarter. Last year, same-store sales are up 29% and earnings per share was up 64%. That's the comparison that we're up against this last quarter, the second quarter of this year. Now for the first half of this year, earnings per share is up 53% and the record $7.83 on a 22% increase in sales.
Looking at current trends so far in July, we see meaningful unit growth and additional price capture as inflation remains a reality in our industry. For the year, we expect 2022 will be another year of record performance. Then, looking to 2023, higher interest rates and perhaps an economics slow down is what we think about.
We were reacting creative ways to take advantage of our scale, product diversity and technology leadership to sustain growth and build upon our growing market share no matter what comes in 2023. We have also asked our teams to focus on productivity and operating efficiencies, which have been more difficult to achieve the last two years, given the unprecedented supply chain, transportation and business disruption that have impacted all businesses, not just ours.
We're also engaged with our OEM partners and working together to develop forward-looking growth initiatives. Watsco has deep relationships with virtually every domestic and internal -- international OEM. And we possess the best, most diverse brand portfolio of any distributor in our industry. More fundamentally, there are numerous reasons to be optimistic about our business and our industry in the medium and long-term.
This morning's press release provides a number of additional data points that we feel support Watsco's growth trajectory. We have immense technology advantage in our marketplace, and we are investing to grow that advantage -- to grow with that advantage. Our technology investments are paying dividends in the form of higher customer engagement, reduced attrition and substantial market share gains.
We have a market advantage in the breadth and diversity of products we sell across dozens of brands. Sorry, let me say that again. Our market advantage is the breadth and diversity of products we sell across dozens of brands and hundreds of product categories. This diversity allows us to offer the full variety of price points required in a market in most, any economic environment. In addition, we have a concentrated position into Sunbelt markets, where both population migration is greatest and the necessity of HVAC products is the most absolute.
Now turning to something that's very important, that's the regulatory front. We have several important federal regulatory changes coming to provide opportunities for growth. The minimum federal SEER standards will increase in 2023 across the entire United States. The price points associated with these new products will be higher and should benefit 2023. Another very important regulatory change will occur in 2025 as the industry transforms or transitions to new refrigerants. Federal mandates are now in place to phase out the current high GWP, which means Global Warming Potential. Say it again. GWP, Global Warming Potential, refrigerants use millions of systems. OEMs are developing new products to incorporate the lower GWP refrigerant.
To sum it up. There are significant opportunity for homeowners and businesses to upgrade systems that will over time be both efficient and environmentally friendly. We believe our scale, technology and financial strength position us extremely well to capture these new market opportunities.
Finally, we're always concern ourselves with our balance sheet, so that we are in a position of financial strength. Today's balance sheet remains in pristine condition with a small amount of debt, and we can continue to funding investments to grow our business. We are fortunate to be the leader in such a key industry. As we mentioned, we feel there are and will be several important drivers as growth for company -- forward growth in our company in years ahead.
As always, we have presented only a small portion of our technology story in today's release. If you have any interest in learning more, let us know, and we will schedule time with A.J. and his team. We are always happy to share more about our progress.
But with that, let's go on to questions and answers.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions]
And the first question will come from Tommy Moll with Stephens. Please go ahead.
Albert Nahmad
Morning, Tom.
Tommy Moll
Good morning and appreciate you are taking my questions.
Albert Nahmad
Of course.
Tommy Moll
So, maybe no surprise. I was hoping to start on gross margins this morning. So, a couple components here. I guess, maybe just to start, any update you can give us on some of the digital pricing optimization investment you've made that, that can impact that gross margin. And then, as a follow-up, any drivers you could call out, particularly from a sequential basis from first quarter to second quarter? And if anyone's willing to hazard a guess on whether that margin might be flat up or down in Q3, we'd all love to know that as well.
Albert Nahmad
I think the first part of your question is very well placed, because we do have technology that help us with that. And the second part of your question, that's a little more intense and we'll get some comments on that. A.J, you want to start?
Aaron Nahmad
Sure. Sure. First, to give you some context, you have to understand that we do business with about a thousand manufacturers and all of them -- I think, it's fair to say all of them have had probably multiple price increases over the last several quarters and years. So, just the administration of putting -- making sure that our systems are up to date with the latest cost basis from each of these suppliers and making sure that we have the right cost and price in the marketplace is enormous. And before we had the technology we do now in our pricing tool, I'm not sure we could do it, certainly not to the way -- not to the extent of proficiency and expertise that we did today. So, just the administrative burden has been eased by the tool itself.
Land, you can start talking about the opportunity. The opportunity is to make sure that we capture the additional price in the marketplace that needs to be passed along to our customers and to their customers and to be reflecting of the inflationary environment. And our tools enable that and then enable to slice and dice and do analytics to find opportunities to maximize, or I should say optimize price by product, by category, by geography, et cetera. And the opportunities are endless.
And it may just so you know it may not always be going up in price. It may also be going down in price. There are very -- there are definitely times where we are out of line with pricing and when we get in line, we can move product more efficiently and create, or I should say capture demand that's out there when we have the pricing correct. So, I'd say we're still early days with the tool, because the tool has really enables infinite opportunities. But it's an exciting and important opportunity that we have in front of us.
Albert Nahmad
Very good. You wanna repeat the second part of your second question please?
Tommy Moll
Sure. Any context qualitative or quantitative on the gross margin from first quarter to second quarter and to the extent you can give any insight on second quarter to third quarter.
Albert Nahmad
Barry, you want that?
Barry Logan
Sure. Tommy, good morning. Well, first again, I'll answer the second part first, because it's a bit longer term and view. And last quarter, first quarter conference call, we talked about 27% as a longer term target for gross profit. And so, therefore, the amount of that target that's above historical levels is the structural and strategic and tactical progress, we believe we've made on gross profit. And we're in an inflationary environment, which we were have been in for the first half of this year, it'll -- it can be something more than the 27% and that's precisely what you see in the numbers year-to-date.
Sequentially, it's noisy to be -- to give a simple thought, which I'll develop. And the noise is that in the first quarter with pricing actions by the OEMs, when we flip inventory for the first 90 days and -- in the smallest quarter of the year, the benefit of that spread is, is in gross profit and builds a gross profit that's higher, and that's where the 29% came from. It's really simply the timing and level of OEM pricing that came into the market. And when it came in, relative to our first quarter. So, the smoothing or the predictability or the projection of gross profit has to look over a longer curve of time than just one quarter. I don't -- I wouldn't want you to take every quarter that we report and try to -- get too many inferences out of it. Just listen to the long-term target, listen to the structural elements of what we've been doing. And if there's more inflation on the road, it's something that can be improved. If there's lack of inflation, then I think the target that I've mentioned is what the more likely event is long-term.
Tommy Moll
All very helpful and very much appreciated. I did also want to ask about SG&A. You highlighted that there have been some factors that -- some factors in play recently and that you may need to -- I believe the term was reevaluate to the extent that business conditions normalize. Can you give us your current thinking on the potential need to reevaluate there?
And I guess ultimately what we're all trying to discern is in a -- in an environment where potentially you even see some reversal on input costs and maybe even some broader economic headwinds, can you still hold a double-digit operating income margin?
Albert Nahmad
Barry?
Barry Logan
Yeah. Thanks Tommy. Well, first, it -- obviously, when you manage the business, you're managing all the pieces that, that end up being double-digit, either margin or not. So, it's -- if I focus on SG&A, there's been a complete lack of capability over the last probably 18 months, almost two years, lack of an ability to find efficiencies when supply chain was completely disrupted. You had exceeding demand in terms of chasing demand in the marketplace. You have competitive factors that we wanted to take advantage of. So, we hired more people brought in, in more customer service, more of everything in order to grow and our market share gains, or evidence of that accomplishment, all of that has to be built through SG&A.
We also asked our vendors for programs and for benefits and economics, so that we could invest more people. We could open up more locations than we have. And obviously, the technology spinning has proliferated over the last two years for good reason, and with good results.
So, now I've built that up. Needless to say, the message now is where are the efficiencies? Let's go -- let's put the nose to the grindstone, ask our teams, ask our leaders, ask our field people, ask our branch managers to take a breath. They're still very busy by the way. It's still a very busy season and business is still very good. But when we look out beyond the horizon, to some extent, SG&A has to be dealt within the creative and entrepreneurial way that that we know is possible.
Virtually every variable cost has increased in line with sales over the last two years. And remember, sales are probably up 25, 30% in the last 18 months, if I put that in perspective on a same-store basis. And so, variable costs will be dealt with, and whatever that variable picture looks like in the next 12 months. And then, you have a bunch of structural costs that have been frankly, again, built in a very inefficient environment that will become more efficient as time goes on.
Aaron Nahmad
If I can -- this is A.J. Let me give you another example of how this supply chain woes, have added to SG&A. And you can do the math of as things normalize, these SG&A costs should come out. As an example is that our vendors and our suppliers, they may be getting us high quantity of product, but it may not be the right mix of products in the right locations. For example, we may have more indoor units than outdoor units, and I'm making this up in one geography or vice versa. And so, we have spent an incremental millions of dollars simply moving product among our locations, so that we have matched systems that we can fill customer requests for. And that's a direct result of just the challenges in the supply chain. So, as things normalize, you would imagine that some of those additional costs should come out as well.
Tommy Moll
Appreciate all the insight and I'll turn it back.
Operator
The next question will come from Ryan Merkel with WB. Please go ahead.
Albert Nahmad
Morning, Ryan.
Ryan Merkel
Hey, everyone. Good morning. First off, can you comment on sales trends exiting the quarter and into July? Just curious if there's been any slowdown in demand.
Albert Nahmad
You mean in the beginning of the third quarter?
Ryan Merkel
Yeah. Correct.
Albert Nahmad
Yes. We've been a -- we've seen a terrific increase in demand. Let's have Barry or Paul either one give you the numbers.
Barry Logan
Go ahead, Paul.
Paul Johnston
Okay. Yeah. Definitely Ryan, we've seen an uptick in the month of July, and it's been one in which we've seen different regions come to life and really give a pop. The most important two regions that are really performing well right now are in the Southeast and the Southwest, but we're seeing substantial increases, even compared to last year's July.
Albert Nahmad
Barry, you were going to add.
Barry Logan
Yeah. I said from my career that I want to report in April and through September half and this quarterly dance that we get on with volatility would go away and that's I think what we're seeing. We're seeing very strong comps that were up against in the second quarter. We're seeing now very strong growth in July, which is the biggest month of the year, by the way, for our company. And the question is, is it some type of wall we've hit or is it simply a volatility discussion? And I believe it's more a volatility discussion versus what last year's performance was in the short analysis. The long analysis is that pricing and units are very strong as we're getting into the later part of -- getting into the third quarter.
Ryan Merkel
Got it. Thanks.
Albert Nahmad
Yeah. I think we commented the units are up mid single dig -- high -- mid single digit in the beginning of July.
Ryan Merkel
Beginning of July unit sales up mid single digits to high single digits?
Albert Nahmad
Yes. Correct.
Ryan Merkel
Okay. That is very strong. And then, my second question is looking out to 2023 with the SEER change. I think there's some misunderstanding about sort of the impact. If you guys could unpack it, it would be very helpful. So, my understanding is you're going to see an increase on the base units, but you're also going to see an increase on SEER 16 and 17 because of the SEER 2 testing. So, my question is what could be the price mix benefit in 2023 when you put all that together with price carryover?
Albert Nahmad
Paul?
Paul Johnston
I would say, right now, everybody is kind of scrambling looking at that number, trying to figure out exactly what the market price will be for the 16, 17. As far as the baseline products, the old 15 SEER, the new 14.3 SEER products is coming in. I would say that that's going to start in the mid teens up from what we currently have today at the 14 SEER level.
Ryan Merkel
Okay. So, asking in a different way, could roughly 75%, 80% of your equipment sales be up mid teens and price in 2023, or do we not have enough information to answer that at this point?
Albert Nahmad
Ryan, if you look at where we are today with -- the base products today represent about 75% to 80% of the sales volume for the industry market. And if you assume that that carries over into 2023, then yes, you would see a mid teen growth.
Ryan Merkel
Got it. Okay. So punchline is price mix in 2023 is going to be pretty meaningful.
Albert Nahmad
Yes, it is.
Ryan Merkel
Perfect. I'll pass it on. Thanks.
Operator
The next question will come from Stephen Volkman with Jeffries. Please go ahead.
Albert Nahmad
Morning, Steven.
Stephen Volkman
Hi. Good morning, guys. Thanks for taking the question. Can I just follow-up on that one? Because it feels like one risk might be that people who were choosing very high SEER product when they felt flush and 401ks were big and all that might choose sort of closer down to the minimum. And so, there could be like a negative mix shift on that. I gather you're not seeing that yet, but do you have any views on that?
Albert Nahmad
Go ahead, Paul.
Paul Johnston
Okay. Steven, yeah, we have views. We have opinions. But obviously, it's very hard to predict what the consumer's going to do in the elasticity of it. There are definite differences between the high SEER and the standard SEER in the areas of comfort, reliability, warranty. There's a lot of soft differentiators besides the energy savings that they accrue.
There's also a second element to it, which gets into both local and state rebates to the consumer. Also, we're getting into a situation where utilities become more aggressive in their rebate. As we -- we have disruptions in electric supply in the marketplace.
So, if you did just a straight calculation and said, would there be a compression? I think we'd have to go back in history and say, and in the past, there has been a compression to the minimum SEER when we went from 10 SEER to 12 SEER and from 12 to 14 in the south. So, if that were to occur, I think you probably could lay out some historical numbers and see if that happens. But that would be just an estimate at this time.
Aaron Nahmad
Yeah. I think, it's also interesting to note -- it's interesting enough too -- sorry to interrupt -- is that part of the, I should say, a victim of the supply chain lows have been high efficiency systems. There's simply just not as many available for us to sell. So, our mix is at least somewhat affected by our inability to get those products from our OEMs and sell into the marketplace today.
Stephen Volkman
Great. And I think feels like you're reading my mind A.J. because my follow up was actually about supply chain. And I was wondering if you could just kind of comment, are we kind of back to normal, or is that overstating it and how do you see that playing out?
Aaron Nahmad
Well, I think, I think we're -- yeah, I think we're getting back to normal. The supply chain is good. However, there's -- there are disruptions in certain product areas, commercial unitary right now, very difficult to get any product in that. The large commercial products, very difficult, very long lead times. When you get to just the standard bread and butter product, we're seeing a pretty good supply chain right now where we're bringing in the indoor and the outdoor are actually coming together for a change.
When we look into the future, all these manufacturers, all these OEMs are going to be changing over to a new product. Some of them completely redesign, some of the modifications of what they currently sell. So, I guess, in my heart, I think that we'll probably have some moderate disruptions as they go through the changeover to the new product line for 2023. And each one of them are going to perform in different manners. And that's the good news about Watsco. We have -- we represent just about everybody in the industry.
Stephen Volkman
Super. I'll pass it on. Thank you.
Operator
The next question will come from Nigel Coe with Wolfe Research. Please go ahead.
Albert Nahmad
Morning, Nigel,
Operator
Perhaps you're muted. Mr. Coe.
Nigel Coe
Yes, I am. Thank you very much. Sorry about that everyone. Good. I'll say good morning again. Just on the 15% kind of mix up on the new sort of minimum SEER of units. Do you think that's going to wash with customers, because there's obviously a lot of inflation pressures right now. Are you seeing any signs of increasing pushback from the channel on pricing?
Paul Johnston
Well, to date, we have not really seen any pushback on pricing. Obviously, demand remains strong. If you look at the industry itself, we're performing at record levels over the last two years with ever increasing prices. And I think as we moved in -- move into the new product, it's going to have higher efficiency. It's going to have other attributes which should be beneficial to the consumer.
I wish I could read into what the consumer's mind is when it comes to the cost of a replacement of an air conditioning unit. It's unlike a car or any other staple that a consumer buys. It's something that -- there isn't a list price out there that they can go ahead and match. There's not a consumer report that tells them what a price should be. And each job as you recognize is custom. And so, it has different attributes and different issues that would affect the price to the consumer.
I think, particularly in the Sunbelt area, when it comes to the new products that we're going to be selling on the air conditioning side, it is a necessity. You're not going to live without it. So, if you have to replace a unit, I think most consumers going to find a way to be able to afford it and to do it. And the same holds true with gas furnaces and heat pumps in the north and in the Mid-Atlantic. Once again, if it's 20 below zero in Alberta, Canada, you're going to be changing out your gas furnace in that market. So, kind of an iffy question. I really don't know how the consumer's going to react. I don't think there's any good tests that we can put on it analytically to be able to determine what the analytics are or what the elasticity is for the consumer.
Barry Logan
I think, Paul, just -- Paul, I just think to add to that, and this just adds a layer of another thought to that is the cost of repair today is probably escalated at even a faster rate than the inflation rate of new equipment. First, labor and materials that the contractor might prescribe for a repair has gone up, obviously materially. Refrigerant, which is used in most repair situations, either a compressor change out or a coil change out or something like that, that's multiplied in price over the last a couple years. And it's only going to get more expensive with the full teeth of the phase out of that refrigerant occurring.
So, the cost of repair is no cakewalk and not a party. It's something that's become much more expensive as well. And contractors despise repair if they see a replacement opportunity. So, I think it's -- still it'll be interesting times, but I don't think the volatility is as great as other consumer products let's say.
Albert Nahmad
And touch consumer financing, Barry.
Barry Logan
Yeah. And the root of how do people pay for these things historically has been cash and credit cards and potentially a small home equity line, but financing has really only -- explicit financing for these products has only been for elite homeowners and elite contractors that offer the -- that financing and versus broad based programs and so on. So, that's something that we are working on, on building on our invention, which is just called CreditForComfort, which becomes available to all of our customers and a much broader group of consumer capability, because it's not one finance company, it's a cascade of finance companies.
So that's training, that's effort, that's launched, that's adoption. That's a curve that we're very early on. The long-term, this consumer financing side of things will become a component of -- will become a component of these calls and part of the backbone of what we're doing with technology.
Nigel Coe
Great. That's great perspective. Thanks Barry. Thanks Paul. And then, just my follow-on is really the perspective around 2023. And I know it's a long way away, but just curious why now, because it doesn't feel like you've seen a real break in the trend into July. No big repair versus replace changes. So, just wondering why now. And what do you think normal looks like? Whatever that means.
Albert Nahmad
I'm not sure I understood the question. Can you clarify that?
Nigel Coe
Yeah. I'm just -- sorry, I'm just wondering why the perspective today on 2023 just given it's some ways away.
Albert Nahmad
Well, because we see the federal government changing the industry and changing what we'll be selling and changing what consumers will be faced to buy. And it's a big thing, is the regulatory environment, plus the ability to move to higher efficiency systems and reduce costs to the homeowner and contribute to the -- to our ability to help with the environment with emissions. Every time you move to a high efficiency unit, you're removing emissions from the planet because we're producing more cooling with less electricity. And if you produce less electricity, you're producing less emission.
There are a lot of factors here. None of them are negative other than the earlier question was, how can a consumer afford this? And we're very motivated to help with that -- with our consumer financing. And I believe we have the best offer now to help the contractor bring the homeowner or the business owner onto a finance program. Now, we're not doing the financing. We lay that off to a series of different finance companies depending on the credit rating of the consumer. And that's just the beginning. So, it's hopefully, I gave you some answers, but wouldn't keep asking.
Nigel Coe
Okay. Well, that's very helpful. Thank you very much.
Operator
The next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.
Albert Nahmad
Hi, Jeff.
Jeffrey Hammond
Hey, good morning guys. Hey, so I just want to come back to this gross dynamic margin. I appreciate the color around the 27%. And it looks like versus a few years ago that's a nice 250 basis point benefit through kind of structural changes. But just as we look into the second half and 2023, it seems like this inflationary environment, whether it be regulatory or just carryon pricing, it seems like it's with us. So, just -- I guess, is the assumption as long as we stay ahead on where we see inflation, we run ahead of that number? And as inflation settles, we get back to that 27%.
Albert Nahmad
Well, that's a good accounting question. Barry, do you want to deal with that?
BarryLogan
Yeah. Jeff, I think, in general, I think if we all had a crystal ball and said what will inflation be a year from now, and yes, there's some unique things to our industry. But just general economic inflation, it will be less than today. I mean, we have a pretty huge federal government exacting monetary policy that sees to that, correct? So, just in our own kind of conservative way, we want to say that as inflation also comes back down to some reasonable level, the benefit of that in the distribution gross profit will also moderate. And that's a little bit of, I think, conservatism that we need to have and that's why the 27% is there.
I don't think that -- the pricing actions are -- hit a wall instantly. They won't. There will still be pricing decisions being made across the market, across product lines, across OEMs. That will be a reality for probably the next 12 months. We're just trying to give a little bit of insight and level set the thinking beyond just the current year.
Jeffrey Hammond
Okay.
Albert Nahmad
You have to remember also half our revenues in that approximate amount is not equipment. It's all the other stuff that keeps us -- that you need to install the air conditioner, to maintain the air conditioners, there are a lot of supplies, a lot of different things. And that's a solid business. The demand of that is more reliable to demand on the equipment. And that's generally at a higher margin.
Jeffrey Hammond
Okay. Great. And then, just back on commercial, it looks like maybe flattish in the quarter and maybe down on volume. But is that just simply a function of supply constraint? Or what are you seeing on the demand side?
Albert Nahmad
Certainly, we know the supply constraint is a big player. Anyone else have any comments on that?
Paul Johnston
Yeah. It's been the worst nightmare. Demand on commercial is up. Supply is down. And lead times for unitary product and applied product, both have been extended out beyond what I've ever seen in my history in the industry. So, I think that's going to be just latent demand that we're going to pick up as supply picks up. I think those shops will be filled, but probably at a later date, not now.
Jeffrey Hammond
Okay. Appreciate it guys.
Operator
The next question will come from David Manthey with Baird. Please go ahead.
Albert Nahmad
Morning, David.
David Manthey
Hey. Good morning, everyone. And yes, Al, could you explain to us your cautious outlook here? Is this based purely on the macroeconomic data? Or are you seeing some kind of forward-looking indicators that indicate slowing demand, because I agree with the 2023 outlook? But when we're talking about pricing, it sounds like that's going to be up. We talked about the inelasticity of replacement demand. Really, all that's left is the minority of your business, which is new construction demand. Is that the piece that you're focusing on as it relates to the 2023 outlook?
Albert Nahmad
I don't believe we're trying to be negative on 2023. We're very positive about 2023. But you did put your finger on a small part of our business as sales to new construction. It's in the newspapers that startups are down, but that is a small part, and it's certainly a small part of our margins. That business is got a small margin for us. But I think we're pretty positive about 2023. Did you think that we were not?
David Manthey
No. I just think that the way the press release read and talking about normalizing conditions and things, I think people automatically jump to that means slowing or negative growth. But if it didn't, that's fine, too.
Albert Nahmad
Well, Barry wrote that thing. Barry, why you wrote that thing?
Barry Logan
I glanced at something before the call which is interesting. And that's that if you look at six-month operating profit two years ago versus today, it's almost 2.5 times greater today. Put that in perspective. Two years ago, six-month operating profit versus this year's operating profit, it's almost 2.5 times greater. So, the messaging is, we love the growth rates, we love the structural profitability gains. But in terms of slower -- slower is not a bad thing. Slower can mean growth that's in -- and more in line with the historical trend, not 2.5 times the current thing two years from now. So, it's trying to pull the reins a bit on reality and expectations and also in the backdrop of the macro economy that we're in.
Albert Nahmad
Let me ask it this way. Do you think we're going to be in record territories in 2023?
Barry Logan
I think we'll be in record territory in 2023.
David Manthey
It's good to hear. Okay.
Albert Nahmad
For the year, yeah.
David Manthey
All right.
Albert Nahmad
I mean, we're selling out all the things we think are going to drive demand. I mean, the regulatory thing is a big deal. Barry is saying that the growth rate of the industry is going to slow, because we were in an extraordinary period for the last two years, but that doesn't mean it's going to slow. It's going to go to normal. It's not going to go -- we don't expect some decrease in demand for all the factors that we've mentioned in terms of normality. No, we're very positive about 2023.
Barry Logan
If I could throw one more thing in there. The same dynamics that create demand in our industry are still going to be in effect. And that is we still have an aging population that's -- looking at myself, I know I'm going to continue aging. We've still got migration and urbanization. Urbanization continues to grow as people move more and more to the cities and move more and more, frankly, to the cities that we like, in Texas, in Florida, in the Mid-Atlantic. We also see climate change and things happening in that area, which is going to impact and help our business, as well as a drive for more efficiencies. So, those are the four demand creators that we've had for the last 30, 40 years that I've been around, and they're going to continue in 2023.
David Manthey
Great. That’s helpful color.
Aaron Nahmad
I have to summarize it my way, which is this, this extreme growth market environment can't last forever, because it's too extreme. But no matter what the market conditions are, we expect to grow. We think there's a lot of tailwinds behind our industry. And then, as a company, we think we've made investments that will ensure growth for many years to come in the long-term.
Albert Nahmad
Well, thanks for clarifying Barry's comment there A.J.
Aaron Nahmad
We should edit that one.
David Manthey
Yeah. Great. Thank you for that.
Albert Nahmad
We're very positive. We're not negative for 2023 or beyond.
David Manthey
Okay. Got it. Okay. And second one, hopefully, see I can sneak this in here. As it relates to Barry's comment about SG&A growing in line with sales growth over the past couple of years, given how much of that revenue growth is due to price, is that seen as disappointing at all? Or maybe are there some expenses in there that were front end loaded that will easily come out of the SG&A operating expenses as things would normalize?
Albert Nahmad
That's a very good question. Why don't we try A.J., somebody that can comment on that or all three of you, Barry, A.J. and Rick?
Aaron Nahmad
Rick? How about Rick? Yeah. Why don’t Rick?
Albert Nahmad
Yeah. Rick?
Rick Gomez
Morning, Dave.
David Manthey
Good morning.
Rick Gomez
Well, yeah, I do think that there is a -- there are multi -- multiple facets to the SG&A question. First, just to give you some context on the year-to-date picture. When you look at the increment in year-to-date SG&A organically, a big, big chunk of that, almost half of it came in variable categories. We've already talked about freight and inter-branch freight. We've mentioned things like commissions and incentive comp in prior press releases. And in our minds, those are things that are largely self regulating in a slower growth environment, if that's, in fact, what we have in 2023, or a more normal growth environment.
And so, there is a good understanding of what's variable? How does it moderate? And how do we expect it to behave in future periods based on different growth algorithms. The trickier question is on the fixed cost. And as we've said, we've made investments to sustain a higher business and to propel the market share gains that we've seen in the last two to three years. And so, we need to now look at some of those investments and figure out where they make sense, figure out what we can do to make them more profitable and more efficient. And, of course, we look at things internally, not just in terms of volume and price, but we look at it in terms of just what I referred to as the stock, right? It's branches. It's people. It’s trucks. It's things that -- it's square footage, those things that we can measure almost independent of the inflationary environment. And that's what we said in the press release, we've challenged our leaders to make all those categories more productive going forward.
David Manthey
All right. Thanks Rick. Thanks everyone.
Albert Nahmad
In other words, we have a lot of opportunity to get more efficient, and we know it. Because what's happened in the last two years, we were all scrambling, and scrambling costs us a lot. But that scrambling is going to decrease as the OEMs catch up. We still are short and high efficiency. And it's going to normalize. As things normalize, the SG&A will normalize to something that's -- as a percentage of sales, lower than what it is today, is our expectation.
Rick Gomez
Right. I would also add one more thing, which is that, on the technology front, we are still a young company as it relates to some of our internal facing technologies. So, we've talked about the pricing technology that's more margin-oriented. That's really only been in the hands of the masses in the company over the last 12, 18 months. And there is additional technology now being deployed to further that warehouse optimization. So, it is still very -- we are earlier in our journey on the technology front for some of that internal technology that's really aimed at productivity.
David Manthey
Terrific. Thank you all.
Operator
The next question will come from Steve Tusa with J.P. Morgan. Please go ahead.
Stephen Tusa
Hey, guys. Good morning.
Albert Nahmad
Morning, Steve.
Aaron Nahmad
Morning.
Stephen Tusa
And I guess, A.J. needs to help Barry write these press releases from here on out.
Aaron Nahmad
Yeah. But it actually works. Now we get the tease Barry for the next several weeks.
Barry Logan
Right. That’s right.
Stephen Tusa
That's worth it. That's definitely worth it.
Albert Nahmad
Very good. Steve. I didn't know you had that kind of humor.
Stephen Tusa
Seriously? I just stated it's a sign of a good CEO to point the finger at the guys that work for you, like Barry, you know that wasn't your press release.
Albert Nahmad
That's right. You're right.
Stephen Tusa
You guys mentioned July and you mentioned volatility. I mean, what did June look like? Because we've seen the HARDI data, we've seen the AHRI data. What did June look like for units for you guys?
Albert Nahmad
Mr. Logan?
BarryLogan
June units -- I would say June dollars was a bit better than the quarter June units. I don't have, Steve, and that's getting a little bit granular. But I would say June was a better month than the others, and that momentum is even that much greater in July.
Stephen Tusa
Okay. So -- but the July comment was a unit comment or a dollar comment?
Barry Logan
Both.
Stephen Tusa
So, the units up mid single -- so what are you saying on units and dollars for July again?
Albert Nahmad
Well, he doesn't know what it was, units in July. He just knows the dollars.
Barry Logan
I'll say carefully. Yeah. Units were up in June. And Al commented earlier, July units were up mid to high single digits.
Stephen Tusa
Yeah. Okay. Got it. All right. That's helpful. And so, on this kind of the great gross margin commentary, you guys have talked about what's normalized. We can see what happened in the first half and the second quarter. So, if that's kind of a normalized number that you should trend along, is there a quarter here where as the inflationary dynamics change, that you would go below that number for a period of time and then obviously, bounce back as things "normalize". Will there be -- because 1Q to 2Q, there's some volatility there. Is there a continued volatility as we move forward in the next couple of quarters on that? Would that go below the 27% normalized at some point?
Albert Nahmad
Well, who wants that one?
Paul Johnston
I'm pointing to Barry.
Stephen Tusa
Al is going to come back around you, if you're not careful. He is going to come right back around you.
Barry Logan
I think it's my 128th press release, by the way, just for the sign of the math, and I'll stand by my long-term track record.
Paul Johnston
The obvious answer is we're very focused on gross profit. We have tools that are helping us. And we want to do 27%. We want to do better. Can we predict it? I'm not sure we can, but we feel pretty comfortable on that number going forward or better.
Stephen Tusa
Okay. Okay.
Paul Johnston
I mean, there could be ups and downs, but we're very focused on margins. I would like to if I want to speculate -- and this is pure speculation -- my goal is to get it to 15% EBIT margin eventually.
Stephen Tusa
Got it. Okay. And then one last one. Are we close to the end of the OEM's residential equipment price increases?
Paul Johnston
No.
Barry Logan
Yeah. I think we're very close to the end of that as we reach forward and introduce the new products that are going to be coming in. Probably in the fourth quarter, we'll see a price increase then.
Stephen Tusa
Right on those -- on the new ones, but not a like-for-like on the existing ones?
Barry Logan
No, no.
Stephen Tusa
Yeah.
Albert Nahmad
Don't forget, Steve, that a lot of -- half the United States will be unable to sell lower efficiency air conditioners.
Stephen Tusa
Yeah. Yeah.
Albert Nahmad
So, that's an inventory trick. But the stuff that we will be selling is the new stuff, and they're coming at higher prices. We already know that.
Stephen Tusa
Right. Right. Okay. Great. Thanks a lot guys. Appreciate it.
Albert Nahmad
All right.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks. Please go ahead.
Albert Nahmad
Well, thanks very much for your continued interest in Watsco. We try to keep it light -- our conversations. But this is a serious leadership team. And we hope you have enjoyed our story. And we hope to continue giving you good news as the quarters go on. So, thanks again for your interest. Bye-Bye.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
