Good morning, and welcome to the Watsco First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. .

I would now like to turn the conference over to Al Nahmad, Chairman and CEO. Please go ahead. .

Thank you. Good morning, everyone. Welcome to our First Quarter Earnings Call. And this is Al Nahmad, Chairman and CEO. And with me is A.J. Nahmad, President; Paul Johnston, Barry Logan and Rick Gomez. .

Now before we start, I will state our cautionary statement as usual. 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. .

Now on to the performance. Watsco delivered good results despite softer market conditions. As a reminder, the first quarter is traditionally the low season for sales in our industry. Although it is early, we are encouraged by the improved sales trends in April ahead of the summer selling season. .

We believe our technology, breadth of brands and products and the expansion of our network have generated market share gains. Our balance sheet strengthened during the quarter through a combination of record cash flow and an equity raise using our ATM program.

And once again, we boosted our annual dividends by 10% to $10.80 per share, beginning April of 2024. This year marks Watsco's 50th consecutive year of paying dividends. .

Now commentary highlights on the quarter. Although residential equipment unit demand remains low, our price realization, a richer sales mix of heat pumps as well as high efficiency products and new locations contributed to record sales in the quarter. Commercial end markets experienced growth and our backlog of projects remain healthy.

Sales of ductless systems, an increasingly important component of our business grew and offset declines in the conventional ductless residential business. Gross margins performed well and are consistent with our near-term target of 27%, though we believe higher margins are achievable over time. .

Turning to expenses. SG&A increased 2% on an adjusted same-store basis. Variable SG&A expenses were lower for the fourth consecutive quarter, and our teams across Watsco has implemented a number of actions to improve efficiency and reduce SG&A. .

And to that end, we have equipped leaders with the necessary tools and data to improve productivity, and most importantly, of all, we possess an entrepreneurial culture to execute change in [indiscernible] possible way.

Since the beginning of last year, we expanded our network through acquisition in 3 -- through acquisitions with 3 terrific businesses joining the Watsco family. Collectively, their aggregate sales are approximately $200 million per year. And more importantly, they expand Watsco's reach into new markets.

These businesses will retain their culture, their leadership and teams and uniqueness in the market, which is consistent with our long-term practice of sustaining great legacy and investing to drive additional growth. .

Our industry remains highly fragmented, and we will continue to pursue other great companies to grow scale in our $64 billion North American market. Watsco's technology advantage, industry-leading scale, equity culture and the strength of our balance sheet are all great reasons to join the Watsco family. .

And finally, before getting into Q&A, as always, I want to emphasize that our focus remains on the long term. Our balance sheet is strong, and we stand ready to invest in the right growth opportunity. We have an immense technology advantage, and we are investing to grow that advantage.

Watsco's broad array of products and brands is also a competitive advantage that allows us to serve contractors in any environment. And we are also fortunate to operate in an industry that benefits from regulation changes and fundamental catalysts that will play out in the years ahead. .

With that, let's go on to Q&A. .

[Operator Instructions] Our first question today is from Jeff Hammond with KeyBanc Capital Markets. .

Well, I'll ask first about this equity raise.

Just wondering, why now? And does it signal some kind of imminent M&A coming? Or what's the rationale?.

Well, it's an opportunity that we had from an institution that has a reputation for being a long-term holder. And we wanted to have them engage with us for the long term because that's their reputation. That's all it is. .

And then since we were picking up in our channel checks, is repair/replace kind of [ shifting more towards players ], kind of consumers struggle with higher rates, et cetera, and the increased cost.

Just wondering what you're seeing on that end?.

Paul?.

Yes, we're really not seeing a lot of repair pickup in the first quarter. And we saw a little bit on the motor side but not on the compressor side. The weather just wasn't there to really institute any real change in the market dynamics right now. .

Okay.

And then just finally, as you mentioned April being better, maybe put a little more context around what you're seeing?.

I'll let Barry answer that. .

Again, it's been a nice pickup and it's in the -- I would call it, characterize it as the high single-digit range that includes the new branches. I look at things on a same-store basis, it's in the mid-single digits is how I put it and unit growth thus far in the market. .

The next question is from Tommy Moll with Stephens. .

So believe it or not, I'm not going to start on gross margin today. I wanted to focus on SG&A. .

Well, we hope you haven't much of that on gross margins. .

No, no. But on the SG&A point, I think even if we strip out the $5 million and change of nonrecurring items that you called out, that expense item did grow faster on a same-store basis versus the top line. I know driving leverage there has been a priority over the past year or so.

So what can you tell us about what you saw in the first quarter and how you think that might unfold going forward?.

Mr.

Logan?.

Tommy, first, it is the first quarter, and a lot of actions were taken in terms of streamlining the branch and the headcount, and again, the general conditions that leaders went out and did. They tended to take those actions at the beginning of this year as opposed to before the holidays. So that makes common sense.

And again, that's part of the mindset, is to start the year with that kind of momentum going on. So much of that played out in February and March, and I would expect the rest of the year -- the remainder of the year to reflect some reductions in some of our major categories. Transportation, freight, logistics were down in the quarter.

That's been consistent now for several quarters. On the headcount side, which is the largest of the contributors to SG&A. I think you'll see some results from what was done for the remainder of the year. .

That's helpful. And I guess a question just on the A2L transition here. What is the state of the union you can offer there in terms of how you're thinking about managing inventory for this year and maybe even into next year, where there will be some portion of the market on the 410A still and then another portion on the A2L.

Just what can you tell us about the strategy here?.

It's a good one for you, Paul. .

Okay. Well, it's going to be an interesting time. We're still waiting to hear from the EPA whether or not there's going to be all the sell-through that people anticipate with the all 410A units. Will they be allowed as components? So that's kind of a fly in the ointment right now.

Right now, what we're looking at is probably just start incorporating the A2L units, probably third and fourth quarter. We'll probably see some sales pickup in the first and second quarter of 2025. I think it's going to be a phase down, phase up between the 2 product lines.

Right now, it's a quite some market as far as when each one of the manufacturers that we represent is going to be introducing their A2L products. .

And in the midst of all of that, is it fair to say, just from a turns perspective, you may need to run that a little higher than typical as you get into the middle or back half -- middle part of back half of this year?.

Yes, it would be contrary to what Mr. Nahmad would like, but some lower turns as we transition from the old 410A over to the new A2L product. We're going to see how much of that we can mitigate, but definitely, there's going to be some uptick in inventory. .

This is A.J. Just if I can add one more piece of color there, speaks to our culture a little bit and being a little more conservative. One thing we will not do, which some other maybe smaller independent distributors may do, is speculate and take huge positions either way on the 410A product or the 454 product.

Our job is to meet the market and meet the expectations of our customers. We're not trying to speculate for some short-term giant swing over the others because we are long-term players. .

The next question is from Jeff Sprague with Vertical Research. .

I want to come back to inventory, again, if I could. Just from my historical vantage point, it still looks a touch high in Q1 relative to, I guess, my estimate of full year sales, and maybe that may differ from what you're planning. But anything else going on there. You've got some new distributors, I'm sure, there's a role.

It doesn't sound like the 454B stuff is impacting you, but perhaps it is. Just any other color on kind of where your inventories stand today relative to how the year might play out. .

I'm going to give you... .

Go ahead. .

Paul, I was just going to give a big picture [ in a turned ] view. I agree with you that the inventory may be slightly higher, and we're not going to stop until we achieve the goals that we had said for that.

In more detail, Paul, do you want to deal with that?.

Yes. It's -- again, a lot of it is pricing that we're seeing in the marketplace. We had a price increase in April -- we had a price increase in February and another one in March from various manufacturers, we have seen copper go up to $4.50 a pound. So we've seen a lot of upward thrust as far as our cost is concerned.

As far as the number of units that we have, outdoor units that we have in inventory, that's actually down year-over-year. So we feel like we're managing our inventory. It's a little bit tough out there right now with the price increases. .

And I'll add, there was some, I guess, on the margin opportunistic buying that our business took advantage of.

So that, and as a result of a moving out of supply chain, which has been chaotic for the last 3 years in COVID, I believe our business [indiscernible] feel that they are very well prepared for the busy summer going season as far as inventory goes. They've got the right mix of products and they've got a healthy quality of inventory.

So the expectation is that as the selling season begins and run its course, we should be well positioned to take care of our customers and [ move ] product. .

Yes. I'll just say that, I think, a year ago in this call, we lamented one of our major vendors and not being at a strong inventory position for the season and lamented about lost sales and so on.

And obviously, a year later, the channel for that particular vendor is still then in a very good competitive condition, it grew nicely in their early stage of the year-to-year, and there's a lot more work to do, but that's also an inventory position. If you look at a year-over-year basis, that contributes to some of our current position. .

And then on just price, OEM price, obviously, on 454B, there's going to be a different price regime.

But on kind of like-for-like product, do you see kind of a bias for kind of OEMs to be looking for more than one increase during the year, as you noted, copper is moving up or we've kind of gotten to something like a little bit more normal on kind of like-for-like units in terms of what's going on with OEM price increases?.

Well, I mean we're just starting to see the prices roll in from the OEMs on the new A2L products. So I would say we're going to see one price increase on the A2L products. And then I think that's going to be probably it for the year. I'm hoping. .

Yes. And the like-for-like products are going away, right? I mean the 410A products will not be sold to us again next year. .

And just one other one for me. These kind of Oxbox branded products. Can you just address how significant, if at all, this is to your strategy, in particular, the interest in the channel in these products and how they're selling through. .

Well, there's, like every market, there's a good, better, best selection of products out there and Oxbox generally fits the value portion of that market. So that's where I think Trane has got a product positioned right now.

We've got a number of other products, such as Payne, some of our ICP products, some of our private label products that compete in that marketplace. And it's a market segment. .

I was going to emphasize that. It's a crowded space, the value segment. There are a lot of brands that are sold in the market. Watsco itself sells probably a half a dozen brands in that segment. And so it's a crowded space, and it is a way for an OEM to diversify its price points in the market. But again, it's a crowded space. .

The next question is from Dave Manthey with Baird. .

First question is on the nonrecurring SG&A, just what was that? And then second, on the 27% gross margin, anything about that, that makes you more or less positive about hitting 27% for the full year?.

Okay. Barry, you're the numbers guy. .

On the -- first, on the gross profit side, I think we -- I think I chimed in on that probably 2.5 years ago when we said what we thought the long term would look like, and it's held up pretty well. So I'll sustain my opinion and what our capabilities are in the near term and for this year.

Obviously, there's always 10, 15 variables and coming up with that, that are subject to change, but I don't think our conviction has changed at all for this year, if that answers your question. .

On the nonrecurring side, we mentioned, all of our stores, all of our leadership across Watsco in a responsible way, reduce headcount in the first quarter. There's obviously some costs incurred in making those decisions, in those reductions. So that would be a component of that, probably the major component of the number.

And as far as other things, there's no one item that's taking out, it's probably $4 million or $5 million items that are just in our minds, clearly, something that is behind us and not a recurring item. .

Okay. And second, it looks like Florida is now going to accept the IRA funding [ between about ] $346 million. And some of our contacts are saying in different states that, that might start to benefit in maybe the fourth quarter this year or something.

Can you give us a read, anything you're seeing in terms of when consumers might start to see that help from the Inflation Reduction Act?.

Yes. I think you're correct, in probably the third quarter, fourth quarter, depends on what part of the country. Right now, New York is the one that's been funded. And so we're hoping to see what that -- what sort of impulse that generates so that we can find out what the impact of it's going to be.

Then from there, I think it's going to be California, will probably be in second place. So it's going to be a gradual spreading of the wealth throughout the U.S. as this thing rolls forward. So it's going to be interesting to see what the first 2 states lay out before we really jump in and say it's going to be a big deal. .

Yes. I was going to say something similar, Paul, that it should be a good thing, but how good and when? We don't know. .

Yes. But I will say this, [indiscernible] benefit right now in the first quarter, for example. And we'll see how this plays out and the trend in the summer. But at least the first quarter, if I look at heat pump growth versus everything else, it's remarkably better.

If that's one of the promises of incentives and so on, we're seeing improved heat pump sales period without necessarily a benefit coming. .

And second is part of the recalibration of all the new products last year was essentially a reinvention of all the higher efficiency products that the industry makes. So 16 SEER, 17 SEER and above, our new products essentially this year. And again, growth rates in that higher mix category grew nicely in the quarter.

So those are just good things without a regulatory incentive. I'll accept it as good things. And again, it needs to play out for the full year. And if the incentives can add to that, that's a good thing. But right now, it's been nice to see the mix improving in the early part of the year and could be good for the rest of the year if it continues. .

The next question is from Ryan Merkel with William Blair. .

I wanted to start on gross margin. And I'm curious, if second quarter, we'll see a sequential lift from the first quarter, my thinking is some of the OEM pricing came a little later this year.

Is that the right way to think about it?.

Do you have a fortune ball there, Barry? Who knows? I mean you can take a shot at it, if you wish. .

Yes. Ryan, there are pricing actions that came in later, you're right. And obviously, it's still -- it's a better market, but it's still not a strong market. So we'll always handicap some conservatism just because of what the market is doing. And if I'm wrong, it will be hopefully on the upside of that discussion.

So I'm not -- I want to change the tune this early in the season. We'll be conservative about our commentary and the market will educate us over the next 6 months of really what's going on. .

Yes. And like you said earlier, Barry, there's, I don't know, half a dozen, a dozen different things that make up gross margins. So that's an important one, but it's not alone. .

No. That's helpful. And then I wanted to ask about the [ A2L ] pricing. I think you mentioned you're starting to get some of the letters from the OEMs.

Just what range are we seeing, I think 10% to 15% is what we've heard? And then the other question I had is, do you expect to get the full list price increase because it's a transition in new equipment because sometimes you don't get full list if it's just a normal increase. I don't know if that's hard to answer, but... .

That's really tough. But the initial wins we've gotten in are in the 10% to 15% range. And in fact, they're right in the middle. And so that pretty much held true. I didn't think that would vary.

Are we going to see a variance on that price as we move into the season? If we do, it's going to be, like I say, very late this year, early next year before we really see an adjustment to that. I think we're going to have 4 10 units to sell right through.

And then we'll start seeing some of the A2L units moving into the marketplace probably in the third quarter, fourth quarter. .

Yes. But I'll just add quickly. I mean, with our advanced pricing systems, which are relatively new to the company, still, we do expect to capture price increases at a rate -- a more complete rate than previously. .

Does that make sense?.

Yes, it does. Yes. Just -- and then just quickly, one of your competitors is forecasting that A2L next year will be 50%, 55% of the market.

Does that seem fair to you?.

Boy, it'd be great if it would. I don't think anybody's got a crystal ball that's going to allow them to see exactly what the impact of the A2L product is going to be next year. I would say it would be somewhere between 50% and 60%. .

It's a positive move. All these are major moves that are positive, which is a little difficult to summarize on the timing of it all. That long term, it's all good. .

The next question is from Patrick Baumann with JPMorgan. .

A couple of quick ones.

The -- what you saw in the quarter in terms of the HVAC equipment sales being down 1% on a same-store basis? Any way to give us more color on the residential [indiscernible] unit lines versus the average selling prices year-over-year in the quarter?.

Yes, Patrick, this is Rick. On the residential side, we saw unit declines of mid-single digits, and that mirrors sort of what's -- what's happening with broader industry trends and sell into the channel. Actually, I think we're outperforming that trend a little bit. And price was positive, not hugely positive but it was positive.

And commercial continues to do better than residential. The backlog there is still very healthy and a lot of strength in Latin America to support that. So that's the color we would give. .

We provided a little bit of data on top of this. So I'd just be helpful. So kind of the unitary product, [indiscernible] product, that is the OEM -- U.S. OEM type product, price and mix, that was up around 3% for the quarter. I used the word mix, price and mix purposely at.

And as we've said, routinely now those pricing actions happen ultimately later in the quarter as opposed to early. So it gives you some read of it. Our ductless products, which is part of our unit [ dispossession ], pricing there is a bit more flat. But in that case, our largest vendor this year decided to have April 1 pricing actions.

So that kind of makes sense. And on commercial, as Rick said, it's outperformed, it grew in the quarter end, is in a steady state, I think at this point of, call it, mid-single-digit growth. .

And the comment on resi -- I mean, I'm sorry, on units trending up in April, that applies to resi as well?.

Yes. That's only resi when I say that. .

Yes. Okay. And then I know HVAC product, there's a bunch of different things going on in that subsegment.

Is there any color you can give on the sales decline you saw in the quarter? Was it volumes or price or maybe color on like what you're seeing in commodity products like refrigerants?.

Sure. I can give the color. It's probably our third quarter where we've had essentially commodity deflation going on an average selling price just being simply a headwind during a quarter.

And when we use the word commodities, that's refrigerant, copper tubing and sheet metal products as a category, it's around between 5% and 6% of Watsco's total sales to give the context but it does have a bigger imputation of reality in that non-equipment products category. .

The good news is that margins and pricing have stabilized. The good news is copper is increasing in price and the better news is that we're kind of getting through this year-over-year cycle and expect less impact if, in fact, no impact and perhaps even positive impact as we get into the rest of this year.

So this seems to be end of the line with some of that discussion. I'm hoping so and expect so based on kind of what we're seeing as we look into the spring, the spring time here. .

Super helpful. And then last one for me, just on the same-store SG&A side. I think last time we talked, you were thinking maybe down slightly for the year.

Is that still a reasonable expectation on a same-store basis?.

Well, it's a good aspiration and goal and it's not [indiscernible]. That's not how we manage Watsco. We manage it through our leadership, if they want to find investments or do something that's important for a market or a customer, they'll do it. But I think from a mindset, from a cultural point of view, it's what we've been after.

But again, carrying that out in the market, if there's sales generation going on to the extent that there is today, let's say, variable costs are going to increase, and we'll probably violate that concept of [indiscernible], which is not a bad thing. We have variable expenses would drive -- would grow along with sales growth. So it's early days.

I'm glad that there's growth going on. Time will tell. There is some noise in the first quarter SG&A that we've quantified to an extent and I would expect better performance as the year goes on. .

The next question is from Damian Karas with UBS. .

So I'd say really encouraging to hear about the pickup in demand you're seeing in April. You mentioned, I think, mid-single-digit same-store sales growth.

Do you have to have be comparable for last year in April, like what the same-store sales growth was in April 2023? And could you just remind us kind of like in the second quarter, what the -- like what the seasonal [ shaping ] looks like, April, May, June?.

That's a lot of forecasting and which we don't like to engage with because of the nature of the industry. I don't know if anybody wants to take a shot from Watsco side. .

[indiscernible] breakout months. Yes. I don't think we break out..... .

We're not going to do that. .

Okay.

The comp from last year for April, though you don't happen to have that?.

The what?.

We have it but it [indiscernible]. .

We're just not [indiscernible]. .

Okay. Fair enough, totally understand. Well, maybe I could just ask you about -- so you guys have put your pricing through. I think, from your OEMs, March and April. One thing that we've heard is that maybe some of the contractors are struggling to pass on some of the price increases.

I just wanted to hear your thoughts on whether you agree with that? You just kind of experience that in your customer base? And if so, is that pretty much just kind of a short-term demand-related issue right now and if someone is going to end up resolving that? Or is that maybe kind of a cumulative byproduct of just like all of the inflation that [indiscernible] in wages over the last few years?.

I mean that is [indiscernible] question with looking in the future, and I don't think we have even a need to respond to that because things will have to happen as they happen. So I'll pass -- we're going to pass on the question. .

[Operator Instructions] The next question is a follow-up from Jeff Sprague with Vertical Research. .

Just sort of a follow-up, I don't know, maybe at Ryan with Damian's question there. But Al, you said a couple of times, you hope not to see any more price increases this year.

So I'm wondering if that is an indication that you're seeing some stress out there in terms of the ability to just handle this stuff? You noted that the repair versus replace dynamics have not eroded, but is this something that's just kind of on your radar screen as a watch item? Or are you seeing some maybe early signs that maybe that is happening?.

No. I mean it's -- the market does what the market does. I mean, what's happening, is the market pricing has gone up. And now we're waiting for the A2L pricing to come in. That was the only insinuation that we have there. .

I've got to chime in on this because it's an important like backbone to what we've talked about already. And I want to emphasize it.

First, if we said earlier that higher-priced heat pumps are outperforming everything else, that's a statement about what's going on in the market with contractors installing higher-priced systems, right? Secondly, as I've said in the call that the mix of higher efficiency is also increasing remarkably, that too is an early stage -- at least an early stage indicator of what's going on in the market.

And again, I'd rather do October and report on how it went. [indiscernible] the early signs of what's going on..

Third of all -- and third of all, we -- no one ever asks, ever, about credit quality, about what's going on with our contractor. It's never a question. It's remarkable to me. And so I feel like I have to talk about it or bring it up.

If you look at the bad debt expense for the quarter versus a year ago, it's less and overall credit quality and how our contractors are behaving with us when they pay us $7 billion or more a year is very healthy. So that's an April view. It's not an October view. But I really -- I don't look at this as like a binary thing of on or off.

It's the subtlety of what's going on in the market, obviously. .

And the contractors, at the end of the day, are going to do the best job they can to get the job, if they have to discount their services or go to a lower brand or go to a product that they need. I know we're going to have it. There's not a location in Watsco that doesn't have multiple brands in it to serve that local market.

And we have very few competitors who do have the same variety of brands across markets. So in a softer market or a trickier market, I like our competitive position even more if I kind of round out the conversation. .

I just have to -- I love your answer there, Barry, and I'll build on it. I love our competitive position on the whole. And we talked about -- we have high-quality inventory deployed in the field. We've got best-in-class technology that our competitors can't match. We've got a balance sheet that's strong and ready to invest in any size opportunity.

We've got, like Barry said, we've got every product that a contractor could need. I just think that we're very well positioned here in the market and expect a good year and expect a good tenure. .

The next question is from Nigel Coe with Wolfe Research. .

Sorry, I was late joining. So I apologize if you've addressed this already. But on the ATM drawdown, I'd be really curious on the timing of that, Al.

You obviously got the cash [indiscernible], et cetera, but why do that in March, unless you got a line of sight on kind of options out there? But issue is in the timing and I've got a follow-up question as well, please. .

I'm sorry, why do what in March?.

The ATM draw.

The [indiscernible]?.

As I said earlier, we didn't do it. Somebody wanted it. And the opportunity came up, we took it because of the -- who we believe the holder is, would be, if we supplied him the shares, and we believe he's a high-quality holder, long-term holder. We wanted to meet what he wanted at that time. We did that. .

Okay. That's fair. And then on the opportunity set out there to deploy the capital, and I'm sure you're not in a rush or anything, but I'd be curious, the [indiscernible] you have to take in full control of [indiscernible] or maybe taking up some of the [indiscernible] within the current prices.

I mean are there any sort of big opportunities out there you see to deploy that capital?.

If we did, we would tell you. .

Okay.

So you just keep the cash [indiscernible]?.

Sorry?.

You will keep the cash?.

What would you like for us to? Of course, we're going to keep it.

What would you like me to do?.

I don't understand the question. We told you we do -- we took it because we had the opportunity to bring in a significant important investor. We do not -- we have a long-term goal of expansion in this program, so the capital will be very useful. .

The next question is from Steve Tusa with JPMorgan. .

I just wanted to follow up on Pat's question, and I was on another call, so I wanted to join and say hi, first and foremost.

So just on this -- these pricing dynamics and mix, I mean, would you -- do you expect pricing to obviously accelerate over the course of the year given the timing of the [ increase ]? I mean, I thought the Carrier increase was like early March, not exactly April 1. So maybe just some color on how you would expect that to play out. .

The March increase we had from Carrier was on the 410A equipment. And then subsequent to that, we've also received pricing on what they're going to be -- what we're going to see on the new A2L products. But we have not received any of the A2L products yet. No. .

Got it.

And you will be taking those -- like at what point do you expect to be kind of filling those products in the warehouses?.

We're [indiscernible], depend on what the operating units will do, it would probably be third quarter, fourth quarter before we see any significant amount of A2L product. .

Got it. Okay. And then just on this inventory question. I mean, I guess there's a bunch of ways you can really cut it.

I mean, do you think your inventories are now normal or you took on a little bit extra ahead of the prebuy, they're lean? How would you kind of characterize your inventories now relative to demand?.

We're a little bit ahead, don't you? I think we're a little bit ahead of inventory right now. We've got some prebuys that came in on the 410A products, and we also had some additional products that we purchased. .

Okay.

And then just one last one, just on -- from an end market demand perspective and putting weather aside, are you seeing anything on repair versus replace, any kind of change up there?.

Nope. Not yet. Too early. There just hasn't been any -- if you put weather aside, there is nothing. .

The next question is Chris Dankert with Loop Capital. .

Just one quick question for you here, I guess. Explicit technology spending in the quarter.

Is that still kind of running at about a [ 14 ] run rate? And is there anything that you'd kind of be teasing us with or anything explicit worth highlighting in the quarter on the technology side beyond on-call air or just anything else on that technology front?.

I didn't understand the question.

Did you, A.J.?.

Are there new things to talk about on the technology side? Is that the question?.

Just the spending run rate and then is there anything new you're introducing or I would call out here?.

Well, when we're going to introduce it, we'll introduce it. We're not going to -- I mean, we're constantly introducing new ideas. .

As far as the pure SG&A, that's your question, there's not much change in the technology spend this quarter sequentially from last quarter. If that's your question. .

It was. .

You can expect us to keep innovating on the technology side, though, for sure. .

The next question is from Stephen Volkmann with Jefferies. .

Barry, I wanted to ask you about credit quality, if that's okay? All seriousness aside, I was curious, I know that you -- I'm grateful for that commentary, but I know you guys also do sort of some origination, I don't know, brokering, how you want to think about it for the end customer financing as well.

I think that's available through some of your platforms.

And I'm curious if you have visibility into how that credit quality looks?.

Well, we don't hold. Yes. Go ahead, A.J. .

So it's not origination, it's really matchmaking between our customers and their -- largely our customers' customers and financing sources, do a small amount of that, and it's pretty stable, I would say. But we do not -- once we make that matchmaking, we are out of the picture and don't have visibility, frankly, into the performance of those loans. .

This concludes our question-and-answer session. I would like to turn the conference back over to Al Nahmad for his closing remarks. .

Once again, thanks very much for your interest in our company. We look forward to conversing with you as time goes on. Bye. .

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