The company’s total revenue was down 20.6% driven by weak demand due to economic conditions, decline in new housing, and a late start to the cooling season. Sales in the quarter were also impacted by lower pricing for certain products that are sensitive to changes in commodity prices.

Second quarter’s revenue reflects a 15% decline in sales of air conditioning and heating (HVAC) equipment, a 28% decline in sales of other HVAC products and a 15% decline in sales of refrigeration products.

The rapid decline in housing starts is being a drag on overall unit demand. We expect the housing market to remain challenging for the next couple of quarters. Thus, the company depends more on the replacement market for its top-line growth.

It is estimated that approximately 80% of the U.S. industry sales are tied to the replacement market and are expected to increase as more energy-efficient units replace old units over the next decade. However, we believe that the replacement market cannot fully offset the rapid deterioration in the new home market over the near-term.

The company recently completed its previously announced joint-venture, named Carrier Enterprises LLC, with Carrier Corporation. This deal fits with the company’s strategy of increasing its market share through acquisitions and by boosting its product offering.

The joint-venture with Carrier not only adds significant new product groups to the company's sales mix, but also marks Watsco's entry into international markets with the addition of the Latin American and Caribbean sales operations of Carrier Enterprises.

Watsco, Inc. (WSO) said that it completed its previously announced joint-venture, named Carrier Enterprises LLC, with Carrier Corporation. Watsco is the largest distributor of air conditioning, heating, and refrigeration equipment as well as related parts and supplies (HVAC/R) in the United States. Carrier, a unit of United Technologies Corp., provides heating, air-conditioning and refrigeration solutions with operations in more than 170 countries.
 
Watsco owns 60% of the joint venture with options to purchase an additional 20% from Carrier in future years. Carrier Enterprises will operate 110 locations in 20 states and Puerto Rico, the Caribbean and Latin America and serve over 19,000 air conditioning and heating contractors. Carrier is contributing 95 locations in the U.S. Sunbelt and Puerto Rico and the export division located in Miami, Florida, while Watsco is contributing 15 locations in 8 states. The operations will sell Carrier, Bryant and Payne-branded residential and light-commercial air conditioning and heating equipment (80% of sales) and a complementary array of parts and supplies (20% of sales).
 
Watsco targets increasing its market share through acquisitions and by boosting its product offering. The joint-venture with Carrier will add significant new product groups to the company's sales mix. Also, this transaction will mark Watsco's entry into international markets with the addition of the Latin American and Caribbean sales operations of Carrier Enterprises.
 
The company estimates that approximately 80% of the U.S. industry sales are tied to the replacement market and are expected to increase as more energy-efficient units replace old units over the next decade. Watsco will benefit from the new economic stimulus legislation, which provides tax credits to homeowners for adding high-efficiency air conditioners or furnaces, covering 30% of the costs up to a total of $1,500. According to the management, this tax credit, along with local utility rebates currently offered to consumers for upgrading their air conditioning systems, provides Watsco another opportunity to enhance the sales penetration of high-efficiency systems.
 
Given its wide distribution network and broad product offering, we believe Watsco is well positioned to take advantage of the growth potential in the replacement market for HVAC products.