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Watsco is the largest distributor of air-conditioning, heating, and refrigeration equipment for both commercial and residential use in the U.S. Founded more than 60 years ago in Miami, Watsco in 2023 acquired Gateway Supply Co., a South Carolina plumbing and HVAC distributor. Albert H. Nahmad has served as the company’s CEO since 1972.

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Watsco (WSO): Company Profile, Stock Price, News, Rankings

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Good day, and welcome to the Watsco First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad.

To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to mister Albert Neyman, chief executive officer. Thank you, and over to you, sir.

Good morning, everyone. Welcome to WatchCo's First Quarter twenty twenty five 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.

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. Now moving on to our report. Watsco reported a good first quarter. We have a lot of positive things going on related to the transition of products to the new A2L system.

They will ultimately impact around 55% of our total sales. Our teams are working to convert nearly $1,000,000,000 in inventory to new systems. We have trained thousands of customers, and we have updated our technology platforms to provide the needed functionality to our customers ahead of the selling season. Similar regulatory let me start again. Similar regulatory mandates have occurred every ten to fifteen years and have historically been good for business.

The new systems offer solutions to homeowners and businesses that are both more efficient and more sustainable and be and provide enhanced sales and profitability for both us and our customers. In terms of trends, our core HVAC replacement business is off to a strong start. Sales of replacement systems, the core of our business, increased 10 on higher volumes. New pricing was introduced and realized in the market, and we also sold a richer mix of high efficiency systems. Gross margins also improved, an important benchmark following the launch of the new systems, which we believe continues to be an area of future opportunity.

I want to emphasize that the first quarter is the smallest and most seasonal quarter of the year. And while they deserve early in the selling season, recent sales and margin trends have improved. Looking forward, we expect the benefits of the new a two l products will become proportionally larger over the remainder of the year, especially during the seasonally stronger second and third quarters. Our balance sheet remains in pristine condition with $430,000,000 in cash, no debt, and over $3,000,000,000 in equity. We raised our annual dividend 11% to $12 per share in April 2025 marks our fifty first consecutive year of paying dividends.

Now turning to current events, we are carefully monitoring the potential impact of proposed tariffs on our business. On the domestic front, which represents 91% of first quarter sales, we are collaborating closely with our OEM partners on current and future pricing actions that may be required in response to the tariffs. We see greater uncertainty for 9% of our sales that are in Canada and Latin America, and we will act and react as needed to grow sales and profitability in those markets. Big picture, we possess the scale, the technology, and the relationship to act quickly and efficiently to these changing market conditions. As always, we feel it's important to keep the long term perspective in mind.

Watsco has delivered superior long term returns over most any time period. We are the market leaders in a highly fragmented $74,000,000,000 distribution market. The products we sell are a necessity, and the and the installed base continues to grow. We have deep collaborative relationships with the industry leaders, OEMs. We offer the broadest product variety and operate the largest network.

And our unique ownership culture, which is shared by more than 4,000 employees, rewards and incentivize long term performance. As always, we invite you to come and visit Miami if you want to learn more and share the continued optimism that we have for our company. With that, let's turn to q and a.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press then two.

At this time, we will pause momentarily to assemble a roster. The first question comes from Stephen Volkmann from Jefferies. Please go ahead.

Good morning. Wow, first. Good morning, everybody. Thank you for taking the question. Maybe I'll dive in on the residential side.

I think you said plus 10%. Can you give us a sense of what you're seeing? How much of that was kind of our $4.54 B versus $4.10 A? And how the pricing kind of layered into that?

Yeah, well, most of what we saw in the first quarter was four ten A. We only had about 20%, twenty five % of it that came out as four fifty four. So when you look at the residential, what we're talking about being up over 10% is the replacement market, not the new construction. And so the bulk of that in the first quarter was 4.10A. Early in the second quarter, we're starting to see the transition over to the A2L product.

And hopefully that'll continue as the summer goes on because we're going to be out of four ten probably by the end of the quarter.

Okay, great. And then maybe just following up, we've seen a fair amount of price that's come through from a variety of suppliers across the industry. And traditionally, that drives your gross margin a little higher, at least in the near term. Is there any reason to think we shouldn't see that happening as the year progresses?

I think after April April is when we had the two big price increases from the OEM. So that's really what's going to be that could be an impact, obviously, in our gross margin. But in the first quarter, we were fairly clean as far as price increases. Most of the improvement in the gross margin really was related to the segment mix that we had moving more towards add on replacement, less towards commercial, less towards residential new construction.

Thank you. The next question comes from David Manthey with Baird. Please go ahead.

Good morning. Hi, Al. So as it relates to the top line, it seems international was weak, but really not big enough to move the needle. And what Paul just said about the mix and that along with other HVAC products being somewhat weak parts and supplies, I understand. But we read into this that residential new construction, even though it's less significant for you guys was substantially softer year to year?

And are you holding share there? Do you think?

I mean, I'll give some insight to it. It, you know, don't we don't really do the algebra for you, but there is one less sales day in the quarter. So that has actually a bigger impact than new construction does by the way in terms of algebra. The new construction element of it is also a choice being made by the contractors that do work for builders in the quarter to use four ten a or wait to use four fifty four upon availability. So there is some disparity in how a market like that this time of year operates in terms of this transition.

The other reality, Dave, as you know is, we're a 40% larger business in the second quarter. So new housing, which is relatively equal in four quarters has a bigger impact in this small quarter and should have less of an impact over time. And I think also there's some backlog that's built that will consume four sixty four B and as time goes on.

I don't think there was a I don't think we've lost any share in the new construction market. Think we're still, you know, what, where we do it, we do it well. And I think it did had more of an impact on the supply side than it did on the equipment side.

Yeah, that's good to hear. Impressing on gross margin a little bit here too, as you think about the transition of refrigerant and along with the kind of the mix driven by seasonality and so forth. And then you've got these what I assume are apples to apples kind of tariff driven and general price increases we're seeing as you pointed out in April, Paul. As we think about the normal cadence of gross margin from first quarter through the year, should just directionally and bigger than a breadbox? Can you tell us do you think it'll be less of a degradation as we move forward because of those positive factors that are rolling in here?

Well, that's a lot of questions. I would, I wish I could see that far out in the future. But let

me give you let me give you an aspiration of goal that we've stated before. Watsco is working to achieve its goal of 30% gross profit margin. That's where we think we're headed. And I don't know when we're gonna get there, but we're working to to achieve that. And we have several different ideas on how to get there.

Now do we have short term changes to that? Yeah. But that's our goal, and we aspire to it.

Thank you. The next question comes from Jeffrey Sprague with Vertical Research. Please go ahead.

Good morning. Interesting times, no doubt. Hope everybody's doing well. Just wanted to kind of think about sort of the cadence of what the OEMs are doing on the price side. I think you said you're collaborating closely with them.

Just got off call with a key player. They said price has gone up twice here just in the last several weeks or so. Maybe just give some view how this collaboration is working, how the lags of getting price through into the channel and whether you are seeing any kind of negative demand response and given magnitude of price that's coming through the pipeline?

No, I don't think we're seeing any real pushback yet from the customers. It's such a newsworthy subject, the tariffs, that I think most contractors and consumers were assuming that there's going to be higher prices. How much of that price is being relayed to the consumer, we really don't have visibility to that. The OEMs have been very prudent as far as getting the price increases out. We have the technology to go ahead and implement the price increases instantaneously, so it really hasn't been that much of an issue to date.

We'll have to wait and see what happens in Q2 and Q3 as far as how long these price increases stay and what the impact has on the consumer.

Is there a mechanism in place or should we expect if the tariff pressure changes that this will feed back into the market as some relief price? How much of the price is surcharge, which is visible and could go away versus what might be in the base and what you might be able to maintain even if there is some tariff relief?

Yeah. There is there is you know, outside of one manufacturer, I think every every pricing every pricing action by every manufacturer right now is a price increase. It's not a surcharge.

Thank you. The next question comes from Tommy Moll from Stephens. Please go ahead.

Morning, Al. Thanks for taking my questions. Yeah. In the earnings release, and I think as Paul just mentioned, you you talked about being able to leverage the technology to quickly, if not instantaneously, implement some of these price increases.

But I want to unpack what other levers you have with the technology, because as you've discussed before, it's not just one standard increase across your entire customer base. You have to be a lot more nimble. So in this environment of OEM price increases, what additional capabilities do you have through the technology to really customize, if not profitize, some of that at the branch level?

Yeah. Yeah. I'll take that one. And my my instinct to that answer is, and I don't mean this to be flippant, but it's infinite. Because the technology we put in place, what it does is provide visibility and tooling for world class analysts to see opportunities not across all of our business units and collectively as an enterprise.

So just for an example, you know, and this is this is an environment where there are raising prices, which by the way, there are and there will be from not just our major equipment manufacturers, but from the thousand parts and supplies manufacturers that we buy products from. And just to give you a sense of the scale, it's a thousand parts and excuse me, a thousand manufacturers of products. We sell products to a hundred thousand contractors. And it's not too hyperbolic to say that we have a different price for every product for every customer almost. And so the tooling enables that sort of intricacies and being dynamic and seeing where there are opportunities to raise prices to a market level that you see customers of a particular segment or size buying at, which perhaps needs to be adjusted for others.

Or the other way around, perhaps we're out of market with the price and we need to get in line and so that we can effectuate more sales. Just I mean, again, as a small example, say we sell products ABC in one market, take Miami, we probably sell it in 20 locations here to several thousand customers at several thousand prices. And if you put that on a histogram, the spread is too big, right? So if we can put a floor and a ceiling and do some, you know, intricate analytics, we can affect margin impacts as well.

Thank you, AJ. As a follow-up, I wanted to ask for a little more detail on the early selling season trends. Al, you mentioned that there's been some improvement. And so while we're all here live, I wanted to just give the opportunity to give any quantification there or additional insight into what you were referencing there. Thank you.

Sure. Again, I'll focus on domestic. We've said that international is still probably greater uncertainty, but if I address the domestic 91% of our business, it's mid single digit growth thus far in the quarter.

Great. I appreciate it and I'll turn it back.

And if I add a sentence to that and margins are behaving well additionally.

Thank you. The next question comes from Ryan Merkel with William Blair. Please go ahead.

Hey, everyone. Good morning. I guess I'm going to follow-up on that last question. I guess it sounds like we shouldn't extrapolate the weak first quarter to the rest of the year. Is that the right read here?

You feel like the business has found better footing?

Okay. That's a simple answer. And then can you just unpack, I think you mentioned the A2L transition was a negative in the quarter.

What was the impact there and what was that negative?

So the one third of the business that was weak, it was the international down nine. And then what else was in there that caused the weakness? Because again, algebra is kind of difficult for some of us to figure out.

Sure, I understand. Let's go through it. Think a lot of the numbers are there in the press release, Ryan. You have non equipment going down for the quarter, it's about 30% of the business, right? Refrigeration has a small component, nonetheless it's part of what else is down, which is what your question is.

We have commercial products which is down right around 10% for the quarter. That too has a heavy influence going on with the product transition and four ten a versus four fifty four b and we think that levels out or at least has less disruption or less disparity going on as time goes on. The commercial products is a component of what else went down. International we talked about and then there are some other products that I would just some other segments I would categorize as large accounts, national accounts, where again, the four ten a versus four thirty four b has some disruption in it. And that's short term and we don't see that as a seasonal reality over time.

And I mentioned the same day, one less selling day and this quarter is about almost a 2% impact on sales.

Okay, I got it. That's helpful. The commercial pieces. Yes, I thought that might be part of it. Question, the price mix outlook, we've had some new price increases.

Any chance you'd help us with what you're thinking there for the year?

Well, I would say we tend to talk factual about what we see, what we experienced in the first quarter and not extrapolate that until we have more data and more time in the season, Ryan. But price was up about price and mix for what is our unitary business was up about 5% for the quarter.

Okay. All right. Great. Thanks, Barry. I'll pass it on.

Thank you. The next question comes from Brett Linzey with Mizuho. Please go ahead.

Hey, good morning everyone. Hey, I wanted to come back to the A2L transition. One of your peers had noted some delays there, maybe a little bit more on the commercial side, but it was related to the learning curve. And I'm just curious, what's the industry readiness like on the transition from a technician standpoint? Are you seeing any bottlenecks?

Is it driving some delays in residential? Any color would be great.

This is Paul. I don't see any real delays with the product. Mean, if you consider that 410A is basically 50% of 410A is 32 and the balance of it is a 125 combination. Whereas when you get into the four fifty four and the 32 products that we sell, they just become 70%, and the four fifty four becomes 32, and of course 32 is 100%. So we're really not seeing a bottleneck from the mechanics viewpoint, no.

Just think it was a, there is a price difference between an A2L product and a four ten product, and I think the contractor gravitated towards the four ten. That's just an opinion.

Yeah, think just to editorialize that probably the right way is, you know, this is a quarter that's as we said seven times, thus far the smallest time of year, but also had a lot going on with whether four ten a was in the channel or not. If you own a lot of four ten a and you leaned into it, you have some short term benefit this quarter, you have long term risk of obsolescence. It should be obvious by our balance sheet at year end, we did not lean into four ten, we did not choose short term consequences with longer term risk. We wanted to move to the four fifty four B, we have the pricing, the margins, the activity with replacement is a good indicator of that decision and maybe some of the large giant customers that wanted to chisel into four ten A and get some short term wins. That's a transient business that is short term.

Yes, got it. Then just a follow-up on the second quarter, guess near term. So I think the industry is talking about some destocking on the R410A, but also we're seeing the industry raise prices really across the board on tariffs. Would you expect some level of pre buy on price escalation here in the near term? How do we think about the netting of those two pieces as we get into the selling season here?

I don't see any pre buy coming on the A2L product. You can't really get four ten products from any of the OEMs. They had to stop manufacturing that on twelvethirty one. So anything that we would have in stock right now that's coming in is going to be an A2L product. The price increases are very rapid.

They happened on April 1, and then a second price increase occurred from most of the OEMs on the third. So unless there's a reversal of tariff, I really don't see much of a pre buy opportunity for April.

Okay, understood. All right, thanks. I'll pass it along. Thanks.

Thank you. The next question comes from Patrick Baumann with JPMorgan. Please go ahead.

Good morning. Thanks for taking my questions. So I just had a question on the gross margin in the first quarter. And I was wondering if you were able to optimize price on the 04/10 inventory that was sold and whether that had a benefit there.

I'm asking kind of in context of I think you said price mix was a 5% benefit in the quarter and I don't think the OEMs raised price on the four ten since they're not really making it anymore. Just curious if you give any color on that.

Yes, Pat, it's a good question. And the answer, I think most distributors were able to gain some price on 410A as we started the year. And also it wasn't said in this call so far but mix also improved meaning energy efficiency mix that tends to help margin to an extent. And third, as Paul said, I think is we have a higher mix of replacement versus new construction that helps margins to an extent. And the rest of the pricing discussion is, I think Paul mentioned 25% of the business is four fifty four B in the quarter.

And obviously the higher pricing contributed something to that equation.

Yep, that makes sense. The benefit on the price optimization maybe in the four ten stuff, is that like in the tens of basis points?

Yeah, it's not material enough. It was not like something to exploit, Pat. It was something to add a bit of inflation as we started the year. It's in basis points.

Helpful. And then we've been hearing about shortages of the four fifty four refrigerant due in part to container issues. Just wondering if you're if you've seen or heard anything on this front and what your view is on whether this could have any impact any impact on the selling Yeah.

We heard that. It's supposed to be over by June, you know, as far as the containers, but it's not just on April. It's also on thirty two a. They both use almost the same container, so there's no real difference. So yeah, there's been a shortage.

We've been on allocation. Everybody in the industry is on allocation right now. There apparently is still some 32 out in the marketplace, but the four fifty four has become increasingly difficult to obtain. Is it gonna impact us longer term? No, it's not.

Our creative branches have come up with other ideas to be able to satisfy the need of the contractor to be able to get the refrigerant they need to top off a new system. You do know that all the equipment is pre charged with $4.54. There's no shortage of four fifty four. It's strictly the container that's missing right now.

Thank you. The next question comes from Jeff Hammond with KeyBanc Capital Markets Inc. Please go ahead.

The consumer just can't catch a break. They keep getting hit with these price increases and high rates. Just wondering if you're hearing or seeing anything on kind of repair versus replace or mix down as people maybe choose a de featured product?

Watsco (WSO) Q1 2025 Earnings Call Transcript

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