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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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Q4 2024

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

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Good day, and welcome to the Watsco Fourth Quarter twenty twenty four and Year End Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Albert Named, Chairman and CEO.

Good morning. This is Ajay Nammid, president of Vodscco, Paul Johnston, Barry Logan and Rick Gomez. Now before we start our cautionary statements, are we? 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 onto the call. Vonsko had a terrific emphasis on terrific fourth quarter to close out a strong year. We achieved record sales, expanded margins, improved operating efficiency and generated record earnings and cash flow. Market conditions continued to improve, which led to a 14 growth in equipment sales and 16% growth in residential products. Our connection position is stronger than ever and we are happy to announce today an 11% dividend increase to $12 per share.

Looking forward, we are optimistic about our opportunities ahead of us. First, the transition to next generation A2L products is right like the way. The new ATL products provide the opportunity to upgrade the installed base of existing equipment to systems that are both more efficient and environmentally friendly. We estimate the transition that will influence 50% to 60% of our sales. We are making investments to train our customers, leverage our technology advantage and transition close to $1,000,000,000 in inventories to aggressively take advantage of this opportunity.

Second, our technology platforms have gained momentum. Our community of active users of VASCO mobile apps has expanded to over 64,000 users. E commerce sales in the quarter increased 16%, outpacing overall growth rates and now represents 35% of our annual sales, which is a number of $2,600,000,000 in aggregate. On CallAir, our digital sales platform for contractors presented approximately 313,000 proposals to homeowners, generating $1,500,000 in gross merchandise value, a 25% increase. There is no question that our technology investments have contributed to our performance and provide us an immense competitive advantage.

And the importance of these investments are only grow with time. Finally, we believe our strong financial position is also an important differentiator. We have the ability to invest in big opportunities to accelerate growth and gain market share. In January 2025, we completed our seventieth acquisition since 1989. There are many great family businesses in our industry and we believe offer compelling reasons for them to join forces with us.

As always, and I emphasize this, our focus is on the long term. We have a great deal more to accomplish and we welcome any of you to visit and spend time with our team in Miami to learn more. With that, let's turn the Q and

The first question comes from David Manthey with Baird. Please go ahead.

Yes. Hey, Al. Good morning. First question is with double digit unit growth in residential versus 16% reported, I guess that implies mid single digit price mix. Was A2L a driver of that uptick?

do you expect to be fully transitioned to the new technology? And it seems like channel feedback is 8% to 10% pricing. Is that consistent with how you're thinking about things?

Yes. In the fourth quarter, no, we really didn't have much of an impact on A2L. We were 90 plus percent on the 410A. Pricing actions, yes, 8% is what was previously announced with the tariffs coming online from the White House. It seems like there's going to be some more pricing actions from the manufacturers that are going to be announced here shortly.

So we're going to start seeing more single digit price increases.

Dave, your question about the unit growth, I don't I'm not sure quite I follow the logic of your math. And just to be super clear about the math, we saw the residential products up what it is for the quarter. But if I look at inside, let's just be careful with it. So unit growth, which when we say the words unit growth, it equates with how AHRI looks at equipment growth, which is unitary products, compressor bearing units. So across Watsco, all markets, that was up 16% for the quarter and price was an additional 3%.

Domestically, it's actually a bit stronger than that in terms of unit growth. So it is a there is some price and mix and driven also by much stronger unit growth. And as Paul said, there's a small influence, a minute influence from A2L in the quarter and greater influence as we get into 2025.

Yes. Thanks for that, Barry. That's encouraging. And just one quick one, kind of on a tangent. Could you talk about Watzco Ventures ownership position in Housecall Pro?

Could you scale that for us and just give us an update there?

Watsco does not have an ownership in Housecall Pro. We have a commercial relationship, which we've enjoyed with them for a very long time and have both benefited from. The flagship in Moscow Ventures portfolio is Encore Air, which is our homegrown software and our homegrown business called Encore Air, which helps the contractor sell at the home. And that's being used at scale now and continues to grow about $1,500,000,000 worth of our customer sales to their customers. Now we're powered through that platform and customers are that are using it, they're growing faster, they're winning more deals, they're higher margin deals, they're higher ticket deals and it's a win win win for everybody.

But to answer your original question, Wasco does not have any investment in ASCAL Pro.

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

Good morning, Alan. Thanks for taking my questions. First question is, if you look at your inventory position today, what's the best guess on when you've run down that four ten currently on the balance sheet and should fully transition to the new product? I mean, it'll depend on the weather and other factors, but what's a reasonable outlook there?

Paul, Barry, you want to take a shot at that?

Yes. We've been working with our subsidiaries to try to make sure that we sell through the 410A and do a reasonable transition into the A2L. And at the present time, what we're looking at is, I would say, probably beginning of second quarter, we should be pretty much running our four ten down to almost nothing and we should be almost fully engaged with A2L.

to say that we're not going to still have four ten products. We still will have four ten products probably throughout the year. But the big transition is probably going to occur in the second quarter.

I would agree with that. I'll just also add.

clarify that our position is that whether the regulation says specifically or there's noise around it is that we want to be through selling and through of our four ten inventory by the end of twenty twenty five and we fully expect to do that. And that's in large part because of the scale and the power of WASCO. It's a good time to be the size that we are because our business units can help each other. There's a lot of data surrounding what's where in terms of inventory and what product needs to be moved and they can help each other out and clear out what needs to be cleared out in time. Okay.

Follow-up question, as you do start to run more of the A2L volumes through, it's really a two part question. What if any impact should we think about in terms of the gross margin percentage there, obviously with the mix tailwind? And then as you execute this in the marketplace, how are you helping your customers in turn articulate the benefits of the product to the end user here? I mean, we're we on the call are all prepared for substantial price mix increases. But at the end of the day, this occurs at the kitchen table.

So how are these conversations or how are you helping your customers with these conversations as we move forward? Thanks.

I mean, that's what we do no matter what the changes, that's our job. Maybe some more specifics, Paul, or

Yes, we provide extensive training to our customers to get them ready for the transition to the new refrigerant. As you know, it's got slight flammability to it, so it has to be handled in a little bit different manner. And it's got other components that are going to be on the product that aren't on the four ten. So a lot of training has gone in prior to the introduction of the product. As far as the gross profit movement, you'll see the gross profit dollars probably go up, but because it's a brand new product, you're not going to see so much the gross profit percentage move up that much to start with.

It's going to be a more expensive product than the 410A product. And we expect that to be somewhere in the neighborhood of 8% to 10%.

Just to add to that, obviously, the entire database of product information that we own needed to be upgraded and has been upgraded for all the new products and how things match and fit and even down to how permits can be pulled on new product is all a digital experience now for what is we say 35% of total Watsco, it's probably closer to 45%, fifty % of our residential business in Watsco. So you have this digital platform that's kind of smoothing the transition into how customers actually buy the products, specify the products, match the products, add correlated products to those products and you get the drift. So you kind of have this, I would say the last time we did this, we didn't have these tools and not on scale, at least to the way that we have them. And so that's super important in this discussion. And we mentioned On CallAir, AJ mentioned On CallAir for those customers signed up on that program.

Now those tools are actually feeding how consumer is going to learn and see and experience these new products. So it's very good timing. I just wish the user community of Encore Air was 10 times the size, but it is $1,500,000,000 of stuff that a consumer is seeing digitally for the first time in their lives buying these products. So there is momentum and that's part of the answer. Going back to gross profit, just to add to what Paul said, it is an algebraic equation that has the benefit of higher cost for sure.

And if we just apply the same margin, that's good for business, right? And of course, one of our other technologies is a pricing platform and the intent there is to make a better margin where we can, if we can, and use the technology to inform our teams on how that's going. So that's a bit more of an abstract answer, but it's one of the opportunities we see with new pricing technology in place as well.

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

Hey, good morning, guys. Just back to fourth quarter, I mean very strong unit growth. I'm just wondering if you can unpack what's kind of easy comps, what's kind of this supplier issue lapping the supplier issue? And then was there any evidence that the contractors were taking four ten that would have impacted the fourth quarter? And then just last, any kind of change in optimism around just underlying demand?

Yes, Jeff, this is Rick. I can take the first part of the question about just the unit trends and what we saw within the customer base. First on the comps, I think fourth quarter of last year, we said we were down about 4%. And so when we looked at units organically over a two year period, it's up about 12%. So it is not just a comp that's benefiting that.

I think there's good underlying demand, good underlying new customer acquisition. We think some market share that will be evident in the data going forward. Now the question then becomes, did what was some of that demand, the contractor channel holding more inventory than they normally do? And I'll give you a couple of data points there. First, just conceptually, I think we all know the average contractor is a small business, an owner operator, handful of trucks.

They don't have 100,000 square foot facilities to store inventory. They tend not to invest in inventory and working capital because we are just we, the distributor, are their just in time inventory partner. And generally, they have days of inventory on hand, not months of inventory on hand. So conceptually, the channel has never really had a whole lot of inventory beyond us, the distributor. So secondly, when you look at our movement throughout the fourth quarter, contractors were buying, you'd say you'd see a spike in December.

And what we saw was very balanced growth throughout all the fourth quarter and October was just as strong as December, which does not would not easily lead to the conclusion that there's more inventory out there. And then we then looked at our own customer level trends among our largest customers. They would be the ones who would have the capacity to buy forward and hold inventory. And there's nothing in that data that points to large scale buying. And fourthly, just to beat the horse dead now, I think our own inventories has a lot about this question.

And beyond the dollars that you see on the balance sheet, units in inventory have been very balanced and flat versus two years ago, believe it or not. So we don't see a whole lot of evidence that contractors are carrying much inventory beyond us in the channel and nothing that would cause alarm about what 2025 growth rates might look like.

Yes. I feel like beating up the dead horse some more, Jeff.

You mentioned about recovery of business from one of our OEMs who had issues a year ago. There is recovery, but that's not what's driving the growth that you see. It's a component of it, but it's not anywhere near the principal reason. And one of the principal reasons that I want to emphasize, Rick said, is new customer growth. We really have seen progress either technology or whatever market share generation concepts we are doing, the greatest component of growth this quarter is new customers.

So I want to say those words like next year and feel like we have a really progressive trend going in that direction, but we saw that this quarter for sure and we've seen it year to date.

Okay. Thanks. Great color guys. Your balance sheet is in great shape. Just maybe talk about the M and A environment.

It does seem like private equity has been more present in the space. Just what are you guys seeing in

your pipeline, etcetera, and the ability to get

Career, our careers, right? Is there still easily 50 to 100 families that own businesses that are 100,000,000 and more. We've tried to always know the families, have a personal relationship, have now multi generational relationships with those families. Much of them are second, third generation at this point. And I would say the stability of the last year or two, COVID you had wild increases in earnings.

The question is, were there wild variations in valuation or not? Well, now we have a couple of years behind that to kind of know where things are and know where things stand. And it's a I I think it's a confidence builder for us to invest. It's reality in terms of how some of these businesses should look at their own valuation. I would say private equity seems still interested, but less a factor than maybe during COVID when evaluations had run wild and there were people taking the bait in that respect.

I would say it's a bit more business as usual in that respect now. But we'll see. As always, our job is to have great relationships and be there when the families want to play something out. And we feel good that there's some good activity in that respect going on today.

The next question comes from Damian Karas with UBS. Please go ahead.

Hey, good morning, Al. Nice work on the quarter.

I guess the one area that's maybe just a little bit stagnant still is the non equipment sales. Could you maybe give us a little bit color around what you're seeing in that area of the business?

I think you're seeing a couple of things happening there. One, we've got a lot of that business that is driven by commodities, copper, refrigerant, steel. I think we're going to skip a pop perhaps in steel and a pop in copper. Refrigerant still has been slow.

When you get into the parts business, which is what it takes to actually install a unit or repair a unit in the field, we saw a definite increase. In fact, we had a double digit increase in parts, which would indicate that there could be kind of a dual action going on in the industry right now, where we've actually seen part sales go up at the same time we're seeing equipment sales go up. So outside of the commodity portion, I would have to say we're very pleased with what we're seeing in the aftermarket right now also.

Great. That's really helpful. And my follow-up, I know you guys are absolutely delighted in talking about gross margins, but I wanted to kind of just hear your confidence in the path to getting back to twenty seven percent or higher, when that might be. And I'm just curious if any of these new customers that Barry talked about driving a lot of the growth, if you expect that to have any kind of meaningful impact on your profitability as you bring some

Well, you may or may not have heard that our aspiration is a 30% gross profit margins. And we think we're going to add a lot of value to our customers to achieve that in product or services. So we aspire more than we presently have. And do we have a time period of that?

No. But we think it's possible and we have the tools and the means to get there probably better than anybody else. Do you want to add anything to that?

Yes, Mel, I'll add something. Again, in just some depth within Watsco. We have a number of business units and like any portfolio, we have outperformers and our outperformer business units are at or near 30 today. So it's not a pie in the sky number. It's something we see within our network that we like any again, like any portfolio, we want to work towards the maturity as well as the overall capability of much higher margins.

But in the near term, the short term, which is your question, obviously we had some impact this year that we described last quarter about recovery with one of our vendors, cost us about 30 basis points this year and we expect to recover that and hopefully expand on that in future periods. And that's the cost of doing business this year that was needed and now we move on from that point of view. Also, the technology story that we've told on pricing and technology, and again, anyone is welcome to come down and understand this better. So it's not just a sound bite on a conference call, anyone is welcome to come down and learn more. But the idea of a culture of improving technology to price every product we sell is still ongoing and that's part of the long term.

Short term, it's basis points. Long term, we want it to be percentage points. And product mix is another. This year, a little bit of headwind, probably 20 basis points or so in our the growth of our equipment versus the flatness of our non equipment. And I want Paul to be right in his sentiments because as they grow together, that's accretive to margin certainly in the short term.

Appreciate your time. Good luck with everything.

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

yes, I want to go back to the fourth quarter, the new customer growth being the big driver. Why all of a sudden in the fourth quarter did you see this? And then who are these customers? Are these more tech forward contractors that appreciate your technology? Or is there anything similar about these customers?

The trend was not isolated to the fourth quarter. I think we saw that trend kind of build throughout the year. If you go back in time, this time last year, it was, a, I'll call it a choppy sideways kind of market. Those are generally markets where we do very well in and have been good at gaining share. And so we just saw it build really throughout the year and it really showed itself in the fourth quarter a little bit more.

But the annual trend is almost exactly the same where, we saw the highest amount of revenue contribution from new customers since we started measuring that metric many years ago. What do they look like? I mean, yes, it's a good question. It's like snowflakes. They all look a little bit different.

I would say that that mix is we are well represented with the large contractor and what we always want to do is go after that mid tier contractor in the market. And that's where our non equipment offering sometimes resonates even more. That's where the product depth and the diversity of what we carry in inventory matters a great deal. And it's also where our technology can be a bit of an inflection point for that contractor. We've heard this a lot, AJ can expand on it is that, what our technology does a very, very good job of is turning that two, three, four truck operation and giving them the same tools and the same sophistication than the biggest customer we have in our portfolio has.

And that is a meaningful contributor over time, I think.

Yes. I mean, if I add to it, if I add to it, just to add some depth as an example, and I'm going to be purposely intentionally abstract to not to protect some of the competitive discussion that we need to be careful with. But one of our a big part of our network historically, its DNA was large customers, large dealers, main brand dealers, people that had been part of a nucleus of large customers for a long time. To grow that business, it needed to serve the other thousands of contractors in its local markets. And when we say working with OEM partners, an example is to go to that partner and say, listen, here's part of the market that we're not addressing.

Watsco (WSO) Q4 2024 Earnings Call Transcript

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