Watsco Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 11 speakers on the call.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Albert Nahmad, CEO and Chairman. Please go ahead.

Speaker 1

Good morning, everyone. Welcome to the 2nd quarter earnings call. This is Al Nahmad, Chairman and CEO. And with me is A. J.

Speaker 1

Nahmad, President and Paul Johnson, Barry Logan and Rick Gomez. In this call, I have asked these executives to chime in anytime they wish with their thoughts so that all of you can get views from multiple people in the company. Before we start, I will state our cautionary statement. This conference call is 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.

Speaker 1

Now onto the call. Watsco delivered another strong quarter. We achieved record sales reflecting strength in both residential and commercial markets. Operating efficiency improved during the quarter as evidenced by lower SG and A as percentage of sales. We generated strong cash flow and our balance sheet remains in pristine condition to enable most any size investment to grow our business.

Speaker 1

Simply put, Watsco's entrepreneurial culture, which empowers local leaders to make local decisions continue to perform well. Technology continues to have an impact and we are fortunate to have served such a large and growing number of contractors with the industry's most innovative technologies. Greater adoption and use of our platforms by a growing number of contractors has produced growth and market share gains. Annualized e commerce sales now exceeds $2,500,000,000 and our active users continue to grow faster than non users. OnCallAir, Watsco's consumer facing sales platform that helps contractors do business continues to grow and expand.

Speaker 1

Thus far in 2024, contractors presented quotes to approximately 160,000 households, an 18% increase and generated $743,000,000 of sales for our contractors, a 27% increase over last year. We are actively updating GWP A2L systems. This presents another important federal regulatory change providing the opportunity for growth in the coming years. Other federal regulatory changes continue to influence growth. Energy efficiency mandates went into effect last year, providing contractors the ability to upgrade older systems with higher efficiency systems.

Speaker 1

The trend towards electrification of fossil fuel heating has driven increased sales of heat pumps contributing to growth. We are fortunate to be in such a great industry and believe our proven culture, customer focused technologies, scale and access to capital provide unique advantages and opportunities. Finally, as always, if you have interest in earning more, please come to Miami and see us. We are transforming an industry and we will enjoy telling you about it. With that, let's go on to Q and A.

Speaker 1

Hello? David, this is the operator. Hello? Yes. Take the question.

Operator

Perfect. We'll now begin the question and answer session. The first question comes from Jeff Hammond from KeyBanc Capital Markets Inc. Please go ahead.

Speaker 1

Hi, Jack.

Speaker 2

Hey, good morning, guys. What's going on?

Speaker 3

Hi, Jack.

Speaker 1

Well, it's bright and sunny and happy to hear your voice.

Speaker 2

Okay, great. We just talk about the moving pieces in gross margin? I know you're kind of been level setting people around 27, but looks like it was down 100 basis points year on year and I know kind of the price timing with the price increases maybe was going to be supportive in the quarter? Thanks.

Speaker 1

Paul or Barry or both, please answer.

Speaker 3

Sure, Jeff. Good morning. Again, we look at things a little by little in a quarter. I want to just zoom out a bit and look at the first half of the year. You look at the first half of the year at 27% plus, which has been our bogey.

Speaker 3

We've been asked about this now consistently for 2.5 years and kind of said the same thing. And there are the moving pieces are more obviously than just the timing or level of an OEM price increase. In fact, the only kind of real price increase that straddled the quarter that's material is the carrier price increase that came in March, helped the Q1 some and obviously came into the Q2 as well. But I just don't want to get too obsessive about short term discussions when the long term is working through. Having said that, in the quarter, you can see that our equipment business grew at, I think, a pretty terrific growth rate and our non equipment business didn't.

Speaker 3

And obviously there's a big disparity in gross margin in those two families of products, enough so to account for some of the year over year change in margin. Also mix is a conversation when it comes to price and margin. And we're far more complex in that regard than an OEM. Watsco has brand mix. We sell multiple OEMs with multiple brands.

Speaker 3

And I won't discuss how much, but there is a variety of margins we make depending on what brands we sell and growth rates that pertain to those brands that year over year working against margin. It's again in basis year over year working against margin. It's again in basis points. It's not a big material thing, but it's a component, as I mentioned. We also see less inventory being owned this quarter.

Speaker 3

That means purchases have been down and replenishment has been down. There's a little bit of a consequential impact year over year on rebates and discounts, things like that, that are earned in the period. And I could give you like 5 more basis point conversations in that mix conversation. But if I again dial it back, look at the big picture year to date, we're where we said we would be. We're never satisfied where we are by the way.

Speaker 3

We still have certainly more potential and as we've said long term much higher aspirations than this. And I'll let Paul talk or Rick as well. Rick, you have a lot of insight too.

Speaker 1

Okay. There you are. Wait a minute, Rick. I don't know what happened to Rick. Anybody know?

Speaker 1

I don't know.

Speaker 4

Can you all hear me?

Speaker 1

Now we can. Now we can.

Speaker 5

I guess I was muted on the

Speaker 4

other end. Sorry about that.

Speaker 5

Yes, Jeff, good morning. And just to, I think Barry explained it very well. I'll just add 2 tidbits to it that I think are maybe helpful. First is, for that year to date period, we have also seen again just steady commercial strength and that family of products relative to residential also has some mix implication as it relates to gross margin. 2nd thought I'd share is just again, if we look ahead a little bit and not backwards, we've got a big product transition coming at the end of the year.

Speaker 5

Those periods of time are usually good opportunities to evaluate margin and act on opportunities. And for us, I think what we're looking forward to is leaning in on some of the technology tools that are now maturing, that can be helpful to margin long term as we go about that regulatory transition.

Speaker 2

Okay, great.

Speaker 1

All you have heard. Okay. He's satisfied. Let's go.

Speaker 2

That's a good segue here because I wanted to jump in. It seems like a couple of OEMs have kind of put out last calls for 410A product. Just maybe your updated thoughts on how much 410A you want to exit with and any kind of implications around pre buy? And then just as you talk to your OEM partners, how are you feeling about the readiness for the ATOL transition in new products?

Speaker 3

Pablo?

Speaker 6

Yes, I think, Jeff, everybody is pretty much ready to go with their A2 products. That we're seeing one manufacturer located in Texas, it's already putting out their A2L product. So I'm not really concerned about a transition here. It's not much of a transition. It's putting in a different compressor into the unit and it's also putting in a sensor that senses and smells if there's any leakage and then a switch that basically will turn on and off the system.

Speaker 6

So there's not a big change in the product. When you get to the $410,000,000 how much $410,000,000 are we going to carry forward? We put in our final orders now pretty much across the board. We think we're going to have enough product to go perhaps into the Q1, but probably no further than that.

Speaker 7

Okay. Thanks guys.

Operator

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

Speaker 1

Good morning, Tom.

Speaker 8

Good morning, Al. Thank you for taking my questions.

Speaker 1

Of course.

Speaker 8

I wanted to talk about some of the trends for the residential business. You called out 6% growth in ducted units year over year. Can you walk us through how the selling season progressed through Q2? And are you able to give us an update on how July paced?

Speaker 1

All right. Well, Barry?

Speaker 3

Yes. Good morning, Tommy. Well, first, I mean things did progress in terms of stronger growth rates during the quarter and kind of a weird item and just to speak in algebra for a second is we had actually had 2 more days in April and 2 less days in June. And in some weird way, I would have rather had been the reverse, because our business is much bigger in June than in April. It was probably $20,000,000 a headwind in the quarter by the way, just to be a trivia give you the trivia of that algebra.

Speaker 3

But if I look at average sales per day during the quarter, it progressed and June certainly was the stronger of the 3 months. If I look at again average sales per day, certainly north of our overall growth rate for the quarter up into high single digits on a same store basis. For July, the only thing strange in July is we have our largest market probably in the country and the Texas coast getting influenced by some hurricane activity, some closed stores. If I look past that, there's the same kind of growth rate in July that you see for the quarter. But it's early and it's strange and August is as big as July.

Speaker 3

And so in terms of a trend, I don't want to get happy or sad on July. August is just as big and will be at full all cylinders as we get through the summer, which wasn't the case throughout part of July.

Speaker 8

Thank you. As a follow-up, I wanted to ask about the OpEx leverage that you showed this quarter. It's been a theme that's come up for some time now. And I think you grew same store OpEx at about half the rate of sales. So showed up clearly leveraging that expense line this quarter.

Speaker 8

What are some of the drivers there that you can unpack for us? And how are you feeling about the initiative that's been in place for some time now to continue to drive leverage there? Thank you.

Speaker 3

I think first going back in time, some then I'll do what Rick does, which is go forward in time. I go back in time, in COVID, it was a circus act to get product to get everyone served and SG and A had to be built and incurred to serve businesses and to serve our customers in a difficult environment. So 2 years later, how do you evaluate that look back and set expectations or communicate the data to our field to act on it. So I would say beginning last fall as it was a more aggressive campaign to act on SG and A. More actions occurred in the Q1 and this is the Q1 where I think there's more evidence of everything I've just said with more opportunities and more actions and more results to come.

Speaker 3

And I looked at SG and A right before the call actually. The only thing peculiar for example is healthcare is up $7,000,000 year to date. That's the only outlier in the whole list of how we look at it. And we improved our benefit plan. We improved our medical plan with intention.

Speaker 3

And there's some bottom line impact to that reality for our employees, which is a long term perspective. But that's the only thing that stands out amongst a long list of things. And so I think the teams in the field are have acted, have reacted and have more to do. And I think you'll see the results of that. And it's all database.

Speaker 3

None of this is emotion or reactionary. It's all in the numbers and looking at the data.

Speaker 4

This is A. J. I was going to go to the same place, Barry, where it's intentional. This is a continuous improvement culture that we have at Watsco. When we talk about technology, it's really become a buzzword, but really what it means, what it also means is looking at processes and systems and opportunities to be more efficient with our time and our people and getting orders processed and filled, etcetera, etcetera.

Speaker 4

So there's certainly been work to continually improve everything we do.

Speaker 8

Thank you both. I'll turn it back.

Operator

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

Speaker 1

Good morning. Good morning.

Speaker 9

Hey, good morning, everyone. Thanks for taking the questions. Can we talk about the other HVAC products, parts and supplies? Why was it a little bit weaker than equipment? Is there

Speaker 3

anything that stands out? Nothing I can Go

Speaker 1

ahead, Paul.

Speaker 6

Yes, there's nothing I can really think of that was odd or unusual about other.

Speaker 3

If it

Speaker 6

was down, it was down a bit, but there really isn't anything in there that was very strange. No.

Speaker 9

Okay.

Speaker 3

And then I

Speaker 6

mean, just to

Speaker 3

be helpful with something we've talked about in the past and because Ryan, I think it's a good question is, if we say it's 21 25 percent of our business then in the quarter it was a $500,000,000 business, right? And there's probably 60 different product groups, 300 or 400 different vendors. It's a hodgepodge of a variety of stuff, right? We have talked about commodities and we only have really 3 that we consider commodities. That's copper tubing, sheet metal products and refrigerant.

Speaker 3

And again, that component of our revenue is closer to $100,000,000 in the quarter, dollars 100,000,000 out of the $500,000,000 And there we have seen stability in price and cost and margin. That's one of those more volatile variables we were seeing a year ago. A year later, it's much more the bandwidth of volatility is much less, but the dollars are less because the pricing is less. So a little bit of headwind still in revenue, but not on margin and not in general business conditions from a materiality point of view.

Speaker 9

Got it. Okay. That's helpful. And then as it relates to product mix, are you seeing, the higher Sears stuff grow or are you seeing people trade down to base systems?

Speaker 6

I think it's generally trading. Yes, it's basically trending towards the basic product. We've got a minimum efficiency now, which is at a point where the higher share product really doesn't have as much impact as it used to. So what we're seeing is the industry is tracking at, I would say, close to 90% at the standard efficiency level. So definitely you're seeing a trend down.

Speaker 3

Okay, great. Thank you. I mean the one trend I'll add to that. The one trend that is consistent and consistently good for business, good for the industry is heat pumps. Heat pumps are certainly growing at a faster rate than underlying furnace demand and that's in our numbers and that's a mixed benefit to selling price, needless to say.

Speaker 3

And also, I would say high efficiency heat pumps have grown at decent rates relative to the underlying. So the heat pump would I would carve out a little bit in that conversation and say there's some good trends there.

Speaker 9

Thanks Barry.

Speaker 3

And I think as Rick said, A2L is going to basic the A2L products, if you think about it, it's going to replace basically probably 55% of what we sell company wide. And it's all new equipment, all new efficiencies, all new opportunities, all new discussions, all new training, all new inventory. But it's a nice chance to kind of refresh the opportunity that's in front. And we kind of like those changes because it puts us in a position to do that.

Operator

The next questioner comes from Brett Linzey from Mizuho. Please go ahead.

Speaker 10

Tends to increase. Is there anything to read into there or is that more of a function of the build in Q1? And then how would you characterize inventory levels just relative to what you're seeing in the market? Thanks.

Speaker 1

I'll make a brief statement on that. First of all, we're very focused as we've been saying quarter after quarter on the inventory asset, which is our largest asset. And we've been applying a considerable amount of technology and science to it. So we're getting more efficient on inventory turns. And Barry, you can follow that up with whatever you want.

Speaker 3

Yes. I think, again, it's AJ mentioned the term continuous improvement and heaven knows after the COVID challenges, inventory remained high even post COVID and inventory turns. If you look today, do the math today versus any historical period, we are looking to improve turns. We obviously must take care of customers in season and we're doing that as evidenced in the growth rates. But I would say inventory is still a work in process also.

Speaker 3

It's still a matter of continuous improvement to really get the inventory turns back in the closer to 5 times instead of today, it's closer to 4 times. I think that process takes time because of the A2L transition coming in front of us and there's another huge transition occurring. But if you talk to us 2 years from now or 3 years from now, I would expect inventory turns and to be more historical at closer to 5 than today closer to 4. I wouldn't read into the there's no science or message in the sequential change. Inventory was built in the Q1 that was in order to be in a good position for growth, which occurred and how we react to what's going on for the rest of the year.

Speaker 3

I wouldn't read into that and there's certainly no message behind it.

Speaker 10

Thanks. And then could you just walk us through what you're seeing more broadly from the consumer affordability side? Are you guys worried about any sort of pushback or erosion there?

Speaker 6

Really, when we look at what the prices have gone up over the last, gosh, it's been 5 years now that we've seen prices continue to move up. We've expected the consumer to start pushing back on price. We have not seen that as of yet. As we indicated in the release, our residential sales were actually up in units for the quarter, which is a strong indication that the consumers out there and they're still buying the product at the price that we're offering. Secondly, we are seeing some moderate increase in the repair side where it's we've been seeing high single digit increases in compressors, motors, the type of things that you would repair a unit with, those continue to remain strong.

Speaker 6

So it's kind of like we have the best of both worlds going right now where we have a consumer that is going to purchase it at the price that we offer and at the same time people are repairing. And just to add to that, Paul, I think what we don't talk

Speaker 3

a lot about, the industry doesn't talk too much about is the ductless side of it, the ductless side of the market. We represent multiple OEMs on the ductless side. Unit growth rates for ductless actually exceeded the ducted product this quarter and year to date. That's a solution that contractors are offering more often. They're comfortable offering and that will work in cold climates now where they're all high efficiency, they're all heat pumps and it's both international and domestic.

Speaker 3

So that is a product that fits somewhere in that conversation of affordability. When you look at the traditional ducted systems versus repair ducted ductless does fit somewhere in that discussion. And we're certainly seeing growth rates in DUC List, and have for some time now.

Operator

The next question comes from Patrick Palmer from JPMorgan. Please go ahead.

Speaker 1

Patrick, almost as I say in Miami.

Speaker 7

Short term share impacts for the other OEMs that have maintained supply, steady supply of their 410A product? And then if so, what kind of impact

Speaker 1

would that have in

Speaker 3

the business?

Speaker 6

I really don't see a big impact in market share coming from that one manufacturer that's introducing their A2L product. I think it's more of an availability issue on their part to be able to provide product that product that is going to be available in 2025. They decided to come out early. They've got a unique design to it. And hence they feel that they've got an opportunity to try to step in and at least lead the way on A2L.

Speaker 6

But I don't see it as a big change in the marketplace as far as share market for them.

Speaker 4

I'll just add one other note on it as well. This is Ajay again. Since we got a question earlier about pre buys and I want to make sure that it's clear. We're not speculating on pre buys or how the transition will play out and try to make a special bet. What we're trying to do is have a functional harmonious and seamless transition to the new brands.

Speaker 4

And we will have not new brands, new products and we will have new I'm sorry, we'll have a year to sell through the old stuff as well. So we expect it to be pretty smooth.

Speaker 7

And what type of initial pricing are you seeing for the new technology versus the current generation or the 410A, I'm sorry?

Speaker 6

We're seeing the 10% increases that were indicated by I think every OEM probably a dozen times here in the last year.

Speaker 7

Yes. Okay. Just wanted to check that. And so we take basically so 55% times to 10% the way to think about your mix impact for next year from selling this new product? Maybe that's Barry question.

Speaker 7

I don't know.

Speaker 3

Yes. Patrick, the only reality, right, is it's not 100% new product 0% old. There's a blend that's going to play out into next year too. So it's a blend into next year. It's not all of next year.

Speaker 6

Plus we have to wait for the Department of Energy still has not pronounced what represents a replacement unit. The current write up that we've been provided by the government indicates that you can sell a unit, a 410 unit if it's repairing a system. It would be a component. And there's a lot of debate in the find out what the DoD decides, which hopefully will happen soon.

Speaker 7

Yes. No, we're waiting to hear that as well. Okay. And then maybe one quick one for Barry, if I could, on gross margin, normal seasonality or however you want to talk to it through the rest of the year. Is that is there anything unusual we should think about versus normal seasonality for gross margin for the rest of the

Speaker 3

year? No, I think we stick to the big picture for the year at the 27% level and Q3 will tell us the progress and I would keep to I think we're keeping to the goal of a notion of 27% for the year. Okay. That's fine. And the seasonality is what it is over the 3rd Q4.

Speaker 3

You can look at the historical trend of that and make your own assumptions.

Speaker 7

Yes, makes sense. Will do. Thanks a lot.

Operator

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

Speaker 1

Hi, David. Yes. Hi, good morning, everyone. First off, Barry, in the release, you mentioned that ducted residential units average selling price was up about 3%. I was hoping maybe you could zoom out and talk about the overall price mix impact on both equipment as well as other HVAC products in general.

Speaker 3

Sure. Well, the second part first on other HVAC products, honestly, I don't count how many rolls of duct tape we sold understand unit versus price on duct tape. And there's 80 as I said, there's probably 80 product lines in that that I'm not sure we have. I'm sure we have insight. I don't know the insight.

Speaker 3

What I did comment on the commodity side is stability and what had been volatile pricing on commodities has become very stable. And so from that perspective, from what I can tell on the HVAC non equipment, I don't think there's anything remarkable in pricing units in that equation. On the equipment side, again, when we use the word average selling price, that's a composite of actual price mix and mix can be geographic mix, product mix, brand mix, vendor mix, customer mix. It starts to broaden out into Snowflake. So I couldn't give you the components of all that.

Speaker 3

I can tell you that the OEM pricing actions year to date flow through and you don't see much variation in equipment margin for us year to date if you look at the full 6 months. And I would say so far so good with the pricing actions. I think as Paul suggested, if we look at mix within brands, within products, within markets, There is a conservatism in the market that I think is there. It still means we're replacing systems. And I think it's an important extremely important concept that every single Watsco location, all 700 have multiple brands of products, multiple price points.

Speaker 3

And if one market is tighter than another, we have brands to sell and sustain margins, sustain the replacement market. Not all competitors, in fact, very few competitors sell more than one brand. And that would include the OEM, the OEM networks that sell single brands. And so we like the diversity. It's helpful to market share.

Speaker 3

It's helpful to margin, it's helpful competitively and it lets us react to what's going on in individual markets in a very, very good way.

Speaker 1

Okay. Thanks, Barry. And just to clarify your statement on the commodity product, when you say it's stable, are you referring to it's stable today relative to what it was a month or 2 ago? Or are you talking about a year over year we should be thinking that that's sort of a flatness today?

Speaker 3

Yes. I would say, if I look at the Q1 of 2024 and the Q2 of 2024, price margin and really the quality of gross profit is sound this year, where last year it was highly volatile. It would go up and down quarter to quarter And it's much more stable and I would say in a very narrow range and acceptable margins for those products this year.

Speaker 1

Okay. All right. And then one more on acquisitions. Is there any update on the Gateway acquisition? And then given the timing of that, I think it was September of 2023, the rollover effect from acquisitions in the Q3, I'm coming up with about $40,000,000 in revenues.

Speaker 1

Does that sound right to you?

Speaker 5

Jeff, it's Rick. I can speak to that

Speaker 3

a little bit. First, we are

Speaker 5

more than delighted with how Gateway is doing. It's a terrific team. It's a terrific market. We will be there actually pretty soon to have a powwow with those folks. And I would say that they are exceeding expectations up to this point when we look at the numbers relative to what we invested in, what they were doing last year when we made that investment.

Speaker 5

So very pleased with how that is unfolding. You are in the ballpark as it relates to Q3 contribution. And I think September 1 is the anniversary of that. So it we will lap that here starting in the Q3.

Speaker 1

All right. Thanks, Rick. Thanks, everyone.

Operator

The next question comes from Nigel Coe from Wolfe Research. Please go ahead.

Speaker 10

Thanks, Lyle. Thanks, everyone. Just you mentioned I know 444B is not a sorry, is that me or you? Okay. Background noise, please.

Speaker 10

So, look, I know the 454B is not a huge fact, but I think you did mention that there's a handful of distributors out there, so the customers out there accepting products. I was just curious kind of what you're seeing in terms of the kind of customer acceptance and whether the price on 44B is sticking? Are you seeing that sort of 10%, 15% uplift on mix?

Speaker 6

Thanks. Well, it's way early to be able to give you any sort of prediction on how the customers are accepting it. We just I think we just had our first delivery of 100 units to a particular customer. So we'll find out quickly what the reaction has been. We obviously have done a tremendous amount of training and we'll continue to add to that and add more training to it to make sure that the customer understands what the tools are that they have to have and what the how they're going to install it.

Speaker 6

There are some variances that will occur, but way too early to be able to really gauge price and acceptance of the product. I have no doubt in my mind that it's going to be accepted.

Speaker 10

Yes, that might it's actually earlier than expected. So sorry for the question. I thought maybe it's a bit more impactful than that. And then you mentioned share gains. And I'm just curious how the how your view of the market in 2nd quarter versus the 4% same store sales.

Speaker 10

So just any color there? And then inventory, I know you've built a fair amount of inventory in 1Q. You worked that down in 2Q. Normally, you'd work up inventory in the Q2. And the spirit of the question is really that it feels like this is a year when inventory is moving higher, not lower.

Speaker 10

So just curious your perspectives on inventory over the back half of the year.

Speaker 1

Paul, let me deal with the first part. All right. Earlier stated that we're very focused on using our tools to improve inventory turn. And we are succeeding that we have certainly enough inventory to meet demand and hopefully the turns will increase and will carry less inventory and still meet demand.

Speaker 6

I would say, as we go through the year, I see our inventory actually trailing downwards and continuing to move down as it does because of 1, seasonality and 2, because of the transition to the new A2L refrigerants. And then we'll probably see in the Q1, we'll probably see an overlap of inventory where we're going to have 410 and we're going to have A2L, which perhaps will cause a bump in the inventory, which would be normal anyway just based on the season. So it's going to be an unusual ride, I think, as we go through this transition to the new product. A lot of the product information that we have right now indicates that it should go smoothly and knock on wood that it does.

Speaker 10

So what you're saying loud and clear here is no pre buy or no material pre buy in Q4?

Speaker 6

No material pre buy, no.

Speaker 10

Okay. Thanks, guys.

Operator

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

Speaker 1

As always, thank you for your interest in our company. We very much appreciate it and we're very sincere in asking you to come visit if you want to learn more about what we do, especially in the technology field. You're always welcome. All it takes is a phone call. And to that end, we look forward to catching up with you in the next quarter.

Speaker 1

Thanks for your interest and for your support. Bye bye

Operator

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

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Key Takeaways

  • Watsco reported record Q2 sales with strength across residential and commercial markets, improved operating efficiency via lower SG&A as a percentage of sales, and generated strong cash flow while maintaining a pristine balance sheet.
  • Adoption of Watsco’s technology platforms drove growth, with annualized e-commerce sales exceeding $2.5 billion and OnCallAir expanding 18% to quote 160,000 households and generate $743 million in contractor sales (+27%).
  • Federal regulatory tailwinds—including the GWP A2L refrigerant transition, energy efficiency mandates, and electrification of heating via heat pumps—are creating material growth opportunities.
  • The company maintained its long-term gross margin target of 27%, navigating mix and OEM price timing headwinds while leveraging maturing technology tools to support future margin enhancements.
  • Watsco continues its culture of continuous improvement, achieving SG&A leverage, progressing toward 5× inventory turns, and integrating acquisitions like Gateway, which is outperforming expectations.
AI Generated. May Contain Errors.
Earnings Conference Call
Watsco Q2 2024
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