Watsco Q1 2025 Earnings Report

Watsco EPS Results

• Actual EPS: $1.93
• Consensus EPS: $2.29
• Beat/Miss: Missed by -$0.36
• One Year Ago EPS: $2.17

Watsco Revenue Results

• Actual Revenue: $1.53 billion
• Expected Revenue: $1.66 billion
• Beat/Miss: Missed by -$127.03 million
• YoY Revenue Growth: -2.20%

Watsco Announcement Details

• Quarter: Q1 2025
• Date: 4/23/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, April 23, 2025
• Conference Call Time: 10:00AM ET

Watsco (NYSE:WSO), together with its subsidiaries, engages in the distribution of air conditioning, heating, refrigeration equipment, and related parts and supplies in the United States and internationally. The company distributes equipment, including residential ducted and ductless air conditioners, such as gas, electric, and oil furnaces; commercial air conditioning and heating equipment systems; and other specialized equipment. It also offers parts comprising replacement compressors, evaporator coils, motors, and other component parts; and supplies, such as thermostats, insulation materials, refrigerants, ductworks, grills, registers, sheet metals, tools, copper tubing, concrete pads, tapes, adhesives, and other ancillary supplies, as well as plumbing and bathroom remodeling supplies. The company serves contractors and dealers that service the replacement and new construction markets for residential and light commercial central air conditioning, heating, and refrigeration systems. Watsco, Inc. was incorporated in 1956 and is headquartered in Miami, Florida.

Watsco Q1 2025 Earnings Call Transcript

Key Takeaways

• Watsco is converting nearly $1 billion of inventory to comply with A2L refrigerant mandates, having trained thousands of customers and upgraded technology platforms ahead of the peak selling season.
• Core HVAC replacement sales rose 10% in Q1, driven by higher volumes, new pricing and a richer mix of high-efficiency systems, while gross margins also improved.
• Management expects the proportional benefits of A2L products to accelerate in the stronger Q2 and Q3, noting Q1 is the smallest and most seasonal quarter but showed improving late-season trends.
• The company emerges from Q1 with a pristine balance sheet—$430 million in cash, zero debt and over $3 billion in equity—and raised its annual dividend 11% to $12 per share for the 51st consecutive year.
• Watsco is closely monitoring proposed tariffs—collaborating with OEMs on domestic pricing actions (91% of sales) and maintaining flexibility in its 9% international markets—while highlighting its leadership in a fragmented $74 billion HVAC distribution market.

Presentation

[Operator]

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.

[Operator]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Operator]

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.

[Operator]

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

[Stephen Volkmann, Equity Analyst at Jefferies & Company Inc]

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

[Stephen Volkmann, Equity Analyst at Jefferies & Company Inc]

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?

[Paul Johnston, Executive Vice President at Watsco]

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.

[Paul Johnston, Executive Vice President at Watsco]

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.

[Stephen Volkmann, Equity Analyst at Jefferies & Company Inc]

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?

[Paul Johnston, Executive Vice President at Watsco]

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.

[Stephen Volkmann, Equity Analyst at Jefferies & Company Inc]

Understood. Thank you. I'll pass it on.

[Operator]

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

[Albert Nahmad, Chairman & CEO at Watsco]

Good morning, David.

[David Manthey, Senior Research Analyst at Baird]

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?

[David Manthey, Senior Research Analyst at Baird]

And are you holding share there? Do you think?

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Paul Johnston, Executive Vice President at Watsco]

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.

[David Manthey, Senior Research Analyst at Baird]

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?

[Paul Johnston, Executive Vice President at Watsco]

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

[Albert Nahmad, Chairman & CEO at Watsco]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

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

[David Manthey, Senior Research Analyst at Baird]

Fair enough, guys. Thank you.

[Operator]

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

[Jeffrey Sprague, Founder and Managing Partner at Vertical Research Partners]

Thank you. Good morning, everyone.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

Good morning.

[Jeffrey Sprague, Founder and Managing Partner at Vertical Research Partners]

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.

[Jeffrey Sprague, Founder and Managing Partner at Vertical Research Partners]

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?

[Paul Johnston, Executive Vice President at Watsco]

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.

[Paul Johnston, Executive Vice President at Watsco]

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.

[Jeffrey Sprague, Founder and Managing Partner at Vertical Research Partners]

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?

[Paul Johnston, Executive Vice President at Watsco]

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.

[Jeffrey Sprague, Founder and Managing Partner at Vertical Research Partners]

Okay. Thank you.

[Operator]

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

[Albert Nahmad, Chairman & CEO at Watsco]

Morning, Tommy.

[Tommy Moll, Managing Director at Stephens Inc]

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.

[Tommy Moll, Managing Director at Stephens Inc]

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?

[Albert Nahmad, Chairman & CEO at Watsco]

Avery, you want to share?

[Aaron Nahmad, President at Watsco]

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.

[Aaron Nahmad, President at Watsco]

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.

[Aaron Nahmad, President at Watsco]

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.

[Tommy Moll, Managing Director at Stephens Inc]

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.

[Albert Nahmad, Chairman & CEO at Watsco]

Barry, you wanna deal with that?

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Tommy Moll, Managing Director at Stephens Inc]

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

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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

[Operator]

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

[Albert Nahmad, Chairman & CEO at Watsco]

Good morning.

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

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?

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

You feel like the business has found better footing?

[Albert Nahmad, Chairman & CEO at Watsco]

Yes.

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

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.

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

What was the impact there and what was that negative?

[Albert Nahmad, Chairman & CEO at Watsco]

Negative?

[Paul Johnston, Executive Vice President at Watsco]

Negative, no.

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

So I

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

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.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

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.

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

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

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C]

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

[Operator]

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

[Brett Linzey, Executive Director at Mizuho Financial Group, Inc.]

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?

[Brett Linzey, Executive Director at Mizuho Financial Group, Inc.]

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

[Paul Johnston, Executive Vice President at Watsco]

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.

[Paul Johnston, Executive Vice President at Watsco]

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.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Brett Linzey, Executive Director at Mizuho Financial Group, Inc.]

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?

[Paul Johnston, Executive Vice President at Watsco]

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.

[Paul Johnston, Executive Vice President at Watsco]

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.

[Brett Linzey, Executive Director at Mizuho Financial Group, Inc.]

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

[Operator]

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

[Albert Nahmad, Chairman & CEO at Watsco]

Good morning, Patrick.

[Patrick Baumann, Analyst at JP Morgan]

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.

[Patrick Baumann, Analyst at JP Morgan]

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.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

And obviously the higher pricing contributed something to that equation.

[Patrick Baumann, Analyst at JP Morgan]

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?

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

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.

[Patrick Baumann, Analyst at JP Morgan]

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.

[Paul Johnston, Executive Vice President at Watsco]

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.

[Paul Johnston, Executive Vice President at Watsco]

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.

[Paul Johnston, Executive Vice President at Watsco]

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.

[Patrick Baumann, Analyst at JP Morgan]

Okay. Appreciate the color.

[Operator]

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

[Jeffrey Hammond, Managing Director at KeyBanc Capital Markets]

Hey, good morning guys.

[Albert Nahmad, Chairman & CEO at Watsco]

Good morning Jeff.

[Jeffrey Hammond, Managing Director at KeyBanc Capital Markets]

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?

[Albert Nahmad, Chairman & CEO at Watsco]

Very good question.

[Paul Johnston, Executive Vice President at Watsco]

In the first quarter, you really aren't going to see a lot of compressor sales. When you look at parts and supplies, parts is what it takes to repair a unit, supplies is generally what it takes to install a unit. And so when we look at it, we look at the motors and we look at the compressors. And as I've said, I think on the last call and the call before, I'm hoping that we have a repair and a replace market. Motor sales for the quarter were up 7%, which is good.

[Paul Johnston, Executive Vice President at Watsco]

And then we were up slightly with the compressors. It wouldn't really be indicative of a repair versus a replace type mode yet. So I think with the dichotomy that we have in the homeowners, I we're gonna see a lot of replacement, and I also think we're gonna see a lot of repair.

[Jeffrey Hammond, Managing Director at KeyBanc Capital Markets]

And the trade down dynamic?

[Paul Johnston, Executive Vice President at Watsco]

I'm not sure.

[Aaron Nahmad, President at Watsco]

Yeah, ahead.

[Aaron Nahmad, President at Watsco]

Go

[Aaron Nahmad, President at Watsco]

ahead.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

Yeah. That's something that's something we've seen. It's obviously, you know, I could comment first. Energy efficiency mix actually improved this quarter.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

I wanna ring the bell in in October when we have our third quarter conference call if the trend continues. But also what's competitive for us, every location in Watsco has multiple brands, multiple price points, many of our competitors including OEM networks have do not have that variety, do not have that functionality or flexibility at a store level. So we can make hay in a tricky environment if that's where the consumer is and I'm glad we have that variety in our stores.

[Jeffrey Hammond, Managing Director at KeyBanc Capital Markets]

Okay. And then, Barry, you mentioned people that leaned in on 410A, which was not your tech, maybe benefited 1Q and maybe they're a little bit behind. So I'm just wondering if you think 1Q was impacted at all because maybe you had less than your fair share of 410A and maybe you catch up some of that. And then it seems like your inventory position is really strong coming out of 1Q. Just kind of thoughts around playing the merchant and gross margin arbitrage around these kind of follow on increases.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

Yeah, mean, obviously I don't have access to anyone else's financial statements to know what somebody else sold versus what we sold. But the anecdote in the market is there's some national accounts, multi family channels, facilities maintenance channel that consume four ten a and I think that provided that short term opportunity. Those aren't channels that we necessarily are going to take product away from our other good higher margin customers and serve that market. And instead we're going to try to serve the good customers that will be there longer term. So that's just an anecdote, Jeff.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

Don't know the but we that's volume where those customers in a more conventional environment, sixty days from now when four ten a is gone, our customers that as opposed to maybe being more opportunistic over the last quarter or so.

[Aaron Nahmad, President at Watsco]

Yeah, I think that's perfectly framed. Mean, can't see it even within our business, some of our business units who did have a higher position of 4x10A products, did have bumps this quarter In mass, in total, Watsco, that was not our tax, as you said. But I think that was a Q1 dynamic. And as A12 becomes the prevalent or the more prominent products that it's going to level out that playing field. And yes, we will be merchants.

[Aaron Nahmad, President at Watsco]

And again, I think looking at Q1, our core performance and our core AOR business, it shows that we're healthy and strong and poised for a good year.

[Jeffrey Hammond, Managing Director at KeyBanc Capital Markets]

Okay. Barry, we thought you were all knowing over twenty five years I've known you, but I understand you can't see everything. Appreciate the time, guys.

[Albert Nahmad, Chairman & CEO at Watsco]

Thanks.

[Operator]

Thank you. The next question is from the line of Chris Snyder with Morgan Stanley. Please go ahead.

[Chris Snyder, Executive Director at Morgan Stanley]

Thank you. Hey, good morning. I appreciate the question. I wanted to follow-up on some of the prior commentary. And it seems like you guys didn't lean into 410A as hard as others and maybe there were some softness in Q1 as a result.

[Chris Snyder, Executive Director at Morgan Stanley]

I guess my question is, do you have any sense of how much four ten a your distributor competitors still have into Q2? Because it seems like, you know, maybe that share shift back to you or four fifty four b will happen really ultimately when the four ten a is just totally done being sold.

[Paul Johnston, Executive Vice President at Watsco]

Chris, this is really no idea.

[Aaron Nahmad, President at Watsco]

Yeah. Go ahead, Rick.

[Rick Gomez, Vice President of Corporate Development at Watsco]

I I I was gonna say that that's awfully hard to to to to, have a line of sight into our best, and it's purely anecdotal. But, you know, obviously, we talked to a lot of other distributors in our in our quest for more acquisitions. And and as we do that, this is obviously a a recurring topic and something that is on everyone's mind. I don't get the sense when when talking to those independent distributors that they have, you know, that they're planning on or that they have enough Fortuna inventory to get very much past the second quarter and nor could the OEMs supply a whole lot of that to close out the year. So I think by the end of 2Q, Fortune A will largely be in the rearview mirror.

[Chris Snyder, Executive Director at Morgan Stanley]

Thank you. I appreciate that. And then, I think you guys said maybe 20% or 25% of your volumes in the quarter were four fifty four, if I heard that right. So I imagine, we're still the field is still not installing a ton of four fifty four B, maybe in April that's changing. But I guess, you have any sense of the rate at which four fifty four B is being installed?

[Chris Snyder, Executive Director at Morgan Stanley]

And just trying to figure out, like, how do we tested the demand or even maybe the price elasticity on four fifty four B? Because it still seems pretty early in the process. Thank you.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

Yes, I was going to say, I don't feel like it's that early. I feel like it's going on materially and importantly and we do have a view into what's going on. I mean 25% of the first quarter is probably $250,000,000 of product. I don't think that's a small number. That's larger than most distributors for a full year.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

And so there some insight into it. If I look at the last two weeks, it's probably over 60% of what we're selling is four fifty four B products, so the ramp is happening pretty quickly. So when we talk about current trend and current margin visibility, we're satisfied the new product is being accepted well.

[Chris Snyder, Executive Director at Morgan Stanley]

Appreciate that. Thank you.

[Operator]

Thank you. The next question comes from Steve Tusa from JPMorgan. Please go ahead.

[Steve Tusa, Managing Director at JP Morgan]

Hey, guys. Good morning.

[Paul Johnston, Executive Vice President at Watsco]

Hey.

[Steve Tusa, Managing Director at JP Morgan]

Sorry, just to follow-up to

[Steve Tusa, Managing Director at JP Morgan]

Pat's questions. Just philosophically as a distributor and when you're looking at like these situations, what is the difference between a how do you look at the difference between like a surcharge and a price increase? And like what is there to read into from OEMs that are picking surcharges versus price increases just broadly? What do you take away from that from an industry perspective?

[Paul Johnston, Executive Vice President at Watsco]

I think a surcharge is temporary because of some exterior condition and a price increase is longer term. A surcharge doesn't affect your inventory, a price increase does. To my knowledge, there's only been one OEM that's issued a surcharge.

[Aaron Nahmad, President at Watsco]

Right. I would say that this is such a this is a new and dynamic environment we're in with these extreme tariffs or potential tariffs. So everybody's working their models and figuring out the best approach. And this is where we've referenced our great relationships with our OEMs and the collaboration. There's a lot of conversation about how to do this without creating much friction or as little friction as possible and make this as harmonious as possible.

[Aaron Nahmad, President at Watsco]

And that that's one of the dimensions that was was discussed thoroughly. And there's pros and cons of doing a surcharge versus a price increase. And like Paul said, I think one OEM went with surcharge. But I don't think there's too much to read into that other than just trying to do the best we can or anybody can to keep harmony in the market.

[Steve Tusa, Managing Director at JP Morgan]

Are you guys doing any surcharges or are you mostly like price increases? Obviously, you guys can be pretty agile with the tech you have. But is mostly of what you do surcharges or price increases

[Steve Tusa, Managing Director at JP Morgan]

or mix?

[Aaron Nahmad, President at Watsco]

It's mostly price increases.

[Paul Johnston, Executive Vice President at Watsco]

Yeah.

[Steve Tusa, Managing Director at JP Morgan]

Yeah. Yeah. Okay. That that price

[Paul Johnston, Executive Vice President at Watsco]

increases.

[Steve Tusa, Managing Director at JP Morgan]

And

[Steve Tusa, Managing Director at JP Morgan]

That makes sense.

[Barry Logan, Executive VP of Planning & Strategy and Secretary at Watsco]

Remind you and and and Steve, to remind you of the texture of of this because it's just important to know the the two sided equation we deal with. As I said earlier, if we have a thousand customers in South Florida, we may sell the same product at a thousand different prices. We also buy the product, purchase the product, the same product at different prices depending on the market segment we're addressing. And so, an OEM's price to us varies depending on those variables. So in that double sided equation, there's a lot of I think artistic and good ways to use technology to deal with these kind of environments where again, I'm not sure our competitors have it.

[Steve Tusa, Managing Director at JP Morgan]

Hey, one last one, Paul. Just from an industry perspective, how much of the like unitary product

[Steve Tusa, Managing Director at JP Morgan]

do you

[Steve Tusa, Managing Director at JP Morgan]

think is like sourced directly from China, like where you have a Chinese manufacturer who may be shipping it over here and sticking a label with The U. S. Guys sticking a label on it. My guess is it's not huge, but like it's been growing in the last couple of years. How much do you think there is of the industry?

[Paul Johnston, Executive Vice President at Watsco]

I think in the industry it's less than 5% on the ducted side and then on the duct free side obviously it's higher. Don't think make a single unit in The U. S. There's a few units made in Mexico, but the ductless side would be heavier, the ducted side would be very small. There's maybe one manufacturer left, I think, that's using a product that's made in China.

[Steve Tusa, Managing Director at JP Morgan]

Right. And then sorry, one last one. I know we got like fifteen minutes left for the hour, might as well get one more in. I heard the kind of the tail end of Pat's question on four fifty four B. Like, why is Honeywell putting this huge price increase out there if there's, like, such abundance and it's just a it's a, you know, container issue?

[Steve Tusa, Managing Director at JP Morgan]

Trying to, like, figure

[Paul Johnston, Executive Vice President at Watsco]

I would too. I'd like to figure out, you know, why there's not more of a shortage on 32 because it's the same container. But I have no clue. But at the same time, there's only two manufacturers that make four fifty four, and that's Honeywell and Chemours. And Chemours had a price increase, a fairly sizable price increase.

[Paul Johnston, Executive Vice President at Watsco]

The primary reason why they had that price increase is because majority, 80 plus percent of the 32 that's brought into The US is from China. There's been a lot of inventory of 32 in The US, but I think those two manufacturers with 70% of four fifty four represented by 32 felt like they had to have a price increase. So both of them went up. It wasn't just Honeywell. On the other side, we're starting to see allocations forming around 32.

[Paul Johnston, Executive Vice President at Watsco]

Yesterday, we saw a material price increase on the 32 that we buy. The price spread between the two products now is narrowed to just little over $3 a pound. So it's not as big of difference or delta as it was when they were introduced.

[Steve Tusa, Managing Director at JP Morgan]

Okay. That's that's great color. Thank you very much.

[Operator]

Thank you. This concludes our question and answer session. I would like to turn the conference back over to the management for any closing remarks.

[Albert Nahmad, Chairman & CEO at Watsco]

Well, thanks for your interest in our company, and we look forward to catching you up at the end of the next quarter. Bye bye now.

[Operator]

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

Participants

Executives

• Albert Nahmad, Chairman & CEO
• Paul Johnston, Executive Vice President
• Barry Logan, Executive VP of Planning & Strategy and Secretary
• Aaron Nahmad, President
• Rick Gomez, Vice President of Corporate Development

Analysts

• Stephen Volkmann, Equity Analyst at Jefferies & Company Inc
• David Manthey, Senior Research Analyst at Baird
• Jeffrey Sprague, Founder and Managing Partner at Vertical Research Partners
• Tommy Moll, Managing Director at Stephens Inc
• Ryan Merkel, Co-Group Head–Industrials at William Blair & Company, L.L.C
• Brett Linzey, Executive Director at Mizuho Financial Group, Inc.
• Patrick Baumann, Analyst at JP Morgan
• Jeffrey Hammond, Managing Director at KeyBanc Capital Markets
• Chris Snyder, Executive Director at Morgan Stanley
• Steve Tusa, Managing Director at JP Morgan