Watsco, Inc. Q3 FY2024 earnings call

• Watsco produced record sales and net income for the quarter, with October sales up mid-single digits driven by meaningful unit growth and market share gains.
• Generated record cash flow, has a strong balance sheet with no debt. Working with an OEM to regain business and add new customers through co-investment.
• Made investments in innovative technology platforms for HVAC contractors, with annualized E-Commerce sales over $2.5 billion and OnCall Air Contractors growing. Leveraging tech to optimize the launch of A2L systems starting in 2025.
• Still working on improving inventory turns and operating efficiency, with modest change in SG&A year-over-year.

Watsco's E-Commerce sales have annualized to exceed $2.5 billion. OnCall Air Contractors presented close to approximately 258,000 households in 2024, a 17% increase, and generated $1.2 billion of sales for contractors, a 22% increase over the previous year. No specific revenue contribution percentages for product segments were detailed.

• Ambition to achieve 30% gross margin in the long term, with engines revved up and focus on gross margins.
• A2L transition seen as an opportunity to re-price and go to market with new products, with inventory set to cycle and pricing/mix critical for driving margin in the next 12 months.

• Hurricanes like Helene and Milton temporarily disrupted operations but were not materially impactful to overall sales. Insurance money flow from storm destruction will take time to translate to business opportunity.
• Still working on improving inventory turns, which is an ongoing challenge.
• Potential challenges in the A2L transition regarding customer readiness and pricing dynamics.

Q: David Manthey with Baird asked about hurricanes Helene and Milton, including negatives and potential positives.

A: Paul Johnston said branches were shut down briefly, but storm impact wasn't dramatically impactful to sales, and insurance investment follows storms but materiality plays out over time.

Q: Tommy Moll with Stephens asked about co-investment with an OEM and inventory pre-buy.

A: Barry Logan said no critical change in the third quarter prompted enhanced co-investment discussion, and inventory pre-buy on 410A is to be ready for first quarter sales, tapering down as A2L inventory comes in.

Q: Ryan Merkle with William Blair asked about units growth and bridging mid-single digit growth with pricing.

A: Barry Logan clarified units were up 5% year to date, with ductless up double digits and ducted flat, and transactional margin consistent, with mix elements like customer, geographic, product, etc., affecting margin.

Q: Jeffrey Hammond with Keybank Capital Markets asked about A2L pricing and M&A environment.

A: Paul Johnston said OEMs are ready, pricing in double digits, and Rick Gomez noted M&A is fragmented, with focus on cultural fit and technology platform aiding discussions.

Q: Patrick Baumann with JP Morgan asked about unit clarification and inventory stability.

A: Barry Logan clarified year to date units up 5% with ducted flat, and Paul Johnston said inventory is stable with 410A pull forward and A2L inventory to follow.

Q: Nigel Coe with Wolfe Research asked about A2L transition readiness and hurricane impact on October sales.

A: Paul Johnston said consumers may be shocked by A2L transition, contractors ready, and Barry Logan said hurricane impact was offset by selling days and insurance money flow will create opportunity later.

Q: Stephen Tusa with JP Morgan asked about A2L pricing visibility and light commercial fundamentals.

A: Paul Johnston said pricing visibility exists with most OEMs, and light commercial demand remains strong despite some pricing reduction.