Watsco, Inc. Q4 FY2024 earnings call

• Transition to next-generation A2L products is underway, with the goal to upgrade existing equipment to more efficient and eco-friendly systems, and over $1 billion in inventories being transitioned. • Technology platforms have gained momentum: community of Watsco mobile app users over 64,000; e-commerce sales up 16% and 35% of annual sales; OnCall Air saw 25% growth in gross merchandise value. • Strong financial position with an 11% dividend increase to $12 per share. • Completed 70th acquisition since 1989.

Watsco had record sales in the fourth quarter. Equipment sales grew 14%, residential products 16%. E-commerce sales during the quarter increased 16%, representing 35% of annual sales ($2.6 billion in aggregate). OnCall Air, the digital sales platform for contractors, presented approximately 313,000 proposals to homeowners, generating 1.5 million in gross merchandise value, a 25% increase.

• Optimistic about opportunities ahead, including continued transition to A2L products with expectation of full engagement in A2L by second quarter 2025. • Technology investments expected to continue driving performance and competitive advantage. • Aim to be through selling and clearing 410 inventory by end of 2025.

• Potential volatility in refrigerant prices, especially with transition to new products. • Uncertainty around Mexico tariffs and their impact on pricing. • Supply chain and inventory management challenges related to transitioning from 410A to A2L products.

Q: With double-digit unit growth in residential, was A2L a driver? And update on 410A transition.

A: In Q4, A2L had little impact. Pricing actions at 8% due to tariffs, with more single-digit increases expected. Transition to A2L expected to be mostly complete by second quarter 2025.

Q: Inventory position and 410A transition?

A: Expect to run down 410A inventory to almost nothing by beginning of second quarter 2025, with full engagement in A2L, though some 410A products will remain.

Q: M&A environment and pipeline?

A: There are still many family-owned businesses in the industry, with private equity still present but less of a factor than during COVID. Watsco has multigenerational relationships and sees good activity in M&A pipeline.

Q: Final view on pre-buy and inventories?

A: OEM attempts to quantify pre-buy are more art than science; inventories are normal, with no evidence of contractors carrying excessive inventory.

Q: Price/mix dynamic and gross margins?

A: A2L product has higher cost, leading to price lift and gross profit dollar increase. Technology investments in pricing and inventory management contribute to margin improvement.

Q: Refrigerant price volatility and aftermarket?

A: No significant price spike in 410A yet; parts and unit sales both up double-digit, indicating repair and replace are both occurring.