Watsco, Inc. Q1 FY2025 earnings call

• The transition of the new A2L system: Around 55% of total sales are impacted, teams are converting nearly $1 billion in inventory, thousands of customers have been trained, and technology platforms have been updated. - Core HVAC replacement: Sales and replacement systems increased 10% on higher volumes, new pricing was realized, and a richer mix of high-efficiency systems was sold, with improved gross margins. - Balance sheet: $430 million in cash, no debt, over $3 billion in equity; dividend raised 11% to $12 per share. - Domestic vs international: Collaborating with OEM partners on pricing for domestic sales (91%) in response to tariffs; greater uncertainty in international markets (9%). - Market position: Market leaders in a $74 billion fragmented distribution market, deep relationships with OEMs, broad product variety, large network, and unique ownership culture.

The core HVAC replacement business saw sales and replacement systems increase 10% on higher volumes. The transition of the new A2L system impacts around 55% of total sales, with teams working to convert nearly $1 billion in inventory. Domestic sales make up 91% of first quarter sales, while international sales (Canada and Latin America) account for 9%.

• Benefits of the A2L products are expected to become more significant in the second and third quarters. - Watsco aspires to achieve a 30% gross profit margin.

• Potential impact of proposed tariffs on business, especially in international markets. - Shortage of 454B refrigerant containers, although equipment is pre-charged with 454B.

Q: Stephen Volkmann from Jefferies asked about residential sales growth breakdown by refrigerant type.

A: Paul Johnston responded that most first quarter growth was from 410A, with only 20-25% from 454B, and transition to A2L in second quarter.

Q: David Manthey with Baird inquired about residential new construction and gross margin outlook.

A: Barry Logan and Paul Johnston discussed new construction impact and gross margin aspirations towards 30%.

Q: Jeffrey Sprague with Vertical Research asked about OEM price collaboration and demand response.

A: Paul Johnston responded on collaboration, price increases, and lack of visible pushback from customers.

Q: Tommy Moll from Stephens asked about technology levers for price increases and early selling season trends.

A: A.J. Nahmad and Barry Logan talked about technology enabling price customization and mid-single-digit domestic growth with good margins.

Q: Ryan Merkel with William Blair asked about quarter weakness and commercial piece impact.

A: Barry Logan discussed commercial product impact, one less selling day, and short-term disruptions.

Q: Brett Linzey with Mizuho asked about A2L transition readiness and second quarter pre-buy.

A: Paul Johnston and A.J. Nahmad talked about no technician bottlenecks and limited pre-buy due to OEM manufacturing stops and rapid price increases.

Q: Patrick Baumann with JPMorgan asked about gross margin benefit from 410A inventory and 454B refrigerant shortage.

A: Barry Logan and Paul Johnston discussed small benefit from 410A and 454B container shortage with allocation and creative solutions.

Q: Jeff Hammond with KeyBanc Capital Markets Inc. asked about repair vs replace mix and trade-down dynamic.

A: Paul Johnston and Barry Logan talked about repair and replace market with motor sales up and energy efficiency mix improvement.

Q: Chris Snyder with Morgan Stanley asked about 410A inventory in competitors and 454B installation rate.

A: Paul Johnston and Barry Logan responded on unknown competitor inventory and 454B installation ramping up to over 60% in recent weeks.

Q: Steve Tusa with JPMorgan asked about surcharges vs price increases and industry unitary product sourcing.

A: Paul Johnston and Albert Nahmad discussed surcharge vs price increase differences and unitary product sourcing with low percentages from China.