Watsco, Inc. Q2 FY2025 earnings call

• Sales declined 4% in the second quarter, with double-digit pricing gains for new equipment offset by lower volumes. Had a late start to the summer season; residential new construction and international markets were subdued. • Achieved record gross profit margins. EBIT increased and EBIT margins expanded despite lower sales. Benefited from OEM pricing actions and the Pricefx pricing technology platform. • SG&A increased 6% due to extra costs during the transition and adding 10 new locations from recent acquisitions. • Technology investments: e-commerce growing, mobile apps with 70,000 users, OnCall Air volume up, development of a new technology-driven sales platform for national customers launching in 2026, accelerated adoption of Pricefx, focus on growing the parts and supplies segment, and launch of 2 AI platforms.

E-commerce is a $2.5 billion business, representing 34% of sales. Mobile apps have 70,000 users and grew 17% year-over-year. The annual volume of products sold through OnCall Air, the digital selling platform for customer contractors, increased 19% to $1.6 billion. The parts and supplies segment is roughly 30% of sales.

• Aim to reach 30% gross profit margin. • Launching a new technology-driven sales platform for national customers in 2026. • Accelerating adoption of the pricing platform Pricefx. • Focus on the parts and supplies segment to improve margins as it carries higher margins. • Dream plan 2 targets $10 billion in revenue, 30% gross profit margin, and 5x inventory turn.

• Market volatility affecting sales volumes. • Weather impact on sales, particularly in northern regions. • Inventory challenges during the transition to A2L refrigerants, with inventory investment higher than expected. • International market volatility, especially in Mexico. • External factors like tariffs, raw material costs, and refrigerant shortages impacting operations.

Q: Ryan Merkel asked about volumes in the quarter and trends in July.

A: Paul Johnston said revenues were not as strong as expected, with April strong, May weak due to weather, June improving; Residential New Construction down 15-20%, replacement holding strong. Barry Logan commented on international sales, Mexico being volatile but improving in June and July.

Q: Brett Linzey asked about gross margin contribution.

A: Rick Gomez said about 50-60 basis points from raw selling margin, ~200 basis points from pricing optimization and technology over 2-3 years, and gained market share during that period.

Q: Tommy Moll asked about inventory.

A: Albert Nahmad said inventory investment is more than hoped due to lower industry demand, focused on increasing inventory turn, and will reduce inventory as transition out of old product continues.

Q: Patrick Baumann asked about large enterprise institutional customers.

A: Aaron J. Nahmad said there are emerging opportunities with multi-location contractors, and they're building a platform called Watsco 1 to serve these customers with a unified experience.

Q: Damian Karas asked about 410A inventory.

A: Paul Johnston said 410A inventory is less than 5% of total, working on combining inventory pieces, and A2L sell-through was over 80% in June.