Watsco, Inc. Q3 FY2025 earnings call

• Transition to next-gen equipment and A2L refrigerants is mostly complete, expected to simplify business in 2026. - Sales declined, but double-digit pricing gains on new products, improved gross margins to 27.5%. Operating expenses up 5% due to transition and new locations. - Fortifying balance sheet, reducing inventories and working capital. - Investing in innovation: e-commerce, mobile app, OnCallAir, pricing optimization tools, AI, and new tech for institutional customers. - Technology impact: E-commerce growing, mobile app users increasing, OnCallAir driving higher-ticket/higher-margin sales.

Sales declined 4% total and 3% in the U.S. Unit volumes were subdued, but there were double-digit pricing gains on new products, with growth in nonequipment and commercial refrigeration. Gross margins expanded 130 basis-points to 27.5%. Non-equipment market is ~30% of sales. E-commerce penetration accounts for 34% of sales, up to 60-70% in certain U.S. markets. Mobile app has 72,000 users, up 18%. OnCallAir digital selling platform saw 19% increase in gross merchandise value, reaching $1.7 billion over 12 months.

• Fourth quarter revenue decline in mid-single digits so far in October. - Aiming for normalized inventory levels by year-end, targeting inventory turns to ~5 to increase cash flow. - Open to acquisitions, focusing on long-term growth and improving margins, with $600 million in cash flow and plans to use cash for potential transactions.

• Market volatility due to product transition, but expected to ease. - Uncertainty in consumer spending on HVAC systems related to housing market and interest rates. - Uncertainty regarding OEM price increases and their impact on customers and sales.

Q: Discuss the repair versus replace dynamic in non-equipment vs. equipment business A: It's a mix of repair and replace. Differences by region (Sunbelt vs. northern states), consumer spending on homes, and contractor sales models. Non-equipment market sees more consumer spending on new machines, while northern regions have more repair.

Q: Fourth quarter sales and unit volumes outlook A: Softness in the equipment business, unit volumes down, but revenue decline mid-single digits. Influenced by new construction and consumer discretion.

Q: Inventory normalization and future inventory ramps A: Aiming for normalized inventory levels by year-end, focusing on improving inventory turns, working with manufacturers for better deliveries. History may not repeat due to focus on better inventory management.

Q: OEM pricing and product mix trends A: Uncertainty on OEM price increases. Mix trends towards base models, but OnCallAir drives higher-efficiency sales. Focus on long-term margin improvement through technology and initiatives.