WATSCO INC Q4 FY2023 earnings call

• Watsco delivered strong results in 2023 despite post-2021-2022 market conditions. - Achieved market share gain, scaled industry-leading technology platforms, and drove long-term productivity gains. - Expanded network and product offerings via acquisitions, and fortified balance sheet with inventory reduction and record fourth quarter cash flow. - Introduced new HVAC products/SKUs in collaboration with OEM partners, trained customers on new products, and updated digital pilot library. - SG&A as a percentage of sales decreased in 2023, indicating productivity progress. - Expanded network through acquisitions of three businesses with ~$200 million annual sales, retaining their culture and leadership.

Residential unit volumes were down but stabilized in the second half of 2023. Commercial end markets remained strong with healthy growth, and backlog extends well into next year. Ductless systems, an important component, grew double digits in 2023, offsetting declines in conventional residential business.

• Aspiration for gross margin is around 30%, with 2024 aiming for ~27% margin. - Expectations for inflationary impacts to diminish in 2024, with better sequential margin expected. - Anticipation of continued productivity improvements and progress in driving long-term margin goals.

• Prior year benefits from pricing, cost, and inflationary gains not repeating in Q4 2023, impacting gross margin. - Mix differences between equipment (lower margin) and non-equipment products affecting gross margin. - Uncertainties around OEM pricing rollouts for A2L products and timing of price increases. - Inventory management challenges to normalize inventory turns to higher levels.

Q: Tommy Moll asked about gross margin factors in Q4 and near-term recovery.

A: Barry Logan and Paul Johnston discussed prior year benefits, mix differences, and inflationary impacts.

Q: Tommy Moll asked about unitary HVAC trends in 2024.

A: Paul Johnston mentioned impact of A2L product transition and mortgage rate effects.

Q: Ryan Merkel asked about price outlook and SG&A.

A: Paul Johnston and Barry Logan discussed OEM price increases and SG&A productivity efforts.

Q: David Manthey asked about gross margin cadence.

A: Barry Logan and Paul Johnston discussed timing of OEM price increases and margin expectations.

Q: Brett Linzey asked about inventory and non-equipment trends.

A: Paul Johnston and Barry Logan discussed inventory management and credit metrics.

Q: Jeffrey Sprague asked about OEM pricing and replacement demand.

A: Paul Johnston and A.J. Nahmad discussed OEM product rollouts and replacement trends.

Q: Joe Ahlersmeyer asked about EPA rule impact and commercial HVAC.

A: Paul Johnston and Barry Logan discussed EPA rule implications and commercial strength.

Q: Jeffrey Hammond asked about gross margin and inventory.

A: Barry Logan and A.J. Nahmad discussed gross margin goals and inventory management.

Q: Steve Tusa asked about gross margin and A2L inventory.

A: Paul Johnston and A.J. Nahmad discussed A2L transition and inventory plans.

Q: Damian Karas asked about inventory and equipment transition.

A: Paul Johnston and A.J. Nahmad discussed inventory plans for A2L and equipment transition.