WATSCO INC Q3 FY2024 earnings call

• Watsco produced record sales and net income for the quarter. October sales up mid-single digits driven by meaningful unit growth and gained share. • Generated record cash flow this year, balance sheet in pristine condition. • Collaborating with a primary OEM to regain business and add new customers. • Made investments in innovative technology platforms for HVAC contractors; annualized E-Commerce sales exceed $2.5 billion, OnCall Air expanding. • Leveraging technology platforms to optimize launch of A2L systems starting in 2025. • Working with OEM community to improve inventory turns and operating efficiency.

No specific detailed breakdown of product segments' absolute revenue and contribution % provided in the transcript.

• A.J. Nahmad stated short-term confidence in 27% gross margin and ambition to achieve 30% in the long term. • Viewed A2L transition as an opportunity to re-price and go to market with new products.

• Hurricanes like Helene and Milton had some impact, though relatively immaterial in terms of overall sales. • Mix factors (customer, geographic, product, end market, brand) affecting gross margin. • Inventory pre-buy dynamics with 410A and transition to A2L inventory. • Uncertainties in M&A environment with private equity activity subduing lately.

Q: About hurricanes, particularly Helene and Milton, talk about negatives and potential positives.

A: Paul Johnston said branches were shut down for a couple days for Helene and Milton, most things back to normal, initial rush of repair components in October, Milton didn't impact as severely as Helene, and there's business opportunity from insurance investment later.

Q: On gross margin, came in light but still feel good about 27%.

A: A.J. Nahmad said yes in short term and ambition to achieve 30%, engines revved up for gross margin focus.

Q: About co-investment with OEM partner, what changed and progress?

A: Barry Logan said year to date business and unit growth outpaced overall growth for the product group, collaboration with OEM, shared cost and experience, lingering impact in fourth quarter dissipates next year.

Q: About inventory and pre buy dynamics.

A: Paul Johnston said it's due to 410A pre buy, OEMs moving inventory for end of year, inventory should taper down with A2L inventory coming in.

Q: On units, year to date up, clarify.

A: Barry Logan said duct did is flat in units year to date, overall up 5%, duct did is not up much.

Q: On gross margin, bridging back to 27%, mix element.

A: Rick Gomez said transactional margin constant, mix elements like growth rates between equipment and non-equipment, residential and commercial, seasonal mix, customer mix affect margin.

Q: On A2L pricing, readiness, M&A environment.

A: Paul Johnston said OEMs are ready, pricing in double digit range, Rick Gomez said M&A always more to do, private equity more prevalent last two years, cultural fit important in M&A.

Q: On units, clarify year to date up.

A: Barry Logan said duct did is flat in units year to date, overall up 5%, looking at second and third quarter combined for stability.

Q: On gross margin, discounting, higher tier levels.

A: Barry Logan said transactional margin unchanged, no material deflation risk, Paul Johnston said compression in high efficiency equipment with energy efficiency mandates.

Q: On A2L transition readiness, hurricane impact on October sales.

A: Paul Johnston said consumer not ready for sticker shock of A2L, contractors ready, Barry Logan said hurricane impact offset by selling days in October, business opportunity from insurance money later.

Q: On A2L pricing visibility, light commercial side.

A: Paul Johnston said have visibility into most OEMs pricing, some with timing issues, light commercial demand still strong.