Watsco, Inc. Q2 FY2025 earnings call

• Sales declined 4% in the second quarter due to lower volumes, but record gross profit margins were achieved. EBIT increased despite lower sales, and EBIT margins expanded.
• SG&A increased 6% due to transition costs and 10 new locations from recent acquisitions. The balance sheet remains solid with a strong cash position and no debt.
• Technology investments continue: e-commerce growth, mobile apps with 70,000 users, OnCall Air volume up 19%. A new technology-driven sales platform for national customers is being developed and expected to launch in 2026.
• Goal to reach 30% gross profit margin. Focus on growing the parts and supplies segment, which is currently ~30% of sales. Launched 2 AI platforms to harness data and transform customer experience, operating efficiency, and drive growth.

E-commerce is a $2.5 billion business, accounting for 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. Parts and supplies currently represent roughly 30% of sales.

• 2026 is expected to be a simpler business after the significant product transition to next-generation equipment with A2L refrigerants. July is better than June, and August is bigger than July. The goal is to reach 30% gross profit margin. The Dream plan 2 includes targets of $10 billion in revenue, 30% gross profit margin, and 5x inventory turn.

• Weather patterns impacted sales, with a late start to the summer season and residential new construction and international markets remaining subdued.
• Cylinder shortage affected the quarter, though it is expected to abate by the second half.
• International market (Mexico) is volatile and has impacted results.
• Macro-economic factors like tariffs, interest rates, and homebuilding changes pose risks to volumes.

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

A: Paul Johnston responded that revenues were weaker than expected with a lumpy market, Residential New Construction down 15-20%, replacement holding strong. Barry Logan commented on international sales (Mexico) being volatile but improving.

Q: Brett Linzey inquired about gross margin sustainability.

A: Barry Logan said OEM price increases helped margin in Q2, but benefit slides off into Q3/Q4, and there's potential to beat the 27% benchmark.

Q: Thomas Allen Moll asked about inventory investment.

A: Albert Nahmad said inventory is more than hoped for, but will reduce by end of third quarter.

Q: Jeffrey Hammond asked about inventory turns.

A: Albert Nahmad mentioned Dream plan 2 with targets of $10B revenue, 30% margin, 5x inventory turn.

Q: Patrick Baumann asked about selling to large institutional customers.

A: Aaron J. Nahmad explained building Watsco 1, a unified interface for large national customers.

Q: Damian Karas asked about volumes attributable to weather and canister shortage.

A: Paul Johnston and others said canister shortage impact lessened, and it's about blocking and tackling in the second half.

Q: Samuel Snyder asked about parts mix and R-32 systems.

A: Paul Johnston said R-32 is from one manufacturer (Daikin), and 454 units are a blend including R-32.

Q: Chris Dankert asked about AI use cases.

A: Aaron J. Nahmad said AI helps in marketing, software engineering, data analysis, and customer service.