Watsco, Inc. Q3 FY2025 earnings call

• Watsco generated healthy earnings and record cash flow despite a challenging market. The transition to A2L refrigerants is substantially complete, expecting a simpler business in 2026.
• Third quarter sales declined, but had double-digit pricing gains on new products, improved gross margins, and reduced inventories/working capital.
• E-commerce penetration growing, mobile app users increasing, OnCallAir showing growth. Investments in technology, pricing optimization, AI, and institutional customer sales initiatives.
• Strong balance sheet, no debt, and focus on enhancing gross margins to exceed 30% long-term.

Sales declined 4% total and 3% in the U.S. Unit volumes were subdued, but double-digit pricing gains on new products with growth in nonequipment and commercial refrigeration sales. Gross margins expanded 130 basis-points to 27.5%. Operating expenses increased 5% due to product transition and new locations. E-commerce penetration accounts for 34% of sales, up to 60-70% in certain U.S. markets. Mobile app has 72,000 users, grew 18%. OnCallAir saw a 19% increase in gross merchandise value, with products sold to the platform reaching $1.7 billion over 12 months.

• Expect SG&A performance to improve post product transition.
• Aim to increase inventory turns and continue reducing working capital.
• Potential for M&A given strong balance sheet and cash position, with focus on growing through innovation and acquisitions.

• Volatility from the product transition remaining temporary but impacting current operations.
• Market conditions affecting equipment business, with Carrier reporting distributor movement declines.
• Consumer spending discretion impacting high-ticket purchases in the replacement market.
• Interest rates and homebuilding activity affecting unit volumes, particularly in new construction.

Q: Tommy Moll asks about repair versus replace dynamics and Carrier's distributor movement decline.

A: Paul Johnston and others respond about repair and replace being a factor, with geographic differences and consumer spending on homes. Albert and others discuss equipment business trends and unit volume vs sales.

Q: Ryan Merkel asks about fourth quarter sales and unit volume decline in August/September.

A: Barry S. Logan and others explain new construction being the largest component of unit decline, influenced by homebuilding activity and consumer discretion.

Q: David Manthey asks about inventory normalization and share repurchase.

A: Albert Nahmad discusses potential M&A given strong balance sheet and cash position.

Q: Jeffrey Sprague asks about inventory normalization and Q2 ramp.

A: Albert and others talk about improving inventory turns and managing inventory post-year-end.

Q: Christopher Snyder asks about inventory ramp and OEM pricing.

A: Albert and Paul Johnston discuss inventory management and uncertainty around OEM pricing actions.

Q: Mitch Moore asks about product mix and OnCallAir.

A: Paul Johnston and Aaron Nahmad talk about product mix trends and OnCallAir's growth and benefits.

Q: Steve Tusa asks about contractor sales and pricing.

A: Paul Johnston and Aaron Nahmad discuss contractor sales variability and pricing dynamics.

Q: Nigel Coe asks about customer behavior and R-32 products.

A: Paul Johnston and Aaron Nahmad talk about customer behavior influences and R-32 product trends.

Q: Steve Tusa asks about HARDI data and next year visibility.

A: Albert Nahmad discusses unusual year demand and being stronger for next year through control of internal operations.