Earnings call transcript: Watsco Q2 2025 misses forecasts, stock dips

Watsco Inc. reported its earnings for the second quarter of 2025, revealing a decline in both earnings per share (EPS) and revenue compared to forecasts. The company posted an EPS of $4.52, missing the forecasted $4.80, resulting in a surprise of -5.83%. Revenue came in at 2.06 billion USD, below the expected 2.23 billion USD, marking a 7.62% shortfall. Following these results, Watsco’s stock fell 3.45% in regular trading, closing at $448.76, and continued to decline 2.1% in premarket trading. According to InvestingPro data, the stock is now trading near its 52-week low of $418.31, with five analysts recently revising their earnings expectations downward for the upcoming period.

Key Takeaways

• Watsco’s Q2 EPS and revenue both missed analyst expectations.
• Stock price dropped 3.45% post-earnings and continued to fall in premarket trading.
• Company achieved record gross profit margins despite lower sales.
• Transition to A2L refrigerants significantly impacted sales.
• E-commerce sales accounted for 34% of total sales.

Company Performance

Watsco’s performance in Q2 2025 was marked by a 4% decline in sales, attributed to a challenging market environment and a major transition to A2L refrigerants, which affected 55% of its historical product sales. Despite these challenges, the company achieved record gross profit margins and increased EBIT. E-commerce sales reached 2.5 billion USD, representing 34% of total sales, while mobile app users grew 17% year-over-year to 70,000.

Financial Highlights

• Revenue: 2.06 billion USD, down from the forecasted 2.23 billion USD.
• Earnings per share: 4.52 USD, below the forecast of 4.80 USD.
• Gross profit margins reached record levels.
• E-commerce sales: 2.5 billion USD, accounting for 34% of total sales.

Earnings vs. Forecast

Watsco’s actual EPS of 4.52 USD was below the forecasted 4.80 USD, resulting in a negative surprise of 5.83%. Revenue also fell short, coming in at 2.06 billion USD compared to the expected 2.23 billion USD, marking a 7.62% miss. This performance contrasts with previous quarters where the company had generally met or exceeded expectations.

Market Reaction

Following the earnings announcement, Watsco’s stock fell 3.45% in regular trading, closing at 448.76 USD. The decline continued in premarket trading, with the stock down an additional 2.1%. This movement reflects investor concerns over the missed earnings and revenue targets, despite the company’s strong gross profit margins and technology investments.

Outlook & Guidance

Looking ahead, Watsco is targeting 10 billion USD in revenue, a 30% gross profit margin, and five inventory turns as part of its "Dream Plan Two." The company continues to invest in technology and pricing optimization and is exploring potential mergers and acquisitions to drive growth.

Executive Commentary

Albert Naumann, CEO, emphasized Watsco’s decentralized system, which he believes provides a competitive advantage. A.J. Naumann, President, described 2025 as "the noisiest year in HVAC ever" and expressed confidence in the company’s ability to "win in any environment and emerge bigger and stronger."

Risks and Challenges

• Transition to A2L refrigerants poses supply chain and sales challenges.
• Soft market conditions and regional weather variations affect revenue.
• Increased SG&A expenses due to the refrigerant transition and acquisitions.
• Residential new construction down 15-20%, impacting sales.
• Regulatory changes in the refrigerant market require adaptation.

Q&A

During the earnings call, analysts inquired about the challenges associated with the A2L refrigerant transition and the company’s inventory management strategies. Executives detailed their technology investments, including AI applications, and addressed concerns about market softness and regional sales variations.

Full transcript - Watsco Inc (WSO) Q2 2025:

Conference Operator: Day, and welcome to the Watsco Second Quarter of twenty twenty five Earnings Conference Call. All participants will be in a listen only mode for the duration of the call. After today’s presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Albert Naumann, CEO and Chairman.

Please go ahead.

Albert Naumann, CEO and Chairman, Watsco: Good morning, everyone. Welcome to our second quarter earnings call. This is Al Naumet, Chairman and CEO. And with me is A. J.

Naumet, President Paul Johnston Barry Logan and Rick Gomez. Before we start, our normal cautionary statement. This conference call has forward looking statements as defined by SEC laws and regulations and are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward looking statements. Watsco delivered healthy second quarter results in a soft market conditions.

I should say, in soft market condition. 2025 marks a year of significant product transition to next generation equipment containing a two l refrigerants. The transition affects roughly 55% of our historical product sales. The trip this transition affects our inventories, our supply chain, staffing levels in our branches, and other aspects of our business. Regulatory changes have historically been good for our business and good for our customers.

We expect that transition to be no different than has happened in the past. The changes are substantial and complete and we’ll look forward to operations as simpler business in 2026. Let me turn to second quarter highlights. Sales declined 4%, like the double digit pricing gains for the new equipment, offset by lower volumes. We had a late start to the summer season.

Sales for residential new construction and international markets remain subdued. On the plus side, Watsco achieved record gross profit margins. Our performance yielded an increase in EBIT and expanded EBIT margins despite lower sales. Our results benefited from OEM pricing actions. Our pricing technology platform called PriceFX also contributed.

Gross margins remain a focus. There is much potential to improve over time. SG and A increased 6% as we incurred extra cost during the transition. We also added 10 new locations from recent acquisitions. Our balance sheet remains solid.

We have a strong cash position and no debt. We continue to invest in innovation and technology to separate us from our competitors. Watsco’s technology journey began fifteen years ago, and we have made terrific progress. Example, ecommerce continues to grow and is now a $2,500,000,000 business or 34% of our sales. Mobile apps have now 70,000 users and grew 17% versus last year.

The annual volume of products sold through OnCallAir, which is our digital selling platform for customer contractors, increased 19% to $1,600,000,000. It’s a great assist to our customers. But we’re not standing still in terms of ideas and making further investments. We are building on or adding new initiatives to drive growth and to delight our customers. Examples include, a new technology driven sales platform being developed to capture larger national customers.

We’re talking about national customers here. This would be incremental to Watsco’s core replacement vehicles and is expected to be launched in 2026. We have accelerated adoption of our pricing platform, price, FX is the name of it. Our goal is to reach 30% gross profit margin. We have launched an initiative to grow the parts and supply segment of our business, which today is roughly 30% of sales and can be a much larger can be much larger over time.

And we launched two AI platforms, one internal and one external to harness our data. Artificial intelligence offers the potential to further transform our customer experience, improve operating efficiency, and create new data driven growth strategies. This is an exciting time, and these are just a few of the many initiatives underway. Now we will expand on these themes at an investor event in Miami, which will occur after temperatures have dropped a bit. Stay tuned for additional details.

Finally, we believe our culture of innovation along with our scale entrepreneurial culture and capacity to invest are unmatched in our industry. With that, let’s turn to q and a.

Conference Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you’re using a speakerphone, please pick up your handset before pressing the keys. And if at any time your question has been addressed and you would like to withdraw it, And our first question here will come from Ryan Merkel with William Blair. Please go ahead with your question.

Albert Naumann, CEO and Chairman, Watsco: Good morning, Ryan.

Ryan Merkel, Analyst, William Blair: Hey, good morning, everyone. Good morning.

Barry Logan, Executive, Watsco: Hi, Ryan.

Ryan Merkel, Analyst, William Blair: So my first question is just on volumes in the quarter were a little bit worse than I was expecting. I know you mentioned weather, A2L, new construction. Would just love to hear from you what happened there? And then more importantly, are you seeing trends improve in July?

Albert Naumann, CEO and Chairman, Watsco: I’m going to ask both Paul and Barry to respond to that.

Paul Johnston, President, Watsco: Yeah, revenues were not as strong as we anticipated going into Q2. What we saw was kind of a lumpy picture in the marketplace where April came in strong, May ended up being very weak, mainly because of the weather patterns in the North. And then in June, they came back again. And it was pretty much RNC is probably our residential new construction is probably down 15% to 20%. Replacement is still holding fairly strong.

We didn’t really see a lot of repair in the beginning of the quarter, which we saw towards the end of the quarter and continues into July, but not enough to offset the unit sales that were certainly down.

Albert Naumann, CEO and Chairman, Watsco: Comment on international sales.

Barry Logan, Executive, Watsco: Yeah, I’ll comment on that. Also on one of the exposures we talked about in the first quarter that repeated itself in the second quarter was our international, which is Mexico. Mexico is probably the most volatile market. It’s a small part of our business, but a big contributor from a margin point of view. Mexico was down, well, let’s put it this way, it cost us about $0.10 a share in the quarter, $0.02 0 a share year to date.

In June it grew and July it’s grown since then. So I’ll take kind of one market that’s been irritating, which seems to be a lot better in the last couple of months. As far as July goes, Ryan, I would say it’s better. August is bigger than July in our forward looking commentary. So if I say that July is better than what we saw in June, that’s okay, but it needs to extend itself and extrapolate itself as the year goes on.

The good news is that in general, what we can control is margin, pricing and the wherewithal of our business to support all these new products in the market with our customers. I’m glad we have our balance sheet to do that with because it’s been a pretty extraordinary product change this year. You can see the building of inventories, that’s a customer focused effort to help our customers get going in this market. The margin speaks to capturing new pricing on, as we say, over half the products we sold we sell. We had to capture price inflation since that price and and get off on the right track in margins and needless to say that’s been accomplished.

So we like what we can control. We’ll be patient about what we can’t control. And and I think also maybe this is more of a 2026 discussion. But, you know, the the entire industry, every OEM we sell products for have been through an extreme product cycle probably for the last two or three years. And at what point does that serenity, you know, play itself out in terms of growth and market share development and product expansion, the blocking and tackling that I think particularly good for us and that we’re good at.

So maybe that’s more of a a next year event, but we’re kinda looking forward to it quite honestly.

Ryan Merkel, Analyst, William Blair: Yeah. That’s fair. Okay. Since you mentioned gross margin, was the other, you know, metric that was really strong this quarter. My sense is it’s both price cost and initiatives.

But my question is, I don’t want us to extrapolate that 29% into the back half. So just how sustainable is that? Was 2Q kind of temporary due to price cost timing?

Albert Naumann, CEO and Chairman, Watsco: Go ahead, Barry.

Barry Logan, Executive, Watsco: Yeah. Yeah. Think there is obviously an algebraic benefit to margin when OEMs raise prices. In in April and May, we talked last quarter that OEMs had faced some inflationary realities going on with tariffs and raw materials and so on. On top of the like for like price increase on the new product, they introduced inflationary pricing early in the quarter.

That clearly helped build a bigger margin this quarter and the benefit of that kind of slides off into the third and fourth quarter. But I’m the one that probably three years ago talked about 27% as a floor, as a benchmark. And I stand by that obviously. And if I say now 27% plus, would expect that for the last half of the year, but we won’t have the benefit of those pricing actions that you see in the first half of this year. So somewhere in between would be my conjecture and the market will play out and determine what it is, but so I think I think we have a chance to beat our benchmark and but not have the benefit that we saw as extraordinarily this quarter in in terms of pricing.

A.J. Naumann, President, Watsco: Well, that’s great. We’ll get better

Ryan Merkel, Analyst, William Blair: than I expected.

A.J. Naumann, President, Watsco: Thanks. Just want to add. I mean, this is AJ. Just real quickly. I mean, there are there is the benefit from the OEM price increases, but also the efforts we’re making on our price optimization and the leadership of those teams and the pricing teams, that’s also working.

So it’s a combination of both. But we continue to put points on the board in terms of the pricing efforts that we’re taking internally.

Albert Naumann, CEO and Chairman, Watsco: Yeah. I’ll add that as we move our product mix, which I mentioned in the opening statements, towards parts and supplies, and that’s what we’re focused on with our technology, That, by its nature, carries a higher margin than equipment sales. So our product mix, hopefully, sometime later this year or into next year, will improve margins too because parts and supplies carry higher margin.

Ryan Merkel, Analyst, William Blair: Thank you very much. I’ll pass it on.

Conference Operator: And our next question will come from Brett Linzey with Mizuho. Please go ahead. Hey,

Brett Linzey, Analyst, Mizuho: good morning. Yes, maybe just a follow-up on that last point there. So if you could maybe just unpack the year over year gross margin contribution, is there any way to delineate that between the pricing optimization tools versus the parts mix versus some of that raw pricing just in the marketplace in the quarter?

Albert Naumann, CEO and Chairman, Watsco: That’s an interesting question. Who wants to deal with that?

Rick Gomez, Executive, Watsco: Yeah, Brett, I’ll take a stab at that. This is Rick. This is a directional because there’s, you know, a lot of art and a lot of science to this as well. And but it’s not all science. So when we look at the quarter, there was and when we look at the year as well, consistent.

There’s about 50 to 60 basis points of gross margin enhancement that we can attribute to that raw selling margin, which is basically the day to day job of a distributor in the market is what are you buying for and what are you selling for. And so gross margins would have been in the high 27s absent any of that inflation and the inflation helps, but it’s not something that you can underwrite perpetually obviously. So that’s what it’s amounted to. By the way that’s been pretty consistent. If I look back maybe two or three years in the data, We’ve been at that, we can aggregate and say that there’s been about 200 basis points of gross margin expansion attributable to this pricing optimization and bringing more technology to how we price.

Keep in mind that complexity of price in the industry is something that generally benefits a distributor. What I mean by that is that virtually every SKU has a different price to every customer. And so to imagine that we are optimized, well, it’s the opposite. We’re far from optimized. And that’s why we think there’s so much room still to go.

And oh, by the way, just to finish the thought is that during that period of time, we’ve also gained market share. We have about 200 to two fifty basis points of incremental market share over that three year period, if I measure it. So that’s mainly attributable to all the technology. And my point there is that, everything that we’re doing on the technology side with margin, has not borrowed from customer acquisition and market growth at the end.

Brett Linzey, Analyst, Mizuho: That’s very helpful. I appreciate that. And then just a follow-up on the cylinder shortage. It sounds like you guys think it abates by the second half. I know some of the peers think it does persist into the second half.

Maybe what was the impact you think in the quarter from shortage situation? And then are you assuming that some of that does carry into H2?

Paul Johnston, President, Watsco: I think, as Paul, what we had was we had an allocation situation where we were being allocated refrigerant. What the OEMs did was they came through and did an overcharge in the unit so that they didn’t require as much field installation type refrigerant. So it’s become less and less of a concern as time goes on, as our allocations continue to increase. We feel good that sometime in August we should be off of allocation. And I think it was very irritating.

It was very disturbing that we had to go through that. But I don’t think that really is the total cause of why the market was slower than what it was.

David Manthey, Analyst, Baird: Thanks for the color.

Barry Logan, Executive, Watsco: Yeah. Just an editorial on that. I you know, the like for like skews that we’re selling now, a two l versus the prior is is is the 10% difference in price. And a speed bump on the canisters or refrigerant is that a speed bump. And so the transition itself, if we look forward again to that word serenity I used earlier, we’re looking forward to it.

David Manthey, Analyst, Baird: Thanks, Barry.

Conference Operator: And our next question will come from Tommy Malt with Stephens. Please go ahead with your question.

Albert Naumann, CEO and Chairman, Watsco: Morning, Tom.

Tommy Malt, Analyst, Stephens: Good morning, Alan. Thanks for taking my questions.

A.J. Naumann, President, Watsco: Of course.

Tommy Malt, Analyst, Stephens: I wanted to start on inventory. Maybe you could characterize for us the investment there versus what you would have expected to need for the transition? Just in dollar terms, is it about what you would have soft circled or maybe a little elevated? Anything you can do to frame that for us and then also how you think it might trend over the next couple quarters?

Albert Naumann, CEO and Chairman, Watsco: Well, the honest answer is that it’s more than we had hoped for and some of that is because we expected not to have the unusual demand, industry demand, the lower industry demand, we peaked at about $2,000,000,000. But we are now very focused on what to do about it and we’ve lost, in terms of inventory investment, dollars 200,000,000 so far in the third quarter. We’re down to 1,800,000,000.0 And plus this transition of product, you have to have the old and you have to have the new on the equipment side. And we’ll transition out of the old before the end of the year and that will help reduce the inventory investment. That’s a very good question.

I’m very dedicated to increasing our inventory turn, and it’s been a rough time to do that, but I think that.

Tommy Malt, Analyst, Stephens: Pretty stoked. Go ahead.

Paul Johnston, President, Watsco: Yeah, on a raw number basis, we had double inventory. We had about 5% of the total inventory was $410 and then we had the more expensive A2L product in there. So we probably had a 15% rise just between what we had and $410 left over and what we experienced when we had price increase. The balance of it is exactly what Al said. The demand just wasn’t there to be able to take the inventory back down.

That you’re going to see come down at the end of the third quarter.

Tommy Malt, Analyst, Stephens: Thank you both. As a follow-up, wanted to ask about the M and A environment and pipeline. It hasn’t gotten a ton of airtime lately, but how can you characterize that for us?

Albert Naumann, CEO and Chairman, Watsco: That’s a very good question. We are eager, eager to see what owners of distribution businesses in HVAC are going to do with this existing very soft market. They may do nothing. They may continue or they may say, well now it’s time to do something in terms of an M and A. And of course, we have a great reputation with independent distributors because the way we treat sellers, we’re careful about relationship built continuing post acquisition with the existing leadership of the business acquired.

So I can’t say it’s gonna happen but I’m sure hoping we have a very, very strong balance sheet and we could take advantage of opportunities as they come. And I cannot, I can only tell you that, well, I can’t disclose it, but there is one that I think without disclosing much more than that, that is of size and we’ll see how that turns out. It’s still under study.

A.J. Naumann, President, Watsco: Yeah, would say rest assured we’re having as many of those conversations as we can. We’re super ambitious and we have the balance sheet to support anything we want if we can manage to muster up. Hopefully it can be an exciting period in M and A.

Tommy Malt, Analyst, Stephens: Thank you both. I’ll turn it back.

Conference Operator: And our next question will come from David Manthey with Baird. Please go ahead.

Albert Naumann, CEO and Chairman, Watsco: Good morning, David. Hey, good morning. I was wondering if you had any thoughts on consumer preference during this product transition. Like, are you continuing to see a premium on the R410 systems? And then as people are buying the a two l, are they gravitating to one end or the other of the good, better, best tier?

That’s an interesting question. I wonder who our team can respond to that. Paul, are you the one, Paul? You always are.

Paul Johnston, President, Watsco: Yeah, the industry really hasn’t popped as far as high efficiency product. It’s still at the entry level. I mean, we’re at basically using the old SEER rating. We’re at above 15 SEER for minimum efficiency. So it’s high efficiency product.

So we really haven’t seen a change in the direction of the industry. It’s still very much sliding along the idea that it’s going to be whatever the minimum efficiency is. And that represents probably 85% of the market. That has not changed. And then when you get into the brands that we’re selling, the brands have been consistent throughout the year and they continue to hold steady.

We’re seeing the Carrier brand and the Rheem brand and the Goodman brands all doing their job and holding up their share of the business. We’re not seeing a migration to a lower branded product, no.

Barry Logan, Executive, Watsco: Just to add to that for the fun of it, If I look at brands, products, markets, customers, geographies, North and South, East and West, and we’re selling close to 20 brands, the first half of the year is very consistent amongst that collection of data points. So nothing stands out Dave and I don’t think this has been disruptive to what kind of the baseline products being sold is going on.

A.J. Naumann, President, Watsco: Yeah. The exciting anomaly though, and I think it’s in our press release, is on call error. When our customers are using the tool that we’ve created for them, which we call a sales engine, they are selling high efficiency systems at a much higher rate, like the inverse amount. Meaning, I think it’s like 70 or 75% of the time, a contractor is selling using Encolair. They’re selling high efficiency systems.

So when we can help influence that through that tool, that’s powerful because the consumer gets a better product, the contractor makes a bigger ticket, as do we. So it’s a win win win.

Albert Naumann, CEO and Chairman, Watsco: It sounds good. Thanks for all the color there. My follow-up, it’s the first time we’ve seen other do better than the equipment in a long time. And as Paul said, the residential new construction is not helping, I assume all the ductwork and thermostats and things in the other category. So should we not read into this that there’s a stronger fix versus replace trend this quarter?

Or is it, I don’t know, commodities or I’m just making this up, any thoughts on that?

Paul Johnston, President, Watsco: It’s pretty small. You take a look at the entire marketplace, you just take compressors, The normal demand for compressors in The U. S. Is about 1,200,000.0 to $1.3 And the balance of them go warranty because you have a five and a ten year warranty on most of the equipment. You take a look at the equipment side, it’s seven to 8,000,000 units.

So for the offset of a down market on the unit side through additional parts, yes, it’s going to help our gross margin. But no, it’s not going to help the top line. It’s not going help your revenue line. The ratio is just too great between what parts represent versus equipment. Are we seeing an uptick?

Yes, we started seeing an uptick in June, which historically is the month in which you’re going to see that up. It’s continued into July, but we really haven’t seen a radical increase in units. We’ve seen an increase in dollars more than we have units.

Albert Naumann, CEO and Chairman, Watsco: Now let’s not mislead either. Our sales in the new quarter are not they’re pretty flattish, small incremental, low digit increase. They’re not it’s nothing that does not signify a a major double digit increase yet.

Conference Operator: No.

Albert Naumann, CEO and Chairman, Watsco: Thanks very much, Yeah.

Barry Logan, Executive, Watsco: When we talked about unit growth of compressors and coil, things like that, year to date is single digit. It’s not, you know, it was not an avalanche of transition to that. It could be us just selling more compressors in the market. And I think you heard Carrier talk yesterday very directly about that and they’re talking to, you know, 150 independent distributors when they’re answering your question to that. So it’s obviously an opportunity to sell more parts but the wholesale trend is not something that I think is quite in the numbers yet.

A.J. Naumann, President, Watsco: Yeah, thanks Barry.

Albert Naumann, CEO and Chairman, Watsco: Well, and somebody mentioned earlier the m and a. We’re very eager to do more m and a. Sometimes opportunities arise when you have these kind of markets. I’m sure hoping for it. Are we shut down again?

Conference Operator: Our next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead. Good morning, Jeff.

Albert Naumann, CEO and Chairman, Watsco0: Hey, good morning, everyone. Is this real Al or or AI Al?

Albert Naumann, CEO and Chairman, Watsco: It’s a combination. You you have to you have to have to figure it out. You see? I know. It’s the real hell.

Yeah. Just to

Albert Naumann, CEO and Chairman, Watsco0: clarify on the on the flattish sales comment, was that parts for July, or is that overall?

Albert Naumann, CEO and Chairman, Watsco: Overall.

Paul Johnston, President, Watsco: Okay. Overall.

Albert Naumann, CEO and Chairman, Watsco0: Yeah. And then just on back to inventories, can you just, you know, maybe talk about, you know, where you wanna ultimately get your turns to? I know you were kinda running four and a half turns a year, you know, pre COVID and pre all these regulatory changes, and now you’re kinda three to three and a half. You know, kinda where you see that happening over and over what time frame?

Albert Naumann, CEO and Chairman, Watsco: Well, first of all, let me compliment you on the data. You’re right about those turns. I’d like I’m not I’m not gonna put a time limit on this, but I’d like to get to five. At some point in time, given all the the technology we’re investing in, I’d like to get to five.

Conference Operator: I’m not going think about it. Yeah,

Paul Johnston, President, Watsco: pre COVID we were at 4.5. We didn’t have the technology investment in inventory systems and the management systems that we currently have. So as we come out of it, I think Al’s goal of five is very attainable.

Albert Naumann, CEO and Chairman, Watsco: We have what we call a dream plan. We may have mentioned it before. Actually, dream plan two, because dream plan one was achieved after three years of effort, and dream plan two is is a new and it may take three years to do that. Dream plan two is 10,000,000,000 in revenue, 30% in gross profit margin, and five times on the inventory turn. And that’s the those are the targets that we’re focused on.

Albert Naumann, CEO and Chairman, Watsco0: I remember when it was 10% growth and and 10% margins for $100

Albert Naumann, CEO and Chairman, Watsco: a month.

Albert Naumann, CEO and Chairman, Watsco0: You guys blew through that one.

A.J. Naumann, President, Watsco: Believe it or not, that was twenty years ago.

Paul Johnston, President, Watsco: Boy, actually, this is a hell of a history lesson here.

Albert Naumann, CEO and Chairman, Watsco: That’s pretty impressive.

Barry Logan, Executive, Watsco: I’m so impressed. For those 20 year olds listening to us, Jeff is right. Was called ten and ten equals 100. It was called ten and ten equals 100. We got our management team together and rallied around that.

Many of them thought Al was out of his mind and obviously we’ve blown past that some time ago. So we reinstituted that cultural, you know, kind of concept about six months ago, actually a year ago and got everyone together and some of the initiatives that you’re not asking about today that you will ask about as we develop them is built on that dream plan to concept and if we got had 75 other Watsco core managers on this call you would be able to ask them about it not just ask us. But just know that culturally those kind of things go on and we have fun with it.

A.J. Naumann, President, Watsco: Yeah and culturally I mean really the takeaway is that we’re super ambitious And that’s why we’re investing in these big goals that we expect to hit in time.

Albert Naumann, CEO and Chairman, Watsco: And the truth is that we also have an equity culture that really inspires people to achieve and to meet the goals set by senior management, which means what is the equity culture? Many, many employees own WADCO shares, either through a four zero one k or through the different stock plans. And we like that. We like the ownership culture to be spread throughout the organization. It’s very unique and it’s very extensive.

And so that ownership culture drives their desire to meet goals, I think. And I’ve always used it and it’s been working. And I expect it to continue working.

Albert Naumann, CEO and Chairman, Watsco0: Great. Thanks for the time, guys.

Conference Operator: And our next question will come from Patrick Baumann with JPMorgan. Please go ahead.

Albert Naumann, CEO and Chairman, Watsco1: Good morning.

Albert Naumann, CEO and Chairman, Watsco: Good morning.

Albert Naumann, CEO and Chairman, Watsco1: Thanks for taking my questions. Maybe I was just curious if you could provide some examples of the large enterprise institutional customers you cite as offering emerging opportunities for growth, like and what exactly are you doing to go after them?

Albert Naumann, CEO and Chairman, Watsco: Sure. Sorry?

Barry Logan, Executive, Watsco: Go ahead, A. J. Into

Albert Naumann, CEO and Chairman, Watsco: that. A.

A.J. Naumann, President, Watsco: J. Yeah. So I’ll jump in first. And, you know, we we we tease some of this in our press release and and also tease that we want you guys to come down to Miami and spend time with us and and see it and hear it and feel it more succinctly. But it’s there are macro trends going on on our industry, including private equity, trying to buy up and consolidate contractors.

And between that and home warranty companies and other institutional type customers, they’re emerging and have emerged, I would call it multi location contractors who may have some some business in Florida, some in Texas, some in Tennessee, you name it. And with our size and scale, we should be able to we should be their preferred vendor. We should be the most exciting place for them to buy product, but we don’t necessarily have a unified experience for them to take advantage of our whole offering and our whole scale. And that’s what that’s what we’re building. We call it Watsco One, and it will be a it’ll be exactly that.

It’ll be one interface for these large institutional type contractors to buy and secure the products that they need from any of our locations, whenever they need it.

Albert Naumann, CEO and Chairman, Watsco1: Interesting.

Albert Naumann, CEO and Chairman, Watsco: Is It doesn’t. Right. It it I mean, this is a huge, huge undertaking. It doesn’t sound that way just using words. But we are a very, very decentralized system.

And to aggregate to meet to aggregate ours, our inventories, and our pricing systems, and all our support systems to meet the needs of a large national customer, that is it takes a lot of lot of initiative, and we’re we’re we’re investing to prepare all those tools to do that, but it should have a very significant impact once we’ve accomplished it because no one else has these capabilities.

Albert Naumann, CEO and Chairman, Watsco1: A follow-up to that, would you see selling to like a larger national account contractor any different than I guess you said it is, but like in terms of like, their buying capacity, is that something that you would see as a headwind for gross margin over time?

Albert Naumann, CEO and Chairman, Watsco: Of course. That’s one of the elements.

Albert Naumann, CEO and Chairman, Watsco2: Yes, but

A.J. Naumann, President, Watsco: I would say yes, but we can also we also have the opportunity to sell them a lot more parts and supplies, which as we discussed earlier, have a higher gross margin profile.

Rick Gomez, Executive, Watsco: Right. That’s why I think it’s not so the the the answer is not so linear, Pat. It’s it’s because today when we look at those big institutional type accounts, we’re largely selling them equipment, and we’re selling them equipment in bulk. And so to broaden that offering means we’re taking all else equal, we’re taking a customer and broadening the mix of products we sell them and that’s generally accretive to margin at the end of the day.

Albert Naumann, CEO and Chairman, Watsco1: That makes sense. Okay.

Barry Logan, Executive, Watsco: Just just, Pat, I’m just gonna say this again for the more for the front of it. I mean, a great home services business you could invest in the last fifty years as Rollins. If don’t know the company, look it up. I mean, technology, you know, deployed at Rollins yielded 10 higher EBIT margins for their business over time, right? So the question is, in our partnership with any customer of any size, do we have a business model, an ecosystem that can help them grow, help them price products, help them operate their business twenty four seven?

So part of the visibility of what we’ve done for most smaller contractors, the question is, is that a pliable technology for larger accounts and larger contractors? And it’s not about just selling more stuff, it’s about helping any kind of size customer operate their business more profitably through us. And our products just happen to be the ones they’ll they’ll scale with to do that with. So this is as much of a technology play as it is a a product or any other kind of label you might put on it.

Albert Naumann, CEO and Chairman, Watsco1: Thanks for the color. Sounds interesting and exciting. Maybe just switching gears on my next question on the operating cost side. I think you cite something in the release about targeting cost efficiencies for the rest of the year. Could you provide any color on, I guess, one, the 6% growth rate in the second quarter of SG and A expense?

You mentioned costs of the A2L transition. I don’t know how that kind of made its way into SG and A, but if you could give color on that. And then can you bend that growth rate in the second half with some of the cost efficiencies you’re targeting?

Rick Gomez, Executive, Watsco: Sure, Pat. Can I’ll take a stab at the so first, let’s take let’s start with the 6%. And we said in the release that we made some acquisitions. We’ve opened some new locations. So about 25% of that 6% is attributable to that.

So you can think of core SG and A growth, if we call it that, more in the 4.5% range, which is still higher than it should be in a down quarter. But that’s kind of our starting point as we think about it. And then when you think about just the day to day life in a branch during a transition, if we have more inventory it means that we’ve received more inventory. It means you need more people receiving that inventory. It means that you have more trucks coming to your locations.

It means that you know, you’re not optimizing, you know, what you have. It’s not business as usual in the day to day a in the day to day life of a branch during such a large scale transition. And to underscore something we said earlier and mentioned in the release, this impacted every domestic location we have in The US, about six fifty of them. So that’s where there was some inefficiency as I would say in the labor and the logistics side. Do we think we can bring that down and bring it more into balance in the end of the year?

The answer is yes. Our leaders are working on that right now. One of the things that should naturally help that is that when

Paul Johnston, President, Watsco: we look

Rick Gomez, Executive, Watsco: at our inventory today, about five to 7% of that inventory is for 10A product, which means we’ve largely received all the new product we’re going to get and we’ve largely worked out of all the old stuff. And that means that the branch can get back to kind of its routine and should be a little bit more efficient in the back half of the year.

A.J. Naumann, President, Watsco: Yeah. Just just to say it a little my way, you know, as we sell through four ten a product, we need to make sure that we have system matchups that are selling in location. So there’s a lot of transferring product within our network to make sure that we have the right systems in place that are sellable in a market where they are selling, if that makes sense. So there’s some extra cost that’s gone into that as well.

Albert Naumann, CEO and Chairman, Watsco1: That makes a lot of sense. Thanks a lot. I really appreciate the color.

Conference Operator: And our next question will come from Damian Karas with UBS. Please go ahead.

Albert Naumann, CEO and Chairman, Watsco3: Hi, good morning gentlemen.

Albert Naumann, CEO and Chairman, Watsco: Good morning.

Rick Gomez, Executive, Watsco: Good morning.

Albert Naumann, CEO and Chairman, Watsco3: I’m curious how you’re thinking about pricing through the rest of the year. On the equipment side, our price is pretty much set for the rest of the year and you’re just going to continue to get that benefit of the higher value mix flowing through top line? And do you foresee any changes on your parts and commodity supplies with respect to price and just thinking about further metals inflation and tariffs?

Paul Johnston, President, Watsco: I don’t think on the equipment side, we’re going to see a lot of price increases going forward. On the non equipment side, Friday is Copper Day, 50% tariff start on copper. We’ve already seen about a 10% increase in some of those products that are heavily endowed with copper. So it’s just a matter of wait and see on some of the non equipment type product. I think equipment is pretty much in place though.

Understood. Would just say,

A.J. Naumann, President, Watsco: let’s just make sure, you know, when we I think what we’re talking about is cost. We’re getting costing you know, the the cost of our products and our equipment products. I don’t think we’re expecting much change from our OEM partners. But on price, meaning our price to our customers, that that’s a cons that’s what the tooling and the technology enables. It’s because every different customer has a different price on every product we sell in every region and every market, that that complexity is opportunity.

Because we with our tooling, we can study where there are trends and patterns and anomalies and outliers and segments that should be priced appropriately. And so we run different icon plays, where we can measure and track when we make a change in a customer’s price or a customer segmentation price or a cohort of customers pricing on different products. We can can take that to market. We can measure and track and we can see the impacts and and either double down or or go on to the next way. So pricing will always be opportunity.

Just just to clarify that costing versus pricing.

Albert Naumann, CEO and Chairman, Watsco3: Got it. Got it. That’s helpful. And I know this is never an easy task, but if you had to guesstimate, if you will, how much of a headwind to volumes in the second quarter do you think are attributed to are attributable to weather and the canister shortage versus weaker housing and underlying market demand? I’m just trying to get a sense for underlying demand might look like as you move past these more transient issues.

Albert Naumann, CEO and Chairman, Watsco: I don’t know if we can quantify that.

Paul Johnston, President, Watsco: I don’t think the canisters has anything to do with sales in the second half of the year as far as the refrigerant we receive. I think it’s going to be what the consumer feels like, what the weather patterns are going to be like, how we’re able to react and meet the inventory demands that the consumer need or that the contractor needs to handle the consumer. I think it’s just going be blocking and tackling in the second half.

A.J. Naumann, President, Watsco: Yeah, I mean, I think it’s all been said, but this has got to be the noisiest year in HVAC ever, between the tariffs and the weather and consumer confidence and the cannabis shortages and the home building changes and interest rates and trading homes isn’t happening as frequently. I mean, there’s just so many things going on at macro levels, most of which are out of our control. So it’s a lot of noise in the industry and our job is to win in any environment and emerge bigger and stronger and more profitable and take more share from our our competitors. That’s I like where we sit in that equation because of our scale, because of our balance sheet, because of our willingness and ability to invest in technology. I’m very, very pleased to be Watsco given all this noise.

Albert Naumann, CEO and Chairman, Watsco3: Really appreciate your thoughts. Good luck out there.

A.J. Naumann, President, Watsco: Thank you.

Conference Operator: And our next question will come from Nigel Coe with Wolfe Research. Please go ahead.

Albert Naumann, CEO and Chairman, Watsco4: Good morning guys. Appreciate all the color. Hi Al. So just I think you mentioned ’4 10 was 60% or thereabouts for the quarter. I’m just curious how that trended or maybe where that’s trending right now real time.

And any concerns that you’re holding too much 410A inventory just given the demand weakness and, you know, or do you are you confident you’ll be done with that transition, you know, this quarter?

Albert Naumann, CEO and Chairman, Watsco: I’m I’m chuckling because that’s very much on my mind. And, we’re doing something about it so that we don’t have that risk. And Paul, you can answer in some detail if you’d like.

Paul Johnston, President, Watsco: Yeah, it’s less than 5% of our inventory at the pleasant time. Where we’re really working our butts off is to be able to get the right combinations that AJ mentioned before. You’ve got to have an indoor unit to go with the outdoor unit. As you sell the inventory down, the pond gets lower, you end up with an indoor unit sitting in one city and you end up with the outdoor unit in another. So we’re putting those pieces together which is going to be a drag on SG and A with freight for a period of time here.

But I think each one of our companies hear about it continuously that we need to reduce it. We need to keep the focus on four ten, get rid of it, and focus then on being able to sell the A2L product that we’ve got.

Albert Naumann, CEO and Chairman, Watsco4: Does that mean that you you yep.

Albert Naumann, CEO and Chairman, Watsco: Yep. Yep.

Albert Naumann, CEO and Chairman, Watsco4: Sorry. Does that mean you’re incentivizing, you know, that sell through of that? Sorry. Sorry for for cutting off that. But any and does that mean you’re incentivizing that process to to to make

A.J. Naumann, President, Watsco: that happen?

Albert Naumann, CEO and Chairman, Watsco: That’s not how we work. We deal with the markets on a decentralized basis. Those are local decisions made by the local entities that we have.

A.J. Naumann, President, Watsco: Okay.

Rick Gomez, Executive, Watsco: And Nigel, I would just add

A.J. Naumann, President, Watsco: to

Rick Gomez, Executive, Watsco: that. Just to add very quickly in terms of the progression of A2L, it’s progressing very, very well. I mean we exited the quarter in June with more than 80% sell through of the A2L product. And so that’s a function of obviously diminishing inventory of four ten A. It’s also a function of contractors transitioning and adapting well to the product.

So, at this point, it’s greater than 80% of our sell through, as you’d expect.

Albert Naumann, CEO and Chairman, Watsco4: Okay. That’s great color. And then my follow-up is, you know, what we’ve seen from you and from your suppliers is tremendously strong prices holding, which is good news, but obviously volumes are incredibly weak. What are you hearing from your contractors? Are they asking for some incentives here to try and stimulate some movements?

Or are they content to just wait for rates to turn and perhaps demand picks up? Are you starting to get more inbounds on price reductions or discounts or incentives?

Paul Johnston, President, Watsco: I don’t think we’re really getting a lot of feedback on getting lower prices in the market. There’s not elasticity to this market. If we drop the price 2% or 3%, it’s going to stimulate a 10% or 12% increase in volume. It ain’t going to happen. So I think the contractor always wants the lowest price, the best price in the marketplace so that they can compete fairly.

But I don’t think we’re getting a lot of pushback right now from most of the contractors on the price.

Albert Naumann, CEO and Chairman, Watsco4: Okay, makes sense. Thanks guys. Appreciate it.

Conference Operator: And our next question will come from Sam Schneider with Northcoast Research. Please go ahead.

Albert Naumann, CEO and Chairman, Watsco5: Hey, looking forward to morning. How are you?

Albert Naumann, CEO and Chairman, Watsco: Good. Thank you.

Albert Naumann, CEO and Chairman, Watsco5: Looking forward for an excuse to come down to Miami, pay for by my employer.

Albert Naumann, CEO and Chairman, Watsco: Thank you. So you heard it. You did hear loud and clear. Right? Yeah.

Conference Operator: Oh, yeah.

Albert Naumann, CEO and Chairman, Watsco: Let’s wait till it goes off. That was great. We’ll we’ll we’ll welcome you when you’re coming.

Albert Naumann, CEO and Chairman, Watsco5: Oh, yeah. No. Thank you. So, look, just focusing on the mix shift, which seemed to benefit margin on parts. I was wondering if the shift was in part at all due to the canister shortage where you had people do more repairs for the time being?

Paul Johnston, President, Watsco: Most of the canister shortage occurred in the first and the second quarter. And it was something that we worked our way through, we made it through it. Now, as I said, we’re seeing a lot more inventory coming in. It’s going out as quickly as it comes in. I see it stopping sometime in early August.

Early August is what, two weeks away? So I don’t think it’s really playing on demand right now as heavily as it was before. I don’t see any bubble cap happening on repair versus replace because of canisters.

Albert Naumann, CEO and Chairman, Watsco5: Got it. Okay. And then just a real quick follow-up sort of on the same topic, but any sort of sizable shift to R32 based systems and if so, is that a temporary thing or more permanent in your view?

Paul Johnston, President, Watsco: There’s only one manufacturer. Daikin, which we represent very proudly with our Goodman and Amano lines, R32. The rest of the industry is four fifty four. So what we’ve seen is we’ve seen excellent response from Daikin to be able to help us with the 32. There hasn’t been a shortage of 32.

When you get into the four fifty four, it’s been Carrier, Rheem, American Standard, all of them sell four fifty four units. And I would remind everybody that four fifty four is roughly 70 R32. It’s blend of 32 plus twelve thirty four y f.

Albert Naumann, CEO and Chairman, Watsco: I keep tuning out. Did everybody tune out or is that just me? Yeah. Think there’s a pause there.

A.J. Naumann, President, Watsco: Big one. Operator, are you seeing

Albert Naumann, CEO and Chairman, Watsco: this? That that happened three times, Harry. Yeah. It paused the Operator, are you there? Yeah.

Tommy Malt, Analyst, Stephens: So I’m here. Not

Albert Naumann, CEO and Chairman, Watsco: that you bury the operator operator.

Conference Operator: Yes, I’m here.

Albert Naumann, CEO and Chairman, Watsco: Why are we tuning out?

David Manthey, Analyst, Baird: Can go to

Conference Operator: the next Okay. Our next question will come from Chris Dankert with Loop Capital Markets. Please go ahead.

Albert Naumann, CEO and Chairman, Watsco2: Hey, good morning, guys. Thanks for taking the question. I guess circling back to Watsco One, you guys

Rick Gomez, Executive, Watsco: sound excited and sounds like it’s

Albert Naumann, CEO and Chairman, Watsco2: a pretty big opportunity. Is there any way to get a bigger than a breadbox sense here? I mean, are we talking about serving 500 customer locations, 5,000, or or is it too early to kinda get into that type of upscaling?

Albert Naumann, CEO and Chairman, Watsco: Well, maybe maybe a better way to approach it, what is our existing sales of parts and supplies? And what do we think we could I don’t wanna speculate too much. What kind of margin improvement do we think we can get from that? It’s a very big chunk of our business, 30%. 30% of 7 and a half billion dollars.

How much of that could we improve our margins on? I’m not gonna speculate, but it there will be an improvement. Right. That You take any any percent of that number, and it’s meaningful.

Albert Naumann, CEO and Chairman, Watsco2: Makes sense. Makes sense. Well, thanks for that. And I guess, maybe just to touch on the AI a little bit here. Can you give us maybe some examples for what the use cases are for for AskWatts Go internally?

I mean, how is this kind of helping your associates? Is this inventory positioning? Is it warranty data? What’s the real use case here?

Albert Naumann, CEO and Chairman, Watsco: I got

A.J. Naumann, President, Watsco: to say so many. How much time do we have? It it it is it’s helping marketing folks design content and publish content. It’s helping our software engineers write code and publish and push more technology faster. It’s helping our business unit leaders and their teams sort through data and understand trends and patterns and anomalies.

It’s helping our customer service folks get to more get through more cases more quickly with more accurate answers and and therefore helping our customers at a greater scale or greater rate and increasing customer satisfaction. I can go on and on and on. And like I said, said in the press release, there’s about 2,100 people a week internally who are using these tools or the tool. And the ways that they’re using it are more and more creative and fast.

Albert Naumann, CEO and Chairman, Watsco5: So I mean, it really

Albert Naumann, CEO and Chairman, Watsco2: is holistic then. Got it. Well, thank you

A.J. Naumann, President, Watsco: so much for that, AJ, and thank you all for the time. Thank you.

Conference Operator: And our next question will come from Chris Snyder with Morgan Stanley. Please go ahead.

David Manthey, Analyst, Baird: Thank you. I wanted to follow-up on the for today inventory. I think you guys have less than 5% of your inventory. Do you have any sense for what that number could look like across your distributor competitors?

Paul Johnston, President, Watsco: No. I don’t think we really have any any good intelligence on that.

Albert Naumann, CEO and Chairman, Watsco: And and we try not to figure that. That’s irrelevant. No. But we Yeah. It’s it’s being phased out.

We don’t really care. Fair enough. Yeah

Conference Operator: Chris there’s

Rick Gomez, Executive, Watsco: a couple of data points. I mean I think one peer of ours that also distributes their product gave a data point on that in terms of what their sell through is and it was pretty high. The other data point, these are all anecdotal. This is not science, it’s aggregating anecdotes is when we are talking to M and A targets, what do they tell us about you know, their philosophy and and their positioning and and, know, as a reminder, most of this stuff was built prior to December 31 and shipped in the first quarter. So someone would have to make a pretty big bet on inventory and would have to really leverage their balance sheet do that.

And so our sense just by having these conversations in the channel with the M and A targets is that they’re largely phasing out of four ten at about the same pace we are.

David Manthey, Analyst, Baird: Thank you. I appreciate that. And if I could maybe follow-up on a different sort of inventory question.

Barry Logan, Executive, Watsco: I guess

David Manthey, Analyst, Baird: it’s kind of surprising that volumes remain down materially, it seems like in July, with the weather picking up. Does that change the way you guys think about how much inventory is downstream at your customers? Could they have been holding extra stock and perhaps that’s why the sell through has been softer? Thank you.

Paul Johnston, President, Watsco: I would say some of the bigger contractors may have some inventory. Inventory at the contractor level is not really material to our industry. It’s being held at the distribution point, not at the contractor point. So I don’t think it’s a big deal with contractor. And I would also remember that in Florida, it’s either hot or hotter.

Not just hot all the time it’s hot. So we’ve not had a cold summer down here. We’ve not had a cold summer in Texas. Where the weather really impacts us is up north where you’ve got a chance out of every third year that you’re going have a hotter than normal summer or a normal summer or a lower than normal summer. And so we are definitely seeing a lot of regional differences in the volume based on weather.

But in the South, we’re not really seeing much movement because it’s hot in Florida or hot in Texas. It’s always hot.

David Manthey, Analyst, Baird: Thanks, I appreciate that perspective.

Conference Operator: And this concludes the question and answer session. I’d like to turn the call back over to Albert Nauman for any closing remarks.

Albert Naumann, CEO and Chairman, Watsco: Well, you for your interest. I love the questions and it shows a lot of interest. I hope we’ve answered your questions fully and if not, please please contact us on your own and we’ll we’ll respond to whatever questions you may still have. And other than that, look forward to having you visit us in in the cold months that are coming. And we’ll give you more detail.

Thank you. Bye bye.

Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

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