WATSCO INC Q1 FY2025 earnings call

• The transition to the new A2L system is underway, with $1 billion in inventory conversion, thousands of customers trained, and technology platforms updated.
• The core HVAC replacement business had a strong start with 10% sales growth on higher volumes and improved gross margins.
• The balance sheet is in strong condition with $430 million in cash, no debt, and over $3 billion in equity; the annual dividend was raised 11% to $12 per share.
• Collaborating closely with OEM partners on domestic pricing actions in response to tariffs and monitoring uncertainty in Canada and Latin America.
• Watsco is a market leader in a $74 billion fragmented distribution market, with deep relationships with OEMs, broad product variety, and a unique ownership culture incentivizing long-term performance.

The core HVAC replacement business saw sales and replacement systems increase 10% on higher volumes, with a richer mix of high-efficiency systems. The new A2L system impacts around 55% of total sales, and the company is converting nearly $1 billion in inventory to the new systems. Domestic sales account for 91% of first quarter sales, while Canada and Latin America make up 9%.

• Benefits of the new A2L products are expected to become more significant in the second and third quarters.
• The balance sheet remains strong with cash, no debt, and over $3 billion in equity.
• The annual dividend was raised 11% to $12 per share, marking 51 consecutive years of paying dividends.

• Potential impact of proposed tariffs on the business.
• Uncertainty in the Canada and Latin America markets, which represent 9% of first quarter sales.

Q: Stephen Volkmann asks about residential sales growth, specifically 454B vs 410A and pricing.

A: Paul Johnston responds that most of the residential sales growth in the first quarter was from 410A, with only about 20-25% from 454B, and the transition to the A2L product will continue in the second quarter.

Q: David Manthey asks about residential new construction and gross margin.

A: Barry Logan and Paul Johnston discuss that new construction has less impact due to seasonality and backlog, and Watsco aims for a 30% gross profit margin.

Q: Jeffrey Sprague asks about OEM pricing collaboration and tariff relief.

A: Paul Johnston states that pricing actions by OEMs are price increases, not surcharges, and collaboration with OEMs is ongoing to handle tariffs.

Q: Tommy Moll asks about technology levers for price increases.

A: A.J. Nahmad talks about technology providing visibility and tooling for customized pricing to handle OEM price increases.

Q: Ryan Merkel asks about first quarter trends and commercial impact.

A: Barry Logan and Paul Johnston discuss that one less selling day in the quarter had an impact, but commercial segment issues are short-term and the business is poised for a good year.

Q: Brett Linzey asks about A2L transition readiness.

A: Paul Johnston and Barry Logan say there are no real delays from a technician standpoint, and the focus is on long-term products like A2L.

Q: Patrick Baumann asks about price optimization on 410A inventory.

A: Barry Logan says price mix benefited from energy efficiency mix and replacement vs new construction, contributing to the gross margin.

Q: Jeffrey Sprague asks about 454B refrigerant shortages.

A: Paul Johnston states that shortages of 454B are due to container issues, but creative solutions are used in the industry.

Q: Jeff Hammond asks about repair vs replace and trade-down.

A: Paul Johnston and Barry Logan discuss motor sales growth and the variety of products available to handle different consumer needs.

Q: Chris Snyder asks about 410A inventory and 454B installation rate.

A: Paul Johnston and Barry Logan say competitors may have more 410A inventory, but the 454B product is ramping up quickly in the market.

Q: Steve Tusa asks about surcharges vs price increases and 454B pricing.

A: Paul Johnston and Albert Nahmad discuss surcharges as temporary and price increases as longer-term, and 454B pricing is affected by container and inventory issues in the industry.