Company Performance - Watsco reported quarterly earnings of $4.52 per share, missing the Zacks Consensus Estimate of $4.84 per share, representing an earnings surprise of -6.61% [1] - The company posted revenues of $2.06 billion for the quarter, missing the Zacks Consensus Estimate by 6.82%, compared to year-ago revenues of $2.14 billion [2] - Over the last four quarters, Watsco has surpassed consensus EPS estimates only once [2] Stock Outlook - Watsco shares have declined approximately 1.9% since the beginning of the year, while the S&P 500 has gained 8.3% [3] - The current consensus EPS estimate for the upcoming quarter is $4.81 on revenues of $2.28 billion, and for the current fiscal year, it is $14.16 on revenues of $7.83 billion [7] Industry Context - The Building Products - Air Conditioner and Heating industry, to which Watsco belongs, is currently ranked in the top 37% of over 250 Zacks industries, indicating a favorable outlook compared to the bottom 50% [8]

[Executive Summary](index=1&type=section&id=Executive%20Summary) Watsco reports Q2 2025 results with record gross margins, expanded operating margins, and strong financial health [Company Overview and Q2 2025 Highlights](index=1&type=section&id=Company%20Overview%20and%20Q2%202025%20Highlights) Watsco, a leading HVAC distributor, achieved earnings growth and an 11% dividend increase in Q2 2025, maintaining a debt-free balance sheet - Watsco is the largest distributor in the **$74 billion** North American HVAC market, achieving an **18% compounded annual total-shareholder return** since 1989[2](index=2&type=chunk) - The company maintains a strong financial position with **$293 million in cash**, **no debt**, and **$3 billion in shareholders' equity** as of June 30, 2025[3](index=3&type=chunk) - The 2025 results are significantly influenced by the regulatory transition to A2L refrigerants, which impacts nearly **$1 billion of inventory** across over 650 U.S. locations[4](index=4&type=chunk) - In April 2025, the annual dividend was increased by **11% to $12.00 per share**, marking the 51st consecutive year of dividends[2](index=2&type=chunk) [Financial Performance](index=1&type=section&id=Financial%20Performance) [Second Quarter 2025 Performance](index=1&type=section&id=Second%20Quarter%202025%20Performance) Q2 2025 revenue declined 4% to $2.06 billion, yet gross profit grew 4% to $603 million with record 29.3% gross margin - Sales trends were impacted by double-digit pricing realization from the A2L product transition, offset by lower unit volumes due to temperate weather, reduced homebuilding, and transition-related installation issues, with the sales mix of new A2L equipment growing from **25% in Q1 to 60% in Q2**[6](index=6&type=chunk) Q2 2025 Key Financial Metrics | Metric | Q2 2025 | Change vs. Q2 2024 | | :--- | :--- | :--- | | Revenues | $2.06 billion | -4% | | Gross Profit | $603 million | +4% | | Gross Profit Margin | 29.3% | +220 bps | | Operating Income | $272 million | +1% | | Operating Margin | 13.2% | +60 bps | | Earnings Per Share | $4.52 | +0.7% | Q2 2025 Sales Performance by Category | Category | % of Sales | YoY Change | | :--- | :--- | :--- | | HVAC Equipment | 68% | -6% | | Other HVAC Products | 28% | Flat | | Commercial Refrigeration | 4% | +3% | | **Region** | | | | Domestic Markets | N/A | -3% | | Non-US Markets | N/A | -12% | [Six-Month 2025 Performance](index=2&type=section&id=Six-Month%202025%20Performance) H1 2025 revenue decreased 3% to $3.59 billion, while gross profit rose 2% to $1.03 billion with a 28.7% gross margin Six-Month 2025 Key Financial Metrics | Metric | H1 2025 | Change vs. H1 2024 | | :--- | :--- | :--- | | Revenues | $3.59 billion | -3% | | Gross Profit | $1.03 billion | +2% | | Gross Profit Margin | 28.7% | +140 bps | | Operating Income | $384 million | -3% | | Operating Margin | 10.7% | Flat | | Earnings Per Share | $6.50 | -2.8% | Six-Month 2025 Sales Performance by Category | Category | % of Sales | YoY Change | | :--- | :--- | :--- | | HVAC Equipment | 68% | -4% | | Other HVAC Products | 28% | -2% | | Commercial Refrigeration | 4% | -1% | | **Region** | | | | Domestic Markets | N/A | -2% | | Non-U.S. Markets | N/A | -10% | [Strategic Initiatives and Growth Drivers](index=2&type=section&id=Strategic%20Initiatives%20and%20Growth%20Drivers) [Innovation & Strategic Technology Initiatives](index=2&type=section&id=Innovation%20%26%20Strategic%20Technology%20Initiatives) Watsco's $250M technology investment drives e-commerce, digital platforms, and AI tools, contributing to record gross margins - The company has invested more than **$250 million in technology** over the last five years, with a current annual run rate of **$60 million**, employing nearly **300 technologists**[11](index=11&type=chunk) [HVAC Pro+ & E-Commerce](index=2&type=section&id=HVAC%20Pro%2B%20%26%20E-Commerce) HVAC Pro+ user community grew 17%, driving e-commerce sales to $2.5 billion, representing 34% of total sales - The authenticated user community for HVAC Pro+ Mobile Apps grew **17% year-over-year** to more than **70,000 users**[11](index=11&type=chunk) - E-commerce sales totaled approximately **$2.5 billion** for the twelve months ended June 30, 2025, comprising **34% of the company's overall sales**[11](index=11&type=chunk) [OnCallAir® Digital Sales Platform](index=3&type=section&id=OnCallAir%C2%AE%20Digital%20Sales%20Platform) OnCallAir® generated $1.6 billion in GMV over 12 months, with H1 2025 GMV up 19% to $886 million - The gross merchandise value (GMV) of products sold through OnCallAir® was approximately **$1.6 billion** for the 12-month period ending June 30, 2025[13](index=13&type=chunk) - In the first half of 2025, contractors using OnCallAir® generated **$886 million in GMV**, a **19% increase** versus the same period last year[13](index=13&type=chunk) [Pricing Optimization and AI Initiatives](index=3&type=section&id=Pricing%20Optimization%20and%20AI%20Initiatives) Pricing optimization and new AI tools enhance gross margins and provide real-time expertise and productivity gains - The pricing optimization platform has been a key contributor to the company's **record gross margin performance in 2025** by applying sophisticated pricing rules and strategies[13](index=13&type=chunk) - Watsco has deployed two AI tools: "Ask.Watsco," an internal engine with over **2,100 users** to enhance productivity, and "AL.watsco," a customer-facing model to provide real-time expertise and recommendations[13](index=13&type=chunk) [Other Growth Initiatives](index=3&type=section&id=Other%20Growth%20Initiatives) New initiatives target non-equipment product sales and large institutional customers with enterprise-wide solutions - The company launched initiatives in 2025 to grow sales of non-equipment products, which represent nearly half of the market and **$1.7 billion in Watsco's purchases** over the last 12 months[13](index=13&type=chunk) - A new strategy, Project "WatscoOne," is being developed to target large institutional customers with enterprise-wide solutions, expected to launch in early 2026[13](index=13&type=chunk) [Buy & Build Acquisition Strategy](index=4&type=section&id=Buy%20%26%20Build%20Acquisition%20Strategy) Watsco continues its "buy and build" strategy, acquiring three distributors in 2025, adding $1.6 billion in annualized sales since 2019 - The North American HVAC/R distribution market is estimated at **$74 billion** and remains highly fragmented with approximately **2,100 independent distributors**[14](index=14&type=chunk) - Since 2019, Watsco has acquired **12 companies** that now represent about **$1.6 billion in annualized sales** and **120 locations**[14](index=14&type=chunk) - **Three distributors** in key Sunbelt markets have been acquired so far in 2025[14](index=14&type=chunk) [Financial Position and Shareholder Returns](index=4&type=section&id=Financial%20Position%20and%20Shareholder%20Returns) [Cash Flow, Financial Strength and Liquidity](index=4&type=section&id=Cash%20Flow%2C%20Financial%20Strength%20and%20Liquidity) Watsco maintains a strong balance sheet, with H1 2025 operating cash flow used for A2L inventory and seasonal buildup - Operating cash flow was a use of **$185 million** for the six months ended June 30, 2025, compared to a source of **$161 million** in the prior year period[16](index=16&type=chunk)[28](index=28&type=chunk) - The use of cash was primarily due to new A2L inventory investments and peak seasonal inventory buildup[16](index=16&type=chunk) - The company's stated goal is to generate annual operating cash flow in excess of net income, consistent with its long-term track record[16](index=16&type=chunk) [Dividend Policy](index=4&type=section&id=Dividend%20Policy) Watsco increased its annual dividend by 11% to $12.00 per share in April 2025, reflecting confidence in future cash flow - In April 2025, Watsco announced an **11% increase** to its annual dividend, raising it to **$12.00 per share**[17](index=17&type=chunk) - The company's philosophy is to share increasing amounts of cash flow via higher dividends while maintaining capacity for network-building investments[17](index=17&type=chunk) [Appendix: Condensed Consolidated Financial Statements](index=6&type=section&id=Appendix%3A%20Condensed%20Consolidated%20Financial%20Statements) [Condensed Consolidated Results of Operations](index=6&type=section&id=Condensed%20Consolidated%20Results%20of%20Operations) Q2 2025 revenue declined 4% to $2.06 billion, but gross margin expanded to 29.3%, with net income largely flat Q2 Financial Summary (in thousands) | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Revenues | $2,062,442 | $2,139,328 | | Gross Profit | $603,488 | $579,760 | | Operating Income | $271,869 | $268,803 | | Net Income (Watsco) | $183,613 | $181,410 | | Diluted EPS | $4.52 | $4.49 | Six-Month Financial Summary (in thousands) | Metric | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Revenues | $3,593,528 | $3,704,319 | | Gross Profit | $1,033,111 | $1,010,385 | | Operating Income | $384,057 | $395,340 | | Net Income (Watsco) | $263,674 | $268,414 | | Diluted EPS | $6.50 | $6.69 | [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2025, total assets reached $4.73 billion, driven by A2L inventory, maintaining a debt-free position Key Balance Sheet Items (in thousands) | Account | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $292,978 | $526,271 | | Inventories, net | $1,952,842 | $1,385,436 | | Total current assets | $3,299,718 | $3,079,981 | | Total assets | $4,729,513 | $4,479,523 | | Total liabilities | $1,507,694 | $1,415,285 | | Shareholders' equity | $3,221,819 | $3,064,238 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) H1 2025 operating cash flow was a use of $185.1 million, primarily due to increased inventory investments Six-Month Cash Flow Summary (in thousands) | Cash Flow Category | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(185,090) | $161,441 | | Net cash provided by (used in) investing activities | $222,252 | $(217,315) | | Net cash (used in) provided by financing activities | $(274,233) | $73,810 | | **Net (decrease) increase in cash** | **$(233,293)** | **$14,742** |

Core Insights - Watsco, Inc. reported strong operating results for Q2 2025, with record gross profit margins and expanded operating margins amid the transition to A2L products [1][4][7] - The company maintains a robust financial position, with significant cash reserves and no debt, allowing for continued investments in growth and technology [3][14] - The ongoing regulatory transition to next-generation HVAC equipment incorporating A2L refrigerants is expected to impact sales and inventory management [4][6] Financial Performance - Q2 revenues decreased by 4% to $2.06 billion, while gross profit increased by 4% to a record $603 million, resulting in a gross profit margin of 29.3%, up 220 basis points [8][23] - Operating income rose by 1% to $272 million, with an operating margin of 13.2%, reflecting a 60 basis point increase [8][23] - For the first half of 2025, revenues decreased by 3% to $3.59 billion, with gross profit increasing by 2% to $1.03 billion and a gross profit margin of 28.7%, up 140 basis points [11][23] Market Trends and Innovations - The transition to A2L refrigerants is driving double-digit pricing realization, although unit volumes have been affected by weather conditions and lower homebuilding activity [6][9] - Watsco has invested over $250 million in technology over the past five years, enhancing its digital ecosystem and customer experience [11][12] - The company's HVAC Pro+ Mobile Apps and e-commerce platform have significantly improved customer engagement, with e-commerce sales reaching approximately $2.5 billion, accounting for 34% of total sales [11][12] Strategic Initiatives - Watsco's "buy and build" acquisition strategy has led to the acquisition of 12 companies since 2019, contributing approximately $1.6 billion in annualized sales [13] - The company is leveraging AI-driven initiatives to enhance customer experience and operational efficiencies, with tools like "Ask.Watsco" and "AL.watsco" [15][12] - Watsco plans to target institutional customers through Project "WatscoOne," aiming to provide comprehensive solutions across multiple markets and product categories [15]

Core Insights - Watsco, Inc. (WSO) is expected to report second-quarter 2025 results on July 30, with earnings projected at $4.84 per share and revenues at $2.21 billion, indicating year-over-year growth of 7.8% and 3.5% respectively [1][2][7] Earnings Performance - In the last reported quarter, Watsco's earnings missed the Zacks Consensus Estimate by 15.7% and decreased 11.1% year over year, while sales missed by 7.6% and decreased 2.2% year over year [1] - Watsco has topped the consensus mark in one of the last four quarters, with an average negative surprise of 5.7% [1] Estimate Revisions - The Zacks Consensus Estimate for the upcoming quarter's earnings has decreased from $4.91 to $4.84 over the past 30 days [2] Revenue Drivers - Strong HVAC demand and the rollout of A2L-compliant systems are expected to boost Watsco's revenues in the second quarter [3] - The company anticipates a smoother sales cadence and a higher-value product mix, with over 60% of recent equipment sales consisting of 454B-based systems [3] Market Conditions - The core residential replacement market is expected to remain strong due to improved weather trends and high-efficiency product demand [4] - Commercial product sales are projected to stabilize as A2L adoption broadens, while international markets may underperform due to macro uncertainties [4] Sales Projections - HVAC Equipment sales are expected to grow 5% year over year to $1.6 billion, while HVAC Products are projected to grow 1% to $540.3 million [5] - Commercial Refrigeration Products sales are expected to grow 2% to $87.3 million [5] Margin Expectations - Gross margins are expected to improve by 100 basis points to 28.1%, driven by favorable pricing and an improved product mix [6][7] - Management aims for a long-term gross margin goal of 30% [6] Cost Pressures - Some cost pressures related to refrigerant container shortages are noted, but management does not expect a material impact on margins [8] Earnings Prediction Model - The current model does not predict an earnings beat for Watsco, as it lacks a positive Earnings ESP and a favorable Zacks Rank [9] - Watsco currently holds a Zacks Rank of 3 [10]

Company Overview - Watsco, Inc. is the largest distributor of heating, air conditioning, and refrigeration (HVAC/R) products with operations in the United States, Canada, Mexico, Puerto Rico, and exports to Latin America and the Caribbean [4] Market Focus - The company focuses on the replacement market, which has grown due to the aging of installed systems, the introduction of higher energy-efficient models, and the necessity of HVAC products in homes and businesses [5] - Approximately 102 million HVAC systems in the U.S. have been in service for over 10 years, many operating below current minimum efficiency standards [5] Environmental Impact - Watsco plays a significant role in addressing climate change by lowering CO2e emissions through the sale of higher-efficiency HVAC systems [6] - HVAC systems account for roughly half of U.S. household energy consumption, making the replacement of older systems critical for reducing electricity consumption and carbon footprints [6] Emission Reduction Achievements - From January 1, 2020, to June 30, 2025, Watsco is estimated to have averted 24.5 million metric tons of CO2e emissions, equivalent to removing 5.7 million gas-powered vehicles from the road annually [7]

Group 1 - Watsco is the largest HVAC maintenance and repair service provider and distributor in the US, with over 375,000 contractors and technicians [1] - The company is benefiting from the industry transition to A2L refrigerants, which is identified as a key catalyst for growth [1]

Core Points - Watsco, Inc. has declared a quarterly cash dividend of $3.00 per share, marking the 200th consecutive quarter of dividend payments [1][2] - The company has a history of paying dividends for 51 consecutive years, reflecting its commitment to sharing cash flow while maintaining a conservative balance sheet [2] - Watsco focuses on the replacement market for HVAC/R products, which is growing due to aging systems and the need for energy-efficient models [4] Company Overview - Watsco is the largest distributor of heating, air conditioning, and refrigeration products in the U.S., Canada, Mexico, and Puerto Rico, with exports to Latin America and the Caribbean [3] - The company plays a significant role in addressing climate change by promoting the replacement of older HVAC systems with higher efficiency models [5] Market Opportunity - There are approximately 102 million HVAC systems in the U.S. that are over 10 years old, many of which operate below current efficiency standards, presenting a substantial market opportunity for Watsco [4] - From January 1, 2020, to March 31, 2025, Watsco is estimated to have averted 23.7 million metric tons of CO2e emissions through the sale of higher-efficiency HVAC systems, equivalent to removing 5.5 million gas-powered vehicles from the road annually [6]

Business Overview - Watsco operates in a highly fragmented market and is a market leader in the HVAC/R distribution industry[4, 13] - The company has a wide geographic presence with 690 locations across the United States, Canada, and Latin America & Caribbean[12] - Watsco's business model involves supplying equipment, parts, and supplies to contractors for the repair or replacement of HVAC systems[10] - The company's revenues are primarily generated in the United States (90%), with the majority coming from residential HVAC equipment (54%)[19] Technology and Digital Transformation - Watsco is focused on transforming the customer experience through enhanced technology, including a robust e-commerce platform and mobile apps[4, 23] - The company's annualized e-commerce revenue in 2023 was $24 billion, a 5% increase[32] - Watsco has digitized over 15 million product SKUs and made them accessible in its mobile app[29, 33] - E-commerce users experience approximately 50% less attrition compared to traditional customers[32] Financial Performance and Shareholder Value - From 1989 to 12/31/23, Watsco's revenues grew from $64 million to $73 billion, representing a 15% compound annual growth rate (CAGR)[41] - The company's market capitalization increased from $22 million to $169 billion during the same period, a 22% CAGR[41] - Watsco raised its annual dividend rate to $1080 per share, effective in April 2024[45]

Business Overview - Watsco operates in a highly fragmented market and is a market leader in the HVAC/R distribution industry[4, 13] - The company has a broad geographic presence with 691 locations, including 630 in the United States, 36 in Canada, and 25 in Latin America & Caribbean[12] - Watsco's revenue is primarily generated in the United States (90%), with Canada and Latin America contributing 5% each[19] - Residential HVAC equipment accounts for 54% of revenues, followed by other HVAC products (27%), commercial HVAC equipment (15%), and refrigeration (4%)[19] Technology and Digital Transformation - Watsco is focused on transforming the customer experience through technology, with annualized e-commerce revenue reaching $2.4 billion in 2023, a 5% increase[4, 32] - The company has over 1.5 million product SKUs digitized and accessible in its mobile app[29, 33] - E-commerce users experience approximately 50% less attrition compared to traditional customers, and e-commerce orders have 15% higher line items per order[32] Financial Performance and Shareholder Value - Watsco's revenues have grown from $64 million in 1989 to $7.3 billion in the trailing twelve months (TTM) ending March 31, 2024, representing a 14% compound annual growth rate (CAGR)[41] - The company's Earnings Before Interest and Taxes (EBIT) has increased from $2 million in 1989 to $757 million in the TTM ending March 31, 2024, an 18% CAGR[41] - Watsco's market capitalization has grown from $22 million in 1989 to $17.3 billion in the TTM ending March 31, 2024, a 21% CAGR[41] - The company has a solid cash flow performance, with cumulative net income of $4.7 billion, operating cash flow of $4.5 billion, and dividends of $2.8 billion over the past 20 years[43]

Business Overview - Watsco is a market leader in a highly fragmented industry[4] - The company transforms customer experience with enhanced technology[4] - Watsco has deep ties to the industry's leading OEMs and suppliers[4] - The company operates 689 locations, including 627 in the United States, 36 in Canada, and 26 in Latin America & Caribbean[12] - E-commerce revenue reached $2.4 billion in 2023, a 5% increase[31] Financial Performance & Returns - From 1989 to TTM 9/30/2024, Watsco's revenues grew from $64 million to $7.5 billion, representing a CAGR of 15%[42] - EBIT increased from $2 million to $753 million during the same period, with a CAGR of 18%[42] - The company's share price rose from $2.70 to $491.88, reflecting a CAGR of 16%[42] - Dividends increased from $0.5 million to $411 million, showing a CAGR of 21%[42] - Market capitalization grew from $22 million to $19.9 billion, with a CAGR of 21%[42] ESG Initiatives - Watsco's sale of high-efficiency equipment averted 21.8 million metric tons of CO2e from January 2020 to September 2024[34] - The sale of Alert Labs water monitoring products saved 10.6 billion gallons of water from August 2019 to September 2024[34]