Watsco(WSO) - 2025 Q2 - Quarterly Results

Executive Summary Watsco reports Q2 2025 results with record gross margins, expanded operating margins, and strong financial health Company Overview and Q2 2025 Highlights 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] - 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] - 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] - In April 2025, the annual dividend was increased by 11% to $12.00 per share, marking the 51st consecutive year of dividends[2] Financial Performance Second Quarter 2025 Performance 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] 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 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 Innovation & Strategic Technology Initiatives 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] HVAC Pro+ & E-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] - 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] OnCallAir® Digital Sales Platform 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] - In the first half of 2025, contractors using OnCallAir® generated $886 million in GMV, a 19% increase versus the same period last year[13] Pricing Optimization and AI Initiatives 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] - 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] Other Growth Initiatives 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] - A new strategy, Project "WatscoOne," is being developed to target large institutional customers with enterprise-wide solutions, expected to launch in early 2026[13] Buy & Build Acquisition Strategy 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] - Since 2019, Watsco has acquired 12 companies that now represent about $1.6 billion in annualized sales and 120 locations[14] - Three distributors in key Sunbelt markets have been acquired so far in 2025[14] Financial Position and Shareholder Returns Cash Flow, Financial Strength and Liquidity 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][28] - The use of cash was primarily due to new A2L inventory investments and peak seasonal inventory buildup[16] - 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] Dividend Policy 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] - The company's philosophy is to share increasing amounts of cash flow via higher dividends while maintaining capacity for network-building investments[17] Appendix: Condensed Consolidated Financial Statements Condensed Consolidated Results of Operations 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 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 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 |