Watsco(WSO_B) - 2025 Q2 - Quarterly Results

Executive Summary & Company Overview Watsco, the largest North American HVAC distributor, maintains strong financial health and strategic growth, actively managing the A2L transition and advancing AI initiatives Company Profile and Market Position Watsco, the largest North American HVAC distributor, boasts strong financial health, 18% shareholder return, and 51 consecutive years of dividend increases - Watsco is the largest distributor in the highly-fragmented $74 billion North American market for HVAC products[2] - The company has achieved an 18% compounded annual total-shareholder return since entering distribution in 1989[2] Company Profile and Market Position Table | Metric | Value (as of June 30, 2025) | | :----- | :-------------------------- | | Cash | $293 million | | Debt | None | | Shareholders' Equity | $3 billion | - In April 2025, the Company raised its annual dividend by 11% increase to $12.00 per share, marking its 51st consecutive year of dividends[2] Strategic Initiatives and A2L Transition Watsco is managing a nearly $1 billion A2L refrigerant inventory transition while advancing AI-driven initiatives to enhance customer experience and efficiency - The ongoing regulatory transition to A2L refrigerants will ultimately result in the conversion of nearly $1 billion of inventory (55% of all products sold) across more than 650 locations in the U.S[4] - Watsco has made substantial investments in customer training, technology enhancements, and new inventory to support customers during the A2L transition[4] - The Company is advancing AI-driven initiatives to leverage its extensive data assets to enhance the customer experience and improve efficiencies, with more than 70,000 contractors engaging with its platforms[3] Financial Performance Highlights Despite revenue declines, Watsco achieved record gross profit margins in Q2 and the first half of 2025, driven by pricing strategies Second Quarter 2025 Performance Q2 2025 revenues decreased 4% to $2.06 billion, but gross profit rose 4% to a record $603 million, with margin expanding to 29.3% Second Quarter 2025 Financial Highlights (YoY Comparison) | Metric | Q2 2025 ($ millions) | Q2 2024 ($ millions) | Change (%) | | :----- | :-------------------- | :-------------------- | :--------- | | Revenues | $2,062.4 | $2,139.3 | -4% | | Gross Profit | $603.5 | $579.8 | +4% | | Gross Profit Margin | 29.3% | 27.1% | +220 bps | | Operating Income | $271.9 | $268.8 | +1% | | Diluted EPS | $4.52 | $4.49 | +0.7% | - Sales trends reflect double-digit pricing realization primarily attributable to the A2L product transition, offset by lower unit volumes resulting from more temperate weather conditions, lower homebuilding activity, and transition-related impacts[6] - The sales mix of new A2L equipment sold domestically was approximately 25% during the first quarter and 60% during the second quarter[6] - Gross profit margin expanded due to margin increases across several product categories attributable to further scaling of Watsco's pricing technologies and OEM pricing actions[8] Six-Month Period Ended June 30, 2025 Performance Six-month revenues decreased 3% to $3.59 billion, while gross profit increased 2% to $1.03 billion, with margin reaching a record 28.7% Six-Month Period Ended June 30, 2025 Financial Highlights (YoY Comparison) | Metric | 6 Months 2025 ($ millions) | 6 Months 2024 ($ millions) | Change (%) | | :----- | :-------------------------- | :-------------------------- | :--------- |\n| Revenues | $3,593.5 | $3,704.3 | -3% | | Gross Profit | $1,033.1 | $1,010.4 | +2% | | Gross Profit Margin | 28.7% | 27.3% | +140 bps | | Operating Income | $384.1 | $395.3 | -3% | | Diluted EPS | $6.50 | $6.69 | -2.8% | - Domestic markets saw a 2% decline, while non-U.S. markets experienced a 10% decline in sales for the six-month period[11] Innovation & Strategic Technology Initiatives Watsco invests heavily in digital platforms, AI tools, and new sales strategies to enhance customer experience and operational efficiency Digital Ecosystem and E-commerce Watsco's $250 million tech investment drives a digital ecosystem, with e-commerce sales reaching $2.5 billion and 70,000 authenticated users - Watsco has invested more than $250 million in technology over the last five years (an annual current run rate of $60 million) and employs close to 300 technologists[11] - The authenticated user community of HVAC Pro+ Mobile Apps grew 17% to more than 70,000 users over the 12-month period ended June 30, 2025[11] - E-commerce sales totaled approximately $2.5 billion for the twelve-month period ended June 30, 2025, comprising 34% of the Company's overall sales, with some regions exceeding 60% e-commerce penetration[11] - OnCallAir®, Watsco's digital sales platform, generated approximately $1.6 billion in gross merchandise value (GMV) for the 12-month period ended June 30, 2025, with GMV increasing 19% to $886 million in the first half of 2025[13] AI-Driven Initiatives Watsco leverages 15 years of data with AI tools like 'Ask.Watsco' and 'AL.watsco' to boost internal productivity and customer expertise - Watsco's AI platform is anchored by 'Ask.Watsco,' an internally-focused AI engine designed to enhance productivity, decision-making, and customer service for over 2,100 current internal users[13] - Complementing its internal platform, Watsco has developed 'AL.watsco,' a customer-facing AI model that delivers HVAC expertise directly to customers and partners, trained on extensive data pools[13] - These AI tools leverage Watsco's industry-leading data sets around customers, products, and vendors that have been curated over the last 15 years[13] Non-Equipment Sales & Institutional Channel Strategies Watsco is expanding non-equipment sales, optimizing sourcing, and launching 'Project WatscoOne' for institutional customers in 2026 - The Company estimates that nearly half of the HVAC/R products sold in its marketplace represent non-equipment products[13] - Watsco is leveraging its product and pricing data to optimize and streamline sourcing of non-equipment products across its supplier network[13] - Watsco expects to begin offering enterprise-wide solutions to institutional customers (termed Project 'WatscoOne') in early 2026[13] Growth Strategies & Financial Strength Watsco pursues a "buy and build" acquisition strategy while maintaining a strong balance sheet and consistent dividend growth Buy & Build Acquisition Strategy Watsco's "buy and build" strategy added three distributors in 2025, contributing to $1.6 billion in annualized sales from 12 acquisitions since 2019 - Thus far in 2025, the Company has acquired three distributors in key Sunbelt markets[14] - Since 2019, Watsco has acquired 12 companies that today represent approximately $1.6 billion in annualized sales and 120 locations[14] - The HVAC/R distribution landscape in North America, estimated to be $74 billion, remains highly fragmented with approximately 2,100 independent distributors[14] Cash Flow, Financial Strength & Liquidity Watsco maintains a strong balance sheet, with operating cash flow impacted by A2L inventory, and increased its annual dividend by 11% to $12.00 per share - Operating cash flow was a use of cash totaling $185 million for the six-months ended June 30, 2025, resulting from new A2L inventory investments and peak seasonal inventory buildup[16][28] - In April 2025, Watsco announced an 11% increase to its annual dividend to $12.00 per share[17] - The Company's objective is to maintain a healthy balance sheet that allows for access to low-cost capital to fund strategic investments in new growth opportunities[15] Additional Information This section provides company background, forward-looking statement disclaimers, and condensed consolidated financial statements About Watsco Watsco operates North America's largest HVAC/R distribution network, focusing on the replacement market and contributing to CO2e emission reduction - Watsco operates the largest distribution network for heating, air conditioning, and refrigeration (HVAC/R) products with 701 locations in the U.S., Canada, Mexico, and Puerto Rico, serving over 375,000 contractors[18] - The company focuses on the replacement market, which has increased in size and importance due to the aging of installed systems and the introduction of energy-efficient models[19] - Watsco averted an estimated 24.5 million metric tons of CO2e emissions from January 1, 2020, to June 30, 2025, through the sale of replacement HVAC systems at higher-efficiency standards[20] Forward-Looking Statements This section outlines forward-looking statements, noting that actual results may differ due to various economic, regulatory, and competitive factors - The document includes forward-looking statements regarding expected financial and operational results, which are subject to uncertainty and changes in circumstances[21][22] - Actual results may differ materially due to changes in economic, business, competitive market, regulatory, and other factors, including those detailed in Watsco's SEC filings[22] Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including results of operations, balance sheets, and cash flows Condensed Consolidated Results of Operations This section details unaudited condensed consolidated results of operations for Q2 and six-month periods ended June 30, 2025 and 2024 Condensed Consolidated Results of Operations (Unaudited, in thousands, except share and per share data) | Metric | Quarter Ended June 30, 2025 | Quarter Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Revenues | $2,062,442 | $2,139,328 | $3,593,528 | $3,704,319 | | Cost of sales | 1,458,954 | 1,559,568 | 2,560,417 | 2,693,934 | | Gross profit | 603,488 | 579,760 | 1,033,111 | 1,010,385 | | Gross profit margin | 29.3% | 27.1% | 28.7% | 27.3% | | SG&A expenses | 339,001 | 319,029 | 661,582 | 628,577 | | Operating income | 271,869 | 268,803 | 384,057 | 395,340 | | Operating margin | 13.2% | 12.6% | 10.7% | 10.7% | | Net income attributable to Watsco | $183,613 | $181,410 | $263,674 | $268,414 | | Diluted earnings per share | $4.52 | $4.49 | $6.50 | $6.69 | Condensed Consolidated Balance Sheets This section presents the unaudited condensed consolidated balance sheets as of June 30, 2025, and December 31, 2024 Condensed Consolidated Balance Sheets (Unaudited, in thousands) | Asset/Liability/Equity | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Cash and cash equivalents | $292,978 | $526,271 | | Accounts receivable, net | 1,015,738 | 877,935 | | 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 | | Accounts payable and accrued expenses | $955,499 | $873,628 | | Total current liabilities | 1,070,916 | 983,901 | | Total liabilities | 1,507,694 | 1,415,285 | | Watsco's shareholders' equity | 2,760,442 | 2,656,990 | | Total liabilities and shareholders' equity | $4,729,513 | $4,479,523 | Condensed Consolidated Statements of Cash Flows This section presents the unaudited condensed consolidated statements of cash flows for the six-month periods ended June 30, 2025 and 2024 Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------- | :----------------------------- | :----------------------------- | | Net income | $311,308 | $318,913 | | 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 and cash equivalents | (233,293) | 14,742 | | Cash and cash equivalents at end of period | $292,978 | $224,854 |