Watsco(US:WSO)2025-07-30 15:00Financial Data and Key Metrics Changes - Sales declined by 4%, with double-digit pricing gains for new equipment offset by lower volumes [5][6] - Record gross profit margins were achieved, leading to an increase in EBIT and expanded EBIT margins despite lower sales [6][7] - SG&A expenses increased by 6% due to additional costs during the product transition and the addition of 10 new locations from recent acquisitions [7][8] - The company maintains a strong cash position with no debt [8] Business Line Data and Key Metrics Changes - Residential new construction and international markets remain subdued, with residential new construction down by 15% to 20% [18] - The annual volume of products sold through OnCallAir, the digital selling platform, increased by 19% to $1.6 billion [9] - Parts and supply segment, currently about 30% of sales, is expected to grow significantly over time [10] Market Data and Key Metrics Changes - International sales, particularly in Mexico, were volatile and negatively impacted earnings by approximately $0.10 per share for the quarter [21] - The company experienced a late start to the summer season, affecting overall market performance [5] Company Strategy and Development Direction - The company is transitioning to next-generation equipment using A2L refrigerants, affecting about 55% of historical product sales [4] - A new technology-driven sales platform is being developed to capture larger national customers, expected to launch in 2026 [10] - The company aims for a gross profit margin of 30% and is focusing on growing the parts and supply segment [10] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, noting that the transition to new products will simplify operations by 2026 [4] - The company is focused on controlling margins and pricing, despite external market challenges [23] - Management acknowledged the current market noise due to various macroeconomic factors but remains confident in the company's ability to grow and take market share [125] Other Important Information - E-commerce sales have grown to $2.5 billion, representing 34% of total sales [8] - The company has launched two AI platforms to enhance data utilization and improve customer experience [11] Q&A Session Summary Question: What happened to volumes in the quarter? - Management noted that April was strong, May was weak due to weather, and June rebounded. Residential new construction was down 15% to 20%, but replacement sales remained strong [18] Question: How sustainable are the gross margins? - Management indicated that while the current gross margin of 29% is strong, it may not be sustainable in the second half due to the absence of pricing benefits seen in the first half [26][28] Question: What is the impact of the cylinder shortage? - Management stated that the refrigerant allocation issue is becoming less of a concern, with expectations to be off allocation by August [40] Question: How is inventory being managed during the transition? - The company has invested more in inventory than anticipated due to lower industry demand, but is focused on improving inventory turnover [48][52] Question: What is the outlook for M&A activity? - Management expressed eagerness for potential M&A opportunities in the current soft market, highlighting a strong balance sheet to support acquisitions [53][55] Question: How are consumer preferences changing during the product transition? - Management noted that the market remains focused on minimum efficiency products, with no significant shift towards high-efficiency systems [60] Question: What are the expectations for pricing in the second half? - Management does not anticipate significant price increases on equipment but expects some inflationary pressures on non-equipment products due to tariffs [118]