Watsco Inc Q1 2025 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Stephen Volkmann - Jefferies LLC - Analyst : Maybe I'll dive in on the residential side. I think you said plus 10%. Can you give us a sense of what you're seeing? How much of that was kind of R-454B versus 410A and how the pricing kind of layered into that?

Question: Stephen Volkmann - Jefferies LLC - Analyst : Okay. Great. And then maybe just following up, we've seen a fair amount of price that's come through from a variety of suppliers across the industry. And traditionally, that drives your gross margin a little bit higher, at least in the near term. Is there any reason to think we shouldn't see that happening as the year progresses?

Question: David Manthey - Robert W. Baird & Co. Incorporated - Analyst : So as it relates to the top line, it seems international was weak but really not big enough to move the needle and what Paul just said about the mix. And that, along with other HVAC products being somewhat weak parts and supplies, I understand. But should we read into this that residential new construction, even though it's less significant for you guys was substantially softer year to year? And are you holding share there, do you think?

Question: David Manthey - Robert W. Baird & Co. Incorporated - Analyst : Yeah, that's good to hear. So impressing on gross margin a little bit here, too, as you think about the transition of refrigerant and along with the kind of the mix driven by seasonality and so forth, and then you've got these, what I assume are apples-to-apples kind of tariff-driven and general price increases we're seeing, as you pointed out, in April, Paul. As we think about the normal cadence of gross margin from first quarter through the year, should just directionally and bigger than a bread box, can you tell us, do you think it will be less of a degradation as we move forward because of those positive factors that are rolling in here?

Question: Jeffrey Sprague - Vertical Research Partners LLC - Analyst : Interesting times, no doubt, I hope everybody is doing well. Just wanted to kind of think about sort of the cadence of what the OEMs are doing on the price side. I think you said you're collaborating closely with them. Just got off call with a key player. They said price has gone up twice here just in the last several weeks or so. Maybe just give some view on how this collaboration is working, how the lags of getting price through into the channel, and whether you are seeing any kind of negative demand response and given the magnitude of price that's coming through the pipeline.

Question: Jeffrey Sprague - Vertical Research Partners LLC - Analyst : Is there a mechanism in place? Or should we expect if the tariff pressure changes that this will feed back into the market as some relief on price? How much of the price is surcharge, which is visible and could go away versus what might be in the base and what you might be able to maintain even if there is some tariff relief?

Question: Tommy Moll - Stephens Inc. - Analyst : In the earnings release, and I think as Paul just mentioned, you talked about being able to leverage the technology too quickly, if not instantaneously implement some of these price increases. But I want to unpack what other levers you have with the technology because, as you've discussed before, it's not just one standard increase across your entire customer base, you have to be a lot more nimble. So in this environment of OEM price increases, what additional capabilities do you have through the technology to really customize if not [profitize] some of that at the branch level?

Question: Tommy Moll - Stephens Inc. - Analyst : Thank you, A.J. As a follow-up, I wanted to ask for a little more detail on the early selling season trends. Al, you mentioned that there's been some improvement. And so while we're all here live, I wanted to just give the opportunity to give any quantification there or additional insight into what you were referencing there? Thank you.

Question: Ryan Merkel - William Blair & Company L.L.C. - Analyst : I guess I'm going to follow up on that last question. I guess it sounds like we shouldn't extrapolate the weak first quarter to the rest of the year. Is that the right read here? You feel like the business has found better footing?

Question: Ryan Merkel - William Blair & Company L.L.C. - Analyst : Okay, that's a simple answer. And then can you just unpack -- I think you mentioned the A2L transition was a negative in the quarter. What was the impact there and what was that negative?

Question: Ryan Merkel - William Blair & Company L.L.C. - Analyst : Okay. So I misunderstood that. Okay. So the one-third of the business that was weak, it was the international down 9. And then what else was in there that caused the weakness? Because again, the algebra is kind of difficult for some of us to figure out.

Question: Ryan Merkel - William Blair & Company L.L.C. - Analyst : Okay. I got it. That's helpful. The commercial piece is, I thought that might be part of it. Last question. The price/mix outlook, we've had some new price increases. Any chance you'd help us with what you're thinking there for the year?

Question: Brett Linzey - Mizuho Securities USA, LLC - Analyst : I wanted to come back to the A2L transition. One of your peers have noted some of the delays there, maybe a little bit more on the commercial side, but it was related to the learning curve. And I'm just curious, what's the industry readiness like on the transition from a technician standpoint? Are you seeing any bottlenecks? Is it driving some delays in residential? Any color would be great. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 23, 2025 / 2:00PM, WSO.N - Q1 2025 Watsco Inc Earnings Call

Question: Brett Linzey - Mizuho Securities USA, LLC - Analyst : Yeah, got it. And then just a follow-up on the second quarter, I guess, near term. So I think the industry is talking about some destocking on the R-410A but also we're seeing the industry raise prices really across the board on tariffs. Would you expect some level of prebuy on price escalation here in the near term? Or how do we think about the netting of those two pieces as we get into the selling season here?

Question: Patrick Baumann - JPMorgan - Analyst : So I just had a question on the gross margin in the first quarter. And I was wondering if you were able to optimize price on the 410A inventory that was sold and whether that had a benefit there/ I'm asking kind of in context of I think you said price mix was a 5% benefit in the quarter, and I don't think the OEMs raised price on the 410A since they're not really making it anymore. Just curious if you could give any color on that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 23, 2025 / 2:00PM, WSO.N - Q1 2025 Watsco Inc Earnings Call

Question: Patrick Baumann - JPMorgan - Analyst : Yeah. That makes sense. The benefit on the price optimization maybe in the 410A stuff, is that like in the tens of basis points?

Question: Patrick Baumann - JPMorgan - Analyst : Helpful. And then we've been hearing about shortages of the 454B refrigerant due in part to container issues. Just wondering if you're -- if you've seen or heard anything on this front? And what your view is on whether this could have any impact on the selling season?

Question: Jeff Hammond - KeyBanc Capital Markets - Analyst : The consumer just can't get to break. They keep getting hit with these price increases and high rates. Just wondering if you're hearing or seeing anything on kind of repair versus replace or mix down as people maybe choose a defeatured product.

Question: Jeff Hammond - KeyBanc Capital Markets - Analyst : And the trade down dynamic?

Question: Jeff Hammond - KeyBanc Capital Markets - Analyst : Okay. And then, Barry, you mentioned people that leaned in on 410A, which was not your tech, maybe benefited 1Q and maybe they're a little bit behind. So I'm just wondering if you think 1Q was impacted at all because maybe you had less than your fair share of 410A and maybe you catch up some of that. And then it seems like your inventory position is really strong coming out of 1Q. Just kind of thoughts around play in the merchant and gross margin arbitrage around these kind of follow-on increases. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 23, 2025 / 2:00PM, WSO.N - Q1 2025 Watsco Inc Earnings Call

Question: Jeff Hammond - KeyBanc Capital Markets - Analyst : Okay. Barry, we thought you were all knowing over 25 years I've known you, but I understand you can't see everything. Appreciate the time, guys.

Question: Chris Snyder - Morgan Stanley & Co LLC - Analyst : I wanted to follow up on some of the prior commentary. And it seems like you guys didn't lean into 410A as hard as others and maybe there was some softness in Q1 as a result. I guess my question is do you have any sense of how much 410A your distributor competitors still have into Q2? Because it seems like maybe that share shift back to you or 454B will happen really ultimately when the 410A is just totally done being sold.

Question: Chris Snyder - Morgan Stanley & Co LLC - Analyst : Thank you. I appreciate that. And then I think you guys said maybe 20% or 25% of your volumes in the quarter were 454, if I heard that right. So I imagine we're still -- the field is still not installing a ton of 454B; maybe in April, that's changing. But I guess, do you have any sense of the rate at which 454B is being installed and just trying to figure out like have we tested the demand or even maybe the price elasticity on 454B. Because it still seems pretty early in the process. Thank you.

Question: Steve Tusa - JPMorgan - Analyst : Sorry, just to follow-up to Pat's questions. Just philosophically, as a distributor and when you're looking at like these situations, what is the difference between a -- how do you look at the difference between like a surcharge and a price increase? And like what is there to read into from OEMs that are picking surcharges versus price increases just broadly? What do you take away from that from an industry perspective?

Question: Steve Tusa - JPMorgan - Analyst : Are you guys doing any surcharges? Or are you mostly like price increases? Obviously, you guys can be pretty agile with the tech you have. But are you -- is it mostly of what you do surcharges or price increases or mix?

Question: Steve Tusa - JPMorgan - Analyst : One last one, Paul. Just from an industry perspective, how much of the unitary product do you think is like sourced directly from China, like where you have a Chinese manufacturer who may be shipping it over here and sticking a label -- with the US guys sticking a label on it. My guess it's not huge, but like it's been growing in the last couple of years. How much do you think there is of the industry?

Question: Steve Tusa - JPMorgan - Analyst : Right. And then sorry, one last one. I know we got like 15 minutes left for the hour, so I might as well get one more in. I heard the kind of the tail end of Pat's question on 454B, like why is Honeywell putting this huge price increase out there if there's like such abundance and it's just -- it's a container issue. Trying to like figure that one out. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 23, 2025 / 2:00PM, WSO.N - Q1 2025 Watsco Inc Earnings Call