Watsco Inc Q2 2025 Earnings Call Transcript

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

Question: Brett Linzey - Mizuho Securities USA LLC - Analyst : Hey, good morning. Maybe just a follow-up on the last point there. So if you could maybe just unpack the year-over-year gross margin contribution. Is there any way to delineate that between the pricing optimization tools versus the parts mix versus some of that raw pricing just in the marketplace in the quarter? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 30, 2025 / 2:00PM, WSO.N - Q2 2025 Watsco Inc Earnings Call

Question: Brett Linzey - Mizuho Securities USA LLC - Analyst : That's very helpful. I appreciate that. And then just a follow-up on the cylinder shortage. It sounds like you guys think it abates by the second half. I know some of the peers think it does persist into the second half. So maybe what was the impact, do you think, in the quarter from the shortage situation. And then are you assuming that some of that does carry into H2?

Question: Brett Linzey - Mizuho Securities USA LLC - Analyst : Thanks for the color. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 30, 2025 / 2:00PM, WSO.N - Q2 2025 Watsco Inc Earnings Call

Question: Brett Linzey - Mizuho Securities USA LLC - Analyst : Thanks, Barry.

Question: Tommy Moll - Stephens Inc - Analyst : Morning. Thanks for taking my questions. I wanted to start on inventory. Maybe you could characterize for us the investment there versus what you would have expected to need for the transition. Just in dollar terms, is it about what you would have soft circled or maybe a little elevated. Anything you can do to frame that for us? And then also how you think it might trend over the next couple of quarters?

Question: Tommy Moll - Stephens Inc - Analyst : Go ahead.

Question: Tommy Moll - Stephens Inc - Analyst : Thank you, both. As a follow-up, I wanted to ask about the M&A environment and pipeline, hasn't gotten a ton of their time lately, but how can you characterize that for us? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 30, 2025 / 2:00PM, WSO.N - Q2 2025 Watsco Inc Earnings Call

Question: Tommy Moll - Stephens Inc - Analyst : Thank you, both. I'll turn it back.

Question: David Manthey - Robert W. Baird & Co Inc - Analyst : Hey, Al, good morning. I was wondering if you had any thoughts on consumer preference during this product transition, like -- are you continuing to see a premium on the R-410 systems. And then as people are buying the A2L, are they gravitating to one end or the other of the good, better, best tier.

Question: David Manthey - Robert W. Baird & Co Inc - Analyst : It sounds good. Thanks for all the color there. My follow-up, it's the first time we've seen other do better than the equipment in a long time. And as Paul said, the residential new construction is not helping. I assume all the DUC work and thermostats and things in the other category. So should we not read into this that there's a stronger fix versus replace trend this quarter? Or is it, I don't know, commodities or I'm just making this up. Any thoughts on that?

Question: David Manthey - Robert W. Baird & Co Inc - Analyst : Thanks, Barry.

Question: Jeffrey Hammond - KeyBanc Capital Markets Inc - Analyst : Good morning, everyone. Is this real Al or AI Al.

Question: Jeffrey Hammond - KeyBanc Capital Markets Inc - Analyst : Yeah. Just to clarify on the flattish sales comment, was that parts for July? Or is that overall?

Question: Jeffrey Hammond - KeyBanc Capital Markets Inc - Analyst : Okay. And then just on -- back to inventories, can you just maybe talk about where you want to ultimately get your turns to? I know you were kind of running 4.5 turns a year, pre-COVID and pre all these regulatory changes and now you're kind of 3 to 3.5. And kind of where you see that happening and over one timeframe?

Question: Jeffrey Hammond - KeyBanc Capital Markets Inc - Analyst : I remember when it was 10% growth in -- and 10% margins for you guys lose you that one. (inaudible)

Question: Jeffrey Hammond - KeyBanc Capital Markets Inc - Analyst : Great. Thanks for the color, guys. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 30, 2025 / 2:00PM, WSO.N - Q2 2025 Watsco Inc Earnings Call

Question: Patrick Baumann - JPMorgan Chase & Co - Analyst : Good morning. Thanks for taking my questions. Maybe I was just curious if you could provide some examples of the large enterprise institutional customers you cite as offering emerging opportunities for growth, like -- and what exactly are you doing to go after them?

Question: Patrick Baumann - JPMorgan Chase & Co - Analyst : Interesting.

Question: Patrick Baumann - JPMorgan Chase & Co - Analyst : A follow-up to that. Would you see selling to like a larger national account contractor, any different than -- I guess, you said it is. But like in terms of like they're buying capacity, is that something that you would see as a headwind for your gross margin over time?

Question: Patrick Baumann - JPMorgan Chase & Co - Analyst : That makes sense. OKay.

Question: Patrick Baumann - JPMorgan Chase & Co - Analyst : Thanks for the color. Sounds interesting and exciting. Maybe just switching gears, my next question on the operating cost side. I think you said something in the release about targeting cost efficiencies for the rest of the year. Could you provide any color on, I guess, one, the 6% growth rate in the second quarter of SG&A expense. You mentioned cost of the A2L transition. I don't know how that kind of maybe to SG&A, but if you can give color on that? And then can you bend that growth rate in the second half with some of the cost efficiencies you're targeting? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 30, 2025 / 2:00PM, WSO.N - Q2 2025 Watsco Inc Earnings Call

Question: Patrick Baumann - JPMorgan Chase & Co - Analyst : Thanks a lot. I appreciate the color.

Question: Damian Karas - UBS AG - Analyst : Hi. Good morning, gentlement. I'm curious how you're thinking about pricing through the rest of the year. On the equipment side, our price is pretty much set for the rest of the year, and you're just going to continue to get that benefit of the higher value mix flowing through top line. And do you foresee any changes on your parts and commodity supplies with respect to price and just thinking about further metals inflation and tariffs?

Question: Damian Karas - UBS AG - Analyst : Understood.

Question: Damian Karas - UBS AG - Analyst : Got it. That's helpful. And I know this is never an easy task, but if you had to guesstimate, if you will, how much of a headwind to volumes in the second quarter, do you think are attributable to weather and canister shortage versus weaker housing and underlying market demand. I'm just trying to get a sense for what underlying demand might look like as you move past the more transient issues.

Question: Damian Karas - UBS AG - Analyst : Really appreciate your thoughts. Good luck out there. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 30, 2025 / 2:00PM, WSO.N - Q2 2025 Watsco Inc Earnings Call

Question: Nigel Coe - Wolfe Research LLC - Analyst : Hi. Good morning, guys. Appreciate all the color. I think you mentioned 410A was 60% or thereabouts for the quarter. I'm just curious how that trended or maybe where that's trending right now real time. And any concerns that you're holding too much 410A inventory, just given the demand weakness and -- or are you confident you'll be done with that transition this quarter?

Question: Nigel Coe - Wolfe Research LLC - Analyst : Does that mean that -- sorry, does that mean you're incentivizing that sell-through of that -- sorry, sorry for cutting off there, but does that mean you're incentivizing that process to make that happen.

Question: Nigel Coe - Wolfe Research LLC - Analyst : Okay. That's great color. And then my follow-up is what we've seen from you and from your suppliers is tremendously strong price, price is holding, which is good news, but obviously, volumes are incredibly weak. What are you hearing from your contractors? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 30, 2025 / 2:00PM, WSO.N - Q2 2025 Watsco Inc Earnings Call Are they asking for some incentives here to try and stimulate some movements? Or are there content to just wait for rates to turn and perhaps demand picks up. Are you starting to get more inbounds on price reductions or discounts or incentives?

Question: Samuel Snyder - Northcoast Research - Analyst : Morning. Looking forward for an excuse to come down to Miami (inaudible)

Question: Samuel Snyder - Northcoast Research - Analyst : Yes. No, thank you. So look, just focusing on the mix shift, which seemed to benefit margin. on parts. I was wondering if the shift was in part at all due to the canister shortage where you have people do more repairs for the time being?

Question: Samuel Snyder - Northcoast Research - Analyst : Got it. Okay. And then just a real quick follow-up sort of on the same topic, but any sort of sizable shift to R-32 based systems? And if so, is that a temporary thing or more permanent in your view? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 30, 2025 / 2:00PM, WSO.N - Q2 2025 Watsco Inc Earnings Call

Question: Christopher Dankert - Loop Capital Markets LLC - Analyst : Morning, guys. I guess circling back to Watsco 1, you guys sound excited a sound that it was a pretty big opportunity. Is there any way to get a bigger than a bread box sense here. I mean are we talking about serving 500 customer locations, 5,000? Or is it too early to kind of get into that type of scaling?

Question: Christopher Dankert - Loop Capital Markets LLC - Analyst : Makes sense. Thanks for that. And I guess maybe just to touch on the AI a little bit here. Can you give us maybe some examples of what the use cases are for -- as Watsco internally? I mean how is this kind of helping your associates? Is this inventory positioning? Is it warranty data? What's the real use case here?

Question: Samuel Snyder - Northcoast Research - Analyst : So I mean, really it's holistic then. Got it. Thank you so much for that, AJ, and thank you all for your time.

Question: Chris Snyder - Morgan Stanley & Co LLC - Analyst : Thank you. I wanted to follow up on the today in inventory. I think you guys had was less than 5% of your inventory. Do you have any sense for what that number could look like across your distributor competitors?

Question: Chris Snyder - Morgan Stanley & Co LLC - Analyst : Thank you. I appreciate that. (inaudible) maybe follow up on a different sort of inventory question. I guess it's time of surprising that volumes remain down materially, it seems like in July with the weather picking up. Does that change the way you guys think about how much inventory is downstream at your customers? Could they have been holding extra stock and perhaps that's why the sell-through has been softer? Thank you.

Question: Chris Snyder - Morgan Stanley & Co LLC - Analyst : Thanks.