Watsco Inc Q3 2025 Earnings Call Transcript

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

Question: Tommy Moll - Stephens Inc - Analyst : I want to start with a question on the repair versus replace dynamic. It's been a couple of quarters in a row now where your non-equipment business trends have been well ahead of the equipment trends. You've obviously been very disciplined on pricing for the new equipment. And so I'm curious is the simplest explanation here just that we're seeing some price elasticity among homeowners? Or is there something else you might call out?

Question: Tommy Moll - Stephens Inc - Analyst : As a follow-up, maybe we'll address the elephant in the room here, maybe just take it on directly. Yesterday, Carrier mentioned that their October distributor movement was down 30% and that they expect something like down mid-20s for November and December? Does all that sound reasonable enough in terms of what you have seen or expect to see for your equipment business this quarter? And should we think of that in terms of volumes or sales? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2025 / 2:00PM, WSO.N - Q3 2025 Watsco Inc Earnings Call

Question: Tommy Moll - Stephens Inc - Analyst : Thank you all for the insight. I'll turn it back.

Question: David Manthey - Robert W. Baird & Co Inc - Analyst : I feel like I'm in a parallel universe here in 25 years covering Watsco. This is the closest kind of come to guidance. It's pretty amazing. But -- as long as we're talking about it, the minus 5% to 10% revenue declines in the fourth quarter. We're talking about equipment only there, correct? Barry S. Logan We did not give guidance. We did not give guidance. We gave a percentage of what we see thus far in the quarter in October.

Question: David Manthey - Robert W. Baird & Co Inc - Analyst : Overall. Okay. Fair. Fair. Okay. All right. And then if you believe in this -- the normalization theme here, you have a lot of cash, no debt, a healthy dividend. You've always invested organically as needed. The stock seems to be on sale here. Is there a thought about allocating some of your cash forward to more aggressive share repurchase at these levels? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2025 / 2:00PM, WSO.N - Q3 2025 Watsco Inc Earnings Call

Question: David Manthey - Robert W. Baird & Co Inc - Analyst : Yes. I appreciate that, Al.

Question: Jeffrey Sprague - Vertical Research Partners LLC - Analyst : I just want to come back to inventories. It was nice to see that sequential step down in Q3. Just want to think about where we end the year. Obviously, a lot of that depends on things so you said you can't control like end demand in the consumer and all those sorts of things. But what is your view at this point in time of sort of how you end the year, how close to normal inventories you might be as you obviously then start to pivot to focus into 2026?

Question: Jeffrey Sprague - Vertical Research Partners LLC - Analyst : And like more cash too. Barry S. Logan There's really two curiosities and the one you're asking about is will our distribution channel at Watsco be in a more conventional position, right? That's your -- and that's really almost an OEM orientation that then asked the question, has the inventory been reset in line with some kind of -- so you understand what I'm saying. So -- and so yes, there's a lot of progress in the third quarter, more progress in the fourth. You could look analytically where are we today versus history and answer the question, and I can help you with that. But what Al was saying is how does inventory affect us looking forward. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2025 / 2:00PM, WSO.N - Q3 2025 Watsco Inc Earnings Call What if we had five inventory turns instead of four? What would that do to our return on invested capital? What would that do to our real estate? What would that do to our cash flow? What would it do to the overall handling and load that we carry in our stores if we had less inventory and better turns? What if we had better technology with our OEMs to replenish our stock every day? Those are the bigger -- those are the things we are focused on, while trying to reduce inventory by the end of the year. And you can understand that it's a longer-term perspective from our point of view. And while we're just trying to get the year-end inventory in line to have a, frankly, a strong hand, a strong capital base to flow into next year. And so I think we said last quarter, we were targeting $500 million of reductions by year-end. And second quarter -- or third quarter was $350 million of that. I think we can improve on the $500 million target. It's a slower time of year to say that, but by the end of the year, I think inventories will be near historical levels versus the size of our company.

Question: Jeffrey Sprague - Vertical Research Partners LLC - Analyst : Great. Well, thank you for that thorough answer. I'll pass the baton and give somebody else an opportunity. Appreciate it. See you in December.

Question: Christopher Snyder - Morgan Stanley - Analyst : I wanted to follow up on some of that inventory conversation. It seems like you guys believe you'll be at like a roughly more normalized level to exit the year. But I guess my question is, should we expect the normal kind of typical ramp in inventories from year-end into Q2 that we've seen you guys do historically? Or could that be more muted just kind of given the inventory backdrop? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2025 / 2:00PM, WSO.N - Q3 2025 Watsco Inc Earnings Call

Question: Christopher Snyder - Morgan Stanley - Analyst : I appreciate that. Maybe to follow up on price. The OEMs that have reported so far talked about an expectation of incremental price in '26. Maybe a bit of a surprise, given what seems like affordability challenges and just overall headwinds facing the consumer, I guess what is your thoughts on that? And do you feel like just given the balance sheet and maybe the absorption headwinds that they're facing, do you feel like that gives you guys better ability to push back or negotiate than years past?

Question: Mitchell Moore - KeyBanc Capital Markets Inc - Analyst : I know most of the industry is already in those entry-level baseline SEER products. But just wondering if you could talk about mix in the quarter. Just maybe if you could flesh out if you're seeing consumers trade down to lower tier products?

Question: Mitchell Moore - KeyBanc Capital Markets Inc - Analyst : Great. That's super helpful. And then obviously, record gross margins here in the third quarter. Just wondering if you could unpack the moving pieces within that. Maybe just how much was mix benefits from the other HVAC products versus some carryover OEM pricing? Rick Gomez This is Rick. I can -- yes, this is Rick. I can help you with that answer a little bit. There's two or three contributors there that help and that feel good and sustainable. The first is we had growth in non-equipment, and as a category as a basket, that non-equipment business has higher gross margins. So that is a mix benefit in our gross margin. There was some carryover benefit from springtime OEM pricing actions. And then the third most structural most interesting aspect of it is that, we've talked about the pricing optimization tools that are maturing and getting better every day in the field. AI is making that even better today and transactional margins were very resilient in a down market and actually slightly up. So we take some comfort in that and feeling and being somewhat -- or to us feel somewhat permanent and structural whatever word you want to use. And those are the large contributors to the margin expansion.

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : (inaudible) I don't know. I was in Italy the summer. So just --

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : Yes. Never real language guy, unfortunately.

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : But I do talk HVAC. I talk the HVAC language. So I'm just curious, when you survey your contractors, what are they saying about like what their volumes are down? Or are they -- I mean I would assume they're down if this is what kind of like what you guys are seeing, but like what is the actual like I don't know what you call it, like activity for the contractors like at the ground level?

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : Well, are your contractor customer sales down? Or are they -- like, is it -- because Lennox mentioned something about contractors having inventory think carrier kind of reinforced that yesterday. So there's this kind of narrative that there were some inventory sitting at contractors? Or should we assume that your sales are kind of in line with what they're seeing on the ground level?

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : And as far as --

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : As far as this institutional channel, which is, I think, the large contractors, how big is that now as a percentage of the market, if like housing and homebuilders are like 20%-ish, like is that institutional channel? How big is that now the consolidators on the contractor side?

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : Got it. And then just one last one for you on pricing. Anything on the in the environment that you're seeing, where maybe there's an OEM that's trying to get rid of inventory or something, any kind of like late season rebate activity that -- or discounting activity you're seeing on a like-for-like basis price-wise? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2025 / 2:00PM, WSO.N - Q3 2025 Watsco Inc Earnings Call

Question: Nigel Coe - Wolfe Research LLC - Analyst : Please don't check my language skills. I don't as is very good. By the way, I think this is the first time you guys have done a formal investor event. So this is one we can't miss. So look forward to that guys.

Question: Nigel Coe - Wolfe Research LLC - Analyst : New York. Yes. So don't be about accents. It's a --

Question: Nigel Coe - Wolfe Research LLC - Analyst : Ireland. Well, yes, I'm actually Wash, but close enough. So I want to go back -- I really love to get your perspective on the customer behavior and why it changed so dramatically. And it seems to be a coincidence, so maybe not coincidence that it's happening at the time that we've seen this A2L transition. And I'm just wondering if the kind of the cost of a full replacement system versus a partial is a factor that contractors are highlighted to you. And within that question, I'm just wondering if you're seeing the same sort of trends for the R-32 products, Ductless or Goodman. Are those kind

Question: Nigel Coe - Wolfe Research LLC - Analyst : Okay. Okay. That's great color. Barry S. Logan I just want to add something for everyone's sake in this because I think part of this discussion is where is the contractor in this and how are their businesses doing? Someone asked, is there a correlation between what a contractor would feel and what we're feeling and so on. And I said this many quarters through my career, no one ever asks about credit. We give contractors $800 million in accounts receivable, and we know the credit quality every second of the day. In the recession, for example, we had 10% of that portfolio over 90 days past due. Today, it's 1.2%. Last year, at this time, it was 1.2%. Credit quality has not changed at all. It's not -- that 1.2% is as low as any year in the last 10 years. So if I look at the pure credit quality of our customer as maybe a leading indicator of some kind, the quality is very high.

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : I believe the term is Serenity now and Serenity later. I believe that they say -- sorry, on that point about this year being an unusual year. So as you kind of stand today, I know the crystal ball is pretty clouded, but like do you view this as kind of like abnormally low? And then next year, you bounce from a sell-through perspective? Or there's not enough visibility to kind of call that as you move into next year?

Question: C. Stephen Tusa - JPMorgan Chase & Co - Analyst : Yes, control the control.