• Record Sales: Achieved record sales in both residential and commercial markets.
• SG&A Efficiency: Lower SG&A as a percentage of sales, indicating improved operating efficiency.
• Cash Flow: Generated strong cash flow, maintaining a pristine balance sheet.
• Annualized E-commerce Sales: Exceeds $2.5 billion.
• Contractor Sales Growth: $743 million in sales generated for contractors, a 27% increase over last year.
• Household Quotes: Contractors presented quotes to approximately 160,000 households, an 18% increase.

• Warning! GuruFocus has detected 8 Warning Sign with WSO.

Release Date: July 30, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Watsco Inc (NYSE:WSO) achieved record sales in both residential and commercial markets, indicating strong market demand.
• The company improved operating efficiency, as evidenced by lower SG&A as a percentage of sales.
• Watsco Inc (NYSE:WSO) generated strong cash flow, maintaining a robust balance sheet to support future investments.
• The company's technology platforms, including e-commerce and OnCall Air, have driven growth and market share gains.
• Federal regulatory changes, such as energy efficiency mandates, have provided opportunities for growth, particularly in heat pump sales.

Negative Points

• Gross margin was down 100 basis points year-on-year, with some concerns about price timing and OEM price increases.
• There was a noted disparity in growth between equipment and non-equipment business, affecting overall margins.
• Inventory levels were a focus, with a need for continuous improvement in inventory turns.
• The transition to new A2L refrigerant products presents challenges, though the company is preparing for a smooth transition.
• There is a trend towards consumers opting for basic products over higher efficiency options, which could impact future sales mix.

Q & A Highlights

Q: Can you discuss the moving pieces in gross margin, given it was down 100 basis points year-on-year? A: Barry Logan, Executive Vice President, explained that while there are short-term fluctuations, the long-term target remains at 27% plus. The disparity in growth rates between equipment and non-equipment businesses, brand mix, and inventory levels contributed to the margin changes. The company is focused on long-term improvements and leveraging technology for future margin opportunities.

Q: What are your thoughts on the transition to A2L products and the remaining 410A inventory? A: Paul Johnston, Vice President, stated that manufacturers are ready for the A2L transition, with some already producing these products. The transition involves minor changes, and Watsco expects to have enough 410A inventory to last into the first quarter of next year.

Q: Can you provide insights into the residential business trends and how the selling season progressed? A: Barry Logan noted that growth rates improved throughout the quarter, with June being the strongest month. Despite some disruptions in July due to weather, the growth trend is expected to continue into August, which is a significant month for sales.

Q: What are the drivers behind the operational expense leverage seen this quarter? A: Barry Logan highlighted that post-COVID, there was a focus on optimizing SG&A expenses, with more aggressive actions taken in the first quarter. Continuous improvement and technology have played a role in driving efficiency and leveraging expenses.

Q: How are inventory levels being managed, and what is the outlook for the rest of the year? A: Aaron Nahmad, President, emphasized the focus on improving inventory turns using technology. Inventory levels are expected to decrease due to seasonality and the transition to A2L products, with a potential increase in the first quarter of next year due to overlapping inventories.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.