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WATSCO INC (WSO)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 2025 was seasonally soft and mixed: revenue fell 2% year over year to $1.53B, EPS declined to $1.93 from $2.17, while gross margin expanded 60bps to 28.1% and operating margin was 7.3% .
  • Core U.S. residential replacement was strong (+10% y/y; +12% on a same‑day non‑GAAP basis), offset by weakness in international (−9%) and non‑equipment/commercial categories; management cited improved sales/margin trends ahead of the summer season .
  • The A2L refrigerant transition is underway (affecting ~55% of sales); Watsco is converting nearly $1B of inventory, implemented April price increases via its tech stack, and targets a 30% gross margin over time .
  • Results missed Wall Street consensus on revenue and EPS; management flagged mid‑single‑digit domestic growth in early Q2 and stable margins, with pricing actions largely via list increases rather than surcharges [GetEstimates]* .

What Went Well and What Went Wrong

What Went Well

  • Core U.S. residential replacement sales grew 10% (12% same‑day) aided by new customers, unit growth, pricing, higher‑efficiency mix, and improved gross margins .
  • Gross margin improved 60bps to 28.1% despite a mixed demand backdrop, reflecting favorable mix and early transition dynamics .
  • Execution on A2L transition and pricing: “The transition to the new A2L products is well underway…strength in sales, margins and improved efficiency mix in our core replacement market” (CEO) ; management reiterated a long‑term goal of ~30% gross margin .

What Went Wrong

  • International sales fell 9% (9% of total), and non‑equipment and commercial product categories were down; commercial products declined ~10% y/y amid transition timing .
  • Seasonality plus one fewer selling day weighed on the quarter (management noted ~2% sales impact), amplifying the effect of mixed demand and transition cadence in a small quarter .
  • Street misses on EPS, revenue, and EBITDA versus consensus (see Estimates Context), reflecting transition frictions and category softness [GetEstimates]*.

Financial Results

Summary Performance vs Prior Periods

MetricQ1 2024Q3 2024Q4 2024Q1 2025
Revenue ($USD Billions)$1.56 $2.16 $1.75 $1.53
Gross Profit ($USD Millions)$430.6 $566.2 $468.1 $429.6
Gross Margin %27.5% 26.2% 26.7% 28.1%
Operating Income ($USD Millions)$126.5 $250.2 $136.2 $112.2
Operating Margin %8.1% 11.6% 7.8% 7.3%
Diluted EPS ($)$2.17 $4.22 $2.37 $1.93

Segment and Mix Detail (Q1 2025)

Category (Excl. Acquisitions)Share of SalesY/Y Change
HVAC Equipment67%−1%
Other HVAC Products29%−3%
Commercial Refrigeration Products4%−5%
U.S. Residential Replacementn/a+10% (+12% same‑day, non‑GAAP)
International9% of total−9%

KPIs and Cash Flow

KPIQ1 2025Prior Period/Note
Operating Cash Flow−$177.6M (use of cash) Inventory investments ahead of selling season
Cash & Equivalents$431.8M Debt‑free balance sheet
Inventory (Net)$1.776B ~$1B conversion related to A2L transition
Digital User Community~67,000 users Higher growth, ~60% lower attrition among users
Unitary Price/Mix~+5% in quarter (unitary business) Mix toward higher efficiency aided margins

Non‑GAAP note: “Same‑day basis” metric adjusts for selling days to enhance comparability; not a GAAP measure .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2025Not providedNot providedMaintained: No formal guidance
Margins (Gross/Operating)FY 2025Not providedLong‑term aspiration: ~30% gross margin (no numeric FY guide) N/A (strategic goal, not guidance)
Pricing Actions2025N/AOEM price increases implemented in April; WSO matching via tech; mostly list increases, not surcharges New dynamic
Dividend2025$10.80 annual (2024) $12.00 annual (effective April 2025); $3.00 quarterly Raised

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 & Q4 2024)Current Period (Q1 2025)Trend
A2L Transition“Upcoming regulatory change…will impact ~60% of sales” (Q3) ; “Transition is well underway” (Q4 CEO commentary) Affects ~55% of sales; converting ~$1B inventory; ~20–25% of Q1 volume 454B; >60% of last two weeks’ sales 454B Rapid ramp progressing into Q2/Q3
Tariffs & PricingStable selling season; efficiency improvements (Q3/Q4) April saw 2 OEM price increases; WSO enabled instant pricing via tech; predominantly list increases vs surcharges Pricing tailwind emerging
Gross Margin OutlookQ3 margin 26.2%; Q4 26.7% Q1 margin 28.1%; aspiration for ~30% long‑term Improving, positive mix and pricing
International & Regional TrendsStrengthening U.S. demand; record cash flow (Q3/Q4) International −9% (9% of sales); domestic 91% and mid‑single‑digit growth early Q2; margins “behaving well” Domestic strengthening; international uncertain
Supply Chain/Refrigerant AvailabilityRegaining OEM‑related share after 2023 issues (Q4) 454B/32A container allocations; shortage driven by containers, not refrigerant; expected to normalize by June Temporary logistics bottlenecks
Technology/AIScaling customer tech; AI pathways initiated (Q4) Deeper pricing analytics; “almost infinite” customization at branch level; continued AI/data leverage Increasing adoption and impact

Management Commentary

  • “The transition to the new A2L products is well underway…We are encouraged by the strength in sales, margins and improved efficiency mix in our core replacement market” — Albert H. Nahmad, Chairman & CEO .
  • “Watsco is working to achieve its goal of 30% gross profit margin…we aspire to it” — Albert H. Nahmad .
  • “After April…two big price increases from the OEMs…[we] implement the price increases instantaneously” — Paul Johnston .
  • “Domestic…91% of our business, it’s mid‑single‑digit growth thus far in the quarter…and margins are behaving well” — Barry S. Logan .
  • “I don’t see much of a prebuy…OEMs stopped manufacturing 410A on 12/31” — Paul Johnston .

Q&A Highlights

  • Transition cadence and mix: Q1 volumes were mostly 410A with 20–25% 454B; pace accelerated with >60% 454B in the last two weeks, implying rapid adoption into Q2 .
  • Pricing dynamics under tariffs: OEMs moved prices twice in April; WSO implemented list increases via tech; limited customer pushback; surcharge usage minimal across OEMs .
  • Margin trajectory: Mix toward replacement/high‑efficiency and pricing analytics support margins; management reiterated long‑term ~30% gross margin aspiration .
  • International/new construction softness and selling day impact: International −9%; commercial down ~10%; ~2% sales impact from one fewer selling day .
  • Refrigerant/container supply: Allocation constraints tied to containers (454B/32A) expected to abate by June; no shortage of refrigerant in equipment (pre‑charged) .

Estimates Context

MetricActual Q1 2025Consensus Q1 2025Surprise
Revenue ($USD Billions)$1.53 $1.65*Bold miss
EPS ($)$1.93 $2.25*Bold miss
EBITDA ($USD Millions)$118.0 [GetEstimates]*$143.7*Bold miss
  • Counts: EPS estimates = 13*, Revenue estimates = 12* (S&P Global consensus).
  • Values marked with * retrieved from S&P Global.
  • Implication: Lower‑than‑expected volumes in international/non‑equipment/commercial and small‑quarter seasonality/one fewer selling day contributed to misses; pricing/mix and transition benefits should manifest more fully in Q2/Q3 .

Key Takeaways for Investors

  • A2L transition is structurally positive: rapid adoption and pricing actions are supportive; expect greater contribution in seasonally stronger Q2/Q3 .
  • Mix/pricing tailwinds: higher‑efficiency mix and April list increases implemented via tech should aid margins; management targets ~30% GM long term .
  • Domestic momentum: early Q2 domestic sales mid‑single‑digit growth with stable margins; watch the cadence through summer .
  • International and commercial/refrigeration headwinds may fade as transition normalizes; selling‑day effects are transitory .
  • Balance sheet optionality: $432M cash, no debt supports inventory carry for transition and ongoing M&A (three acquisitions announced YTD) .
  • Dividend raised to $12.00/year ($3.00 quarterly) reflects confidence and shareholder return focus .
  • Near‑term setup: Q1 Street misses and headlines around tariffs/allocations are likely overhangs, but improving sales/margins and tech‑enabled pricing provide catalysts into peak season [GetEstimates]* .

Appendix: Additional Data

Cash Flow and Balance Sheet (Q1 2025)

MetricQ1 2025
Operating Cash Flow ($USD Millions)−$177.6
Cash & Cash Equivalents ($USD Millions)$431.8
Inventories, Net ($USD Millions)$1,776.1
Total Assets ($USD Millions)$4,454.4
Shareholders’ Equity ($USD Millions)$3,087.9

Notable Corporate Actions and Context

  • Dividend declaration of $3.00 per share on April 30, 2025; annualized to $12.00 (11% increase) .
  • Ongoing acquisitions in 2025 (Southern Ice Equipment Distributors; Lashley & Associates; Hawkins HVAC) adding 10 locations and ~$47M annualized sales in Sunbelt markets .

Values marked with * retrieved from S&P Global.