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WATSCO INC (WSO)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 delivered mixed results: revenue fell 4% to $2.06B while EPS edged up to $4.52; record gross margin of 29.3% and operating margin expanded to 13.2% despite softer volumes and the A2L transition .
  • Wall Street consensus implied a miss: revenue ($2.062B vs $2.230B*), EPS ($4.52 vs $4.83*), and EBITDA ($276M* vs $304M*) all below expectations; management attributed pressure to weather, new construction weakness, and transition-related inefficiencies .
  • Pricing technologies and OEM price actions drove margin expansion; mix shift toward parts/supplies and ongoing AI initiatives (Ask.Watsco and AL.watsco) aim to sustain margin advantages into 2H and beyond .
  • Strategic catalysts: accelerated A2L conversion (>80% sell-through exiting June) , institutional-channel buildout (Project WatscoOne) for early 2026 , and a strengthened M&A pipeline with 10 new locations acquired YTD .

What Went Well and What Went Wrong

What Went Well

  • Record gross profit margin at 29.3% (+220 bps YoY) driven by pricing technologies and OEM pricing actions; operating margin expanded to 13.2% .
  • Management highlighted resilient execution: “we improved gross margins and generated a measure of earnings growth… our leaders are taking actions to boost sales, sustain margins and improve operating efficiencies” (Albert H. Nahmad) .
  • Digital and AI momentum: e-commerce TTM ~$2.5B (34% of sales), 70k authenticated mobile app users (+17% YoY), OnCallAir TTM GMV ~$1.6B with 1H quotes to ~177k households (+11% YoY) .

What Went Wrong

  • Volumes softer than expected: domestic -3%, non-US -12%; HVAC equipment -6% YoY, new construction down 15%-20%, Mexico volatility cost ~$0.10/share in Q2 .
  • Transition-related inefficiencies elevated SG&A (+6% YoY) due to receiving/transport and network rebalancing; inventory peaked near $2.0B and remains elevated as old/new systems are matched and sold through .
  • Q2 missed consensus on revenue, EPS, and EBITDA; the OEM pricing timing benefit likely to fade in 2H, implying margins normalize toward the “27%+” benchmark rather than the Q2 peak .

Financial Results

MetricQ2 2024Q1 2025Q2 2025
Revenue ($USD Billions)$2.139 $1.531 $2.062
Gross Profit Margin (%)27.1% 28.1% 29.3%
Operating Income ($USD Millions)$268.8 $112.2 $271.9
Operating Margin (%)12.6% 7.3% 13.2%
Diluted EPS ($)$4.49 $1.93 $4.52
CategoryMix of SalesYoY Growth
HVAC Equipment68% -6%
Other HVAC Products28% Flat
Commercial Refrigeration4% +3%
Domestic vs. Non-USDomestic -3%, Non-US -12% —
KPIsValueNotes
E-commerce Sales (TTM)~$2.5B34% of sales
Mobile App Authenticated Users>70,000+17% YoY
OnCallAir GMV (TTM)~$1.6B1H ‘25 quotes to ~177k households (+11%) and GMV +19% YoY
A2L Domestic Sales Mix25% in Q1; ~60% in Q2 >80% sell-through exiting June (company-wide)

Q2 2025 Actual vs. Consensus

MetricActualConsensus*Surprise
Revenue ($USD Billions)$2.062 $2.230*Miss
Diluted EPS ($)$4.52 $4.83*Miss
EBITDA ($USD Millions)$276*$304*Miss

Values marked * retrieved from S&P Global.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Gross Margin Benchmark2H 202527% “floor” historically Expect “27%+” in 2H; Q2 benefit from OEM pricing fades Maintained/clarified
SG&A Trajectory2H 2025—Targeting cost efficiencies as transition-related inefficiencies abate Introduced focus
Inventory TurnsMulti-year~3–3.5 recent; ~4.5 pre-COVID Target 5x (Dream Plan 2: $10B sales, 30% GM, 5x turns) Raised long-term target
Refrigerant AllocationQ3 2025Allocation constraints in H1 Expect off-allocation by August Easing constraint
DividendQ3 2025Annual dividend raised to $12.00 in April 2025 $3.00 quarterly dividend payable 7/31/2025 Maintained higher rate

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024)Previous Mentions (Q1 2025)Current Period (Q2 2025)Trend
A2L TransitionTransition “well underway,” strong Q4 execution Early-stage large-scale transition; built inventory ahead of season Domestic mix ~60% in Q2; >80% sell-through exiting June; transition complexities impacted SG&A Progressing; operational friction easing
Pricing/Margins26.7% GM in Q4; pricing tools scaling GM +60 bps to 28.1% ; OEM/tariff pricing actions noted Record 29.3% GM; OEM actions + internal optimization; 27%+ benchmark for 2H Elevated; normalizing in 2H
Digital & AIE-commerce $2.6B 2024; 64k app users; OnCallAir $1.5B ~67k users; AI pathways forming ~$2.5B e-comm TTM; 70k users; OnCallAir $1.6B TTM; Ask.Watsco and AL.watsco deployed Scaling adoption
Supply Chain/InventoryDemand planning tools; WMS/TMS investments Built strong A2L inventory; op cash use for inventory Inventory peaked ~$2.0B; working down to ~$1.8B; matching old/new systems drives SG&A Peak passed; normalization
Macro/TariffsRebound from OEM supply chain issues Tariffs noted; pricing actions 50% copper tariff starting; OEM pricing benefit fading in 2H Mixed headwinds
International/MexicoInternational stable in Q4 International -9% in Q1 Non-US -12%; Mexico cost ~$0.10 EPS Q2; improving into July Volatile but stabilizing
Institutional Channel (WatscoOne)——Build unified interface for multi-location contractors; launch early 2026 New growth vector
M&A70 acquisitions through ‘24 Active pipeline 3 acquisitions YTD; 10 locations added; evaluating larger targets Active

Management Commentary

  • “Despite the challenging environment, I am proud that we improved gross margins and generated a measure of earnings growth… Our leaders are taking actions to boost sales, sustain margins and improve operating efficiencies” — Albert H. Nahmad, CEO .
  • “Gross margins would have been in the high 27s absent any [OEM] inflation… about 200 bps of gross margin expansion attributable to pricing optimization” — Rick Gomez, CFO .
  • “We exited the quarter with more than 80% sell-through of the A2L product” — Management commentary during Q&A .
  • “Dream Plan 2 is $10 billion in revenue, 30% gross profit margin, and five times on the inventory turn” — Management .

Q&A Highlights

  • Volume drivers: weather variability (weak May north), new construction down 15%-20%, international (Mexico) volatility (~$0.10 EPS headwind in Q2; ~$0.20 YTD); July improved, August expected bigger than July .
  • Margin sustainability: Q2 benefited from OEM pricing timing; expectation for 27%+ in 2H with internal price optimization and mix shift to higher-margin parts/supplies .
  • Inventory strategy: peaked ~$2.0B; down ~$200M in Q3 to ~$1.8B; focused on reducing and improving turns toward a 5x multi-year target; matching old/new systems drives near-term SG&A .
  • Supply constraints: refrigerant allocation easing; expect off allocation by August; copper tariffs at 50% may lift non-equipment costs .
  • Institutional channel: WatscoOne aims to unify national accounts purchasing; broaden mix into parts/supplies, potentially accretive to margins .

Estimates Context

  • Q2 2025 missed consensus across key metrics: Revenue ($2.062B vs $2.230B*), EPS ($4.52 vs $4.83*), EBITDA ($276M* vs $304M*) . Values marked * retrieved from S&P Global.
  • Given margin normalization guidance (27%+) and the fade of OEM pricing benefits, models may need to reduce 2H gross margin assumptions; SG&A efficiencies and parts/supplies mix can offset partially .
  • International (Mexico) recovery and A2L sell-through above 80% exiting June support sequential improvement; however macro/tariff headwinds (copper) could pressure non-equipment costs .

Key Takeaways for Investors

  • Margin execution is the near-term anchor: expect gross margin to normalize toward 27%+ in H2 as OEM pricing tailwinds fade; internal pricing optimization and parts mix should help sustain elevated levels .
  • Volumes remain the swing factor: weather, new construction weakness, and lingering transition frictions weighed on Q2; watch July/August trajectory for signs of sequential improvement .
  • Inventory and SG&A should improve: with A2L adoption >80% sell-through and reduced refrigerant allocation issues by August, branch-level inefficiencies are expected to ease; monitor inventory turns progress toward 5x .
  • Strategic optionality: WatscoOne institutional channel and continued M&A provide multi-year growth vectors; AI platforms (Ask.Watsco, AL.watsco) can enhance productivity and customer engagement at scale .
  • Estimate revisions likely lower near term: Q2 misses on revenue/EPS/EBITDA and commentary on margin normalization suggest cautious 2H updates; balance against internal pricing/mix levers and easing transition frictions .
  • Dividend remains attractive: $3.00 quarterly payout and debt-free balance sheet provide income support and investment capacity through cycle .
Values marked * retrieved from S&P Global.