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WATSCO INC (WSO)·Q3 2024 Earnings Summary

Executive Summary

  • Record Q3 sales of $2.16B (+2% y/y) with EPS of $4.22 (-3% y/y); gross margin compressed 50 bps to 26.2% on mix and co-investment with a major OEM; operating margin 11.6% (-50 bps y/y) .
  • October-to-date update: mid-single-digit sales growth driven by meaningful unit growth, pointing to improving momentum into Q4; management believes share gains continued .
  • Mix headwinds: equipment outperformed parts/supplies; ductless grew double-digit while ducted units declined 1%; transactional (invoice) margins held steady, but overall GM was diluted by ~30 bps YTD from targeted OEM recovery investments .
  • Balance sheet and cash flow strength provide strategic optionality: 9M operating cash flow +50% to a record $394M; $550M cash/short-term investments and no revolver borrowings; maintained $2.70 quarterly dividend ($10.80 annual) .
  • Near-term catalysts: continued October strength, A2L refrigerant transition with expected 8–10% OEM list pricing uplift and greater full-system replacements, and a path back toward ≥27% gross margin with longer-term ambition of ~30% as mix/pricing reset under A2L .

What Went Well and What Went Wrong

What Went Well

  • Record Q3 sales and net income; management cites market stabilization and continued share gains; October tracking mid-single-digit growth with meaningful unit gains .
  • Commercial HVAC remained solid; overall units +4% in Q3 with strong ductless growth (double-digit); technology adoption advanced (61k authenticated users; e-commerce ~35% of sales YTD; OnCallAir GMV ~$1.4B) .
  • Cash generation and liquidity improved meaningfully: 9M operating cash flow +50% to $394M; $550M cash/ST investments; no revolver borrowings; dividend maintained at $2.70 per quarter .
  • Management quote: “We believe the market environment for HVAC products stabilized this year… [A2L] will ultimately impact approximately 60% of our sales” — Albert H. Nahmad, Chairman & CEO .

What Went Wrong

  • Gross margin fell 50 bps y/y to 26.2% and operating margin fell 50 bps to 11.6% on mix (equipment vs. parts, residential vs. commercial, new construction) and OEM co-investment; EPS declined 3% y/y .
  • Category mix: other HVAC products -2% and commercial refrigeration -4% y/y (ex-acquisitions), weighing total GM; ducted unit price -1% in Q3 on mix even as transactional margins held steady .
  • Inventory dollars elevated into the A2L transition and R-410A prebuy; seasonality of inventory likely to look different over next quarter or two before normalizing mid-2025 .

Financial Results

Headline metrics vs prior periods

MetricQ3 2023Q2 2024Q3 2024
Revenue ($USD Millions)$2,126.8 $2,139.3 $2,160.0
Gross Margin %26.7% 27.1% 26.2%
Operating Margin %12.1% 12.6% 11.6%
Net Income Attributable to Watsco ($MM)$171.0 $181.4 $171.0
Diluted EPS ($)$4.35 $4.49 $4.22

Sales mix and category trends (Q3 2024, ex-acquisitions)

Category% of SalesY/Y Change
HVAC Equipment71% +1%
Other HVAC Products25% -2%
Commercial Refrigeration4% -4%

Additional KPIs and balance sheet/cash flow

KPIPeriodValue
Operating Cash Flow9M 2024$394M (+50% y/y)
Cash + Short-term Investments9/30/2024$550M
Revolver Borrowings9/30/2024$0 (capacity $600M)
E-commerce as % of Sales9M 202435%
Authenticated Tech UsersTTM to 9/30/2024~61,000 (+14% y/y)
OnCallAir Annualized GMVTTM to 9/30/2024~$1.4B
October Trend (QTD)October 2024Mid-single-digit sales growth; meaningful unit growth

Notes: “Same-store” metrics are non-GAAP as defined by the company .

Guidance Changes

Watsco does not provide formal quantitative revenue/EPS guidance; management offered qualitative updates and policy items.

MetricPeriodPrevious GuidanceCurrent Guidance/UpdateChange
Revenue/EPSFYNo formal guidanceNo formal guidance; October sales up mid-single digits QTD with meaningful unit growth Update (trend)
Gross MarginNear-term/Long-termTarget ~27% near term (historical commentary) Management reiterates ability to return to ≥27% with long-term ambition ~30%; near-term mix headwinds and ~30 bps YTD dilution from OEM co-investment Maintained/Elaborated
Pricing (A2L transition)2025 transitionInitial OEM indications ~10–15% (Q1 commentary) Updated expectation “low double-digit… around 8–10%,” with full-system replacements likely to rise Lowered vs earlier range
DividendOngoing$2.70 quarterly ($10.80 annual) since Apr-2024 Declared $2.70 quarterly dividend on Oct 1, 2024 (payable Oct 31) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2024 / Q2 2024)Current Period (Q3 2024)Trend
A2L readiness & pricingOEM A2L pricing letters arriving; 10–15% range discussed; A2L shipments expected 3Q–4Q 2024 start, more in 1H25 Most OEMs “ready”; early launches begun; pricing “around 8–10%,” more clarity 2Q25; full system replacements expected to increase Advancing; pricing expectations refined lower
Mix & marginsNear-term GM ~27% achievable; multiple drivers (price, mix, etc.) Transactional (invoice) margins stable; overall GM pressured by mix (equipment>parts, residential vs commercial, new construction, customer mix) and OEM co-investment; ambition to reach 30% LT Stabilizing transactional margin; mix headwinds persist near term
Demand/unitsApril improving to mid-single-digit same-store; resi units down mid-single in Q1; commercial healthy Q3 units +4% overall; ductless double-digit; ducted -1%; October mid-single-digit sales growth with meaningful unit growth Improving
Supply chain/OEM recoveryInventory a bit elevated; planning balanced A2L transition; recovery with a major OEM in focus Co-investment with primary OEM driving share recovery in FL/TX/CA/Carolinas; ~30 bps GM dilution YTD Recovery continues; dilution fades into 2025
Inventory & prebuyExpect temporary higher inventory during transition; avoid speculative positions R-410A “last call” prebuy affecting 4Q seasonality; inventory cadence different over next couple quarters before normalizing mid-2025 Temporary elevation; normalize mid-2025
Weather/events & macroIRA incentives rollout timing uncertain; early heat pump strength Hurricanes Helene/Milton: local disruptions/repair parts uptick; usually not material at national scale; insurance flows may help into late 2024/2025 Neutral-to-modest tailwind localized

Management Commentary

  • “Watsco achieved record sales and net income… [and] we look forward to helping our customers navigate next year’s regulatory transition toward the new A2L systems… [impacting] approximately 60% of our sales” — Albert H. Nahmad, CEO .
  • “Our engines are revved up… ambition… 30% [gross margin]… we’re investing there and have high expectations.” — Management on long-term GM ambition .
  • “Transactional margin… is constant versus last year… the 3–4 elements of mix… explain… the year-to-date margin profile.” — Rick Gomez .
  • “October sales are up mid-single digits and driven by meaningful unit growth… we also believe we have gained share.” — Management .
  • “Pricing [for A2L] has been… around 8–10%… consumer will be buying more systems (indoor + outdoor), not just outdoor units.” — Paul Johnston .

Q&A Highlights

  • Hurricanes impact: localized branch closures with quick normalization; initial uptick in repair parts; insurance-related replacement demand may flow over ensuing 30–90 days; not material at national scale .
  • Gross margin bridge: transactional margin flat; mix headwinds across equipment vs non-equipment, residential vs commercial, seasonality/new construction, and customer mix; co-investment with OEM weighed margins YTD (~30 bps) but expected to dissipate in 2025; long-term GM ambition ~30% .
  • A2L transition: broad OEM readiness; early shipments in Q4 at some OEMs; pricing “8–10%” vs earlier 10–15%; expects more full-system replacements, adding to ticket sizes; complexity in sell-through pricing by customer/market .
  • Inventory cadence: 410A prebuy drives 4Q shipments/1Q sell-through; A2L intake to ramp as 410A sells down; seasonality atypical next 1–2 quarters, normalizing mid-2025 .
  • Demand mix: Q3 units +4% overall; ductless strong double-digit; ducted -1% with price -1% on mix; October unit growth meaningful .

Estimates Context

  • Wall Street consensus (S&P Global) for Q3 2024 EPS/revenue was unavailable during this session due to data access limits, so we cannot quantify beat/miss at this time. Values retrieved from S&P Global were unavailable due to access limits.
  • Implications for estimates: mix headwinds and co-investment likely to pressure near-term gross margin assumptions, but October acceleration and A2L 2025 pricing (8–10%) support potential upward revisions to 2025 revenue/ASP and mix toward full-system replacements; path back toward ≥27% GM appears intact as mix normalizes and co-investment fades .

Key Takeaways for Investors

  • Momentum improving: October mid-single-digit sales with meaningful unit growth suggests stabilization turning to growth as heating season begins .
  • Margin story is about mix, not price: transactional margins steady; mix (equipment vs parts, resi/commercial, new construction) and OEM recovery co-investment explain the GM dip; model gradual reversion to ≥27% in 2025 as co-investment fades .
  • A2L transition is a 2025 catalyst: industry-wide reprice/reset (8–10%), more full-system replacements, and full inventory cycling over 12 months should support ASPs and margins if executed well .
  • Ductless remains a structural share/growth driver: double-digit growth offsets ducted softness; ongoing investment (e.g., Gree, Carrier ductless) to continue to outpace conventional .
  • Strong cash generation and balance sheet underpin strategy: record 9M CFO, $550M liquidity, no revolver borrowings, and consistent dividend ($2.70/qtr) provide capacity for M&A and organic initiatives .
  • Watch inventory cadence: R-410A prebuy and A2L ramp will skew seasonal inventory patterns over next 1–2 quarters; expect normalization by mid-2025 .
  • Potential near-term stock catalysts: continued Q4 demand strength, clarity on A2L pricing capture and system mix, and signs of GM re-expansion toward 27% as mix improves and OEM co-investment impact abates .