Watsco announced its operating results for the second quarter and six-month period ended June 30, 2024. Commentary was also provided on business trends, growth opportunities, technology innovation and its financial position.

Second Quarter Results

• Revenue increased 7% to a record $2.1 billion (4% increase on a same-store basis)
• Gross profit increased 3% to $580 million (27.1% gross margin)
• SG&A increased 5% (2% increase on a same-store basis) and improved 30 basis-points as a percentage of sales
• Operating income of $269 million (operating margin of 12.6%)
• Earnings per share of $4.49 versus $4.42 last year
• Operating cash flow improved by $100 million compared to last year ($58 million of cash flow in 2024 versus a $42 million cash use in 2023)

Sales trends (excluding acquisitions)

• 8% increase in HVAC equipment (71% of sales)
• 1% decline in other HVAC products (25% of sales)
• 1% increase in commercial refrigeration products (4% of sales)

Albert H. Nahmad, Watsco’s Chairman and CEO noted: “We are pleased with our second quarter results, which reflect record sales, strong cash flow and a strengthened balance sheet, which is particularly gratifying during our peak selling season. In addition, we made strides toward producing greater operating efficiencies across our network, as evidenced by our SG&A performance. We now look ahead to the next important regulatory transition and the introduction of new products by our OEM partners later this year.”

Second quarter sales reflect healthier residential end-markets, reflecting 6% growth in ducted residential units and a 3% increase in average selling price. In addition, sales of commercial products grew 8% during the quarter on top of the 18% growth achieved during the comparable period last year.

First-Half Results

• Revenue increased 4% to a record $3.7 billion (1% increase on a same-store basis)
• Gross profit of $1.0 billion (27.3% gross margin)
• SG&A increase of 6% (3% increase on a same-store basis)
• Operating income of $395 million (operating margin of 10.7%)
• Earnings per share of $6.69 versus $7.25 last year
• Operating cash flow improved by $250 million compared to last year ($161 million of cash flow in 2024 versus an $89 million cash use in 2023)

Sales trends (excluding acquisitions)

• 4% increase in HVAC equipment (70% of sales)
• 3% decline in other HVAC products (26% of sales)
• 2% increase in commercial refrigeration products (4% of sales)

Mr. Nahmad further commented: “Given our strong balance sheet and solid cash flow, Watsco is well-positioned to invest in future growth opportunities to expand our business. We look forward to investing in market share opportunities as the upcoming regulatory change and product transitions unfold. We are also prepared to partner with other great family businesses in our industry. Our scale, technology and entrepreneurial culture gives us confidence in the growth outlook.”

Technology Transformation
 Watsco has developed the industry’s leading digital ecosystem of technologies that transform the customer experience and reshape how our industry operates. Through platforms like HVAC Pro+ and OnCallAir®, Watsco has enabled above-market growth for its customers and, in turn, has made it easier for contractors to do business thereby improving their speed, efficiency and profitability. Updates to our various technology initiatives include:

• Product Information Management (PIM), Watsco’s repository of rich product information, is delivered seamlessly through its mobile apps and e-commerce platform. Watsco’s PIM database contains more than 1.5 million SKUs accessible to more than 375,000 contractors and technicians annually.
• HVAC Pro+ Mobile Apps provide contractors real-time access to critical information that improves speed to market and enhances efficiency for the customer. This includes real-time technical support, product specifications, inventory availability, warranty look-up and processing, system matchups, e-commerce, and much more. The community of authenticated users (those linked to an e-commerce account) over the 12-month period ended June 30, 2024 expanded 12% to approximately 60,000 users.
• E-commerce sales continue to outpace overall sales growth rates, growing 13% during the quarter and accounting for 36% of total sales (inclusive of revenues from recently acquired businesses), and in some regions, exceed 60% of total sales.
• OnCallAir®, Watsco’s digital sales platform, has increased penetration among HVAC contractors as digital engagement with homeowners expands. The annualized gross merchandise value (GMV) of products sold by customers through OnCallAir® was approximately $1.4 billion for the twelve-month period ended June 30, 2024. During the first-half of 2024, OnCallAir® presented quotes to approximately 160,000 households, an 18% increase, and generated $743 million GMV, a 27% increase, versus the comparable period last year.

A.J. Nahmad, Watsco’s President, commented: “We continue to make good progress towards our goal of scaling Watsco’s customer-focused technologies to more and more contractors. Our e-commerce sales grew at nearly double the rate of overall sales, indicating more progress in scaling our industry-leading tools and platforms. We are also engaging with more contractors and technicians than ever before through our mobile platforms, which should generate more operating efficiencies over time. I am encouraged by our progress and we have produced great results, but I feel the bulk of the benefit from our technology investments remains ahead of us.”

Long-Term Growth Drivers
 In addition to the Company’s unique technology investments that are expected to drive future growth, Watsco believes that various industry-driven catalysts will support continued growth and profitability in the years ahead. These industry catalysts – coupled with Watsco’s scale, technology platforms, OEM relationships and entrepreneurial culture – are competitive advantages that we believe position us favorably over the long-term.

Regulatory Changes. New energy efficiency standards and a new generation of refrigerants translate to more product innovation, improved homeowner energy efficiency, reduced carbon footprint of end-users, and increased average selling prices over time.

Technology Investments. Watsco is investing to enhance its technology advantage in the HVAC/R distribution industry. Customers who become active users of our technology platforms produce higher growth rates and exhibit approximately 50% less attrition. Consequently, the Company believes that increased technology adoption by more contractors will aid future growth and profitability and will lower the Company’s overall cost to serve its customers. Watsco has also invested in numerous internal technology platforms with the goal of further enhancing margins and improving operating efficiencies.

Electrification of Heating Systems. Regulatory catalysts and electrification trends are also influencing the adoption of heat pump HVAC systems in lieu of traditional gas furnaces and other forms of fossil-fuel heating. For the twelve-month period ended June 30, 2024, sales of heat pump HVAC systems exceeded $1.2 billion and continued to outpace growth rates for conventional straight-cool HVAC systems.

Growth of Ductless HVAC Systems. The growing acceptance of ductless HVAC systems in both residential and commercial applications is also a long-term growth driver. We are the leading distributor of ductless products in North America, representing approximately 20 brands manufactured around the world. Long-term growth in sales of ductless HVAC systems continue to outpace growth rates of conventional ducted HVAC systems.

Buy and Build Acquisition Strategy. Watsco has been the partner of choice for 69 market-leading independent distributors, and these acquisitions are an important long-term driver of the Company’s growth and scale. Our “buy and build” strategy builds upon their long-standing legacies through investment in new locations, new products and by leveraging Watsco’s technology platforms. The $64 billion HVAC/R distribution landscape in North America is still highly fragmented with an estimated 2,200 independent distributors.

Cash Flow, Financial Strength and Liquidity
 Watsco’s strong balance sheet and liquidity are key components of the Company’s ability to drive growth across any industry or macroeconomic cycle. As of June 30, 2024, Watsco had $425 million of cash and short-term investments and no borrowings under its unsecured $600 million credit facility, providing significant access to capital to invest in new growth opportunities. In March 2024, the Company raised $282 million of new capital from the sale of 712,000 shares of Common stock under its ATM program. We have executed a supplemental ATM program in May 2024 providing equity sales capacity of $400 million.

Watsco has paid dividends for 50 consecutive years. The Company increased its annual dividend rate by 10%, effective in April 2024, to $10.80 per share. The Company’s philosophy is to share increasing amounts of cash flow through higher dividends while maintaining a conservative financial position with continued capacity to build its network. Future dividend increases will be considered in light of investment opportunities, general economic conditions and the Company’s overall financial position.