Watsco announced its results for the third quarter and nine-month period ended September 30, 2024 and provided commentary on business trends, growth opportunities, technology innovation and its financial strength.

Watsco is the largest distributor in the highly fragmented $64 billion North American HVAC/R market, with nearly 700 locations across the U.S., Canada and Latin America. Watsco estimates that it provides services on a local basis to over 375,000 owner-operators, technicians and installers annually. Since entering distribution in 1989, Watsco’s operating profits have grown at a compounded annual growth rate (CAGR) of 18% and dividends have grown at a 21% CAGR. The Company believes these long-term growth rates are indicative of strong and consistent performance across most macroeconomic and industry cycles.

A cornerstone of Watsco’s growth strategy is the acquisition of long-standing, family-owned businesses. Since 1989, Watsco has acquired 69 companies, while preserving their unique culture and legacies. Since August 2019, Watsco has acquired eight businesses that today generate approximately $1 billion in annual sales. We believe our proven entrepreneurial culture, technology advantage, strong financial position and other unique factors provide an attractive home for great businesses, as well as for the OEMs and other suppliers throughout our industry.

Watsco has also developed industry-leading technologies to enhance the customer experience, gain operating efficiencies and drive growth. Today, approximately 61,000 contractor businesses and technicians engage with Watsco digitally, complemented by modern, state-of-the-art technologies at each of our nearly 700 locations. Since the launch of its technology ecosystem, Watsco has generated higher sales growth rates among digital customers, added new customers and reduced customer attrition. The Company believes this technology advantage will continue to provide unique opportunities for long-term growth.

Highlights related to 2024 performance

Watsco’s unit sales of residential HVAC equipment stabilized during the 2024 selling season (i.e. growth rates for 2024’s second and third quarter on a combined basis) complemented by solid growth in sales of commercial HVAC systems. Business trends in October 2024 have strengthened, reflecting meaningful unit growth and an overall mid-single digit growth rate in sales.

2024 results also reflect ongoing efforts to regain sales and market share related to one of the Company’s primary OEMs after product and supply chain disruptions impacted customer relationships in 2023. Watsco and its OEM partner have made co-investments that are yielding positive results to both regain lost customers and attract new customers. The Company estimates these investments have been dilutive to gross margins by approximately 30 basis-points for the nine-month period ended September 30, 2024. Watsco is actively collaborating and investing alongside the OEM to reestablish market share and drive long-term growth.

Watsco has further strengthened its financial position in 2024 and is well-positioned to invest in growth. Operating cash flow increased 50% to a record $394 million for the nine-months ended September 30, 2024. At September 30, 2024, the Company had $550 million in cash and short-term investments, no borrowings under its $600 million revolving credit facility and $400 million of equity capacity under its ATM program.

Third quarter results 

• Sales increased 2% to a record $2.16 billion (flat on a same-store basis)
• Gross profit of $566 million with gross margin of 26.2%
• SG&A expenses increased 2% (flat on a same-store basis)
• Operating income decreased 2% to $250 million (11.6% operating margin)
• Net income attributable to Watsco of $171 million, flat versus last year
• Earnings per share declined 3% to $4.22

Sales trends (excludes acquisitions)

• 1% increase in HVAC equipment (71% of sales)
• 2% decline in other HVAC products (25% of sales)
• 4% decline in commercial refrigeration products (4% of sales)

Albert H. Nahmad, Chairman and CEO commented: “During the third quarter, Watsco achieved record sales and net income, produced strong cash flow and made further strides to improve operating efficiency across its network. We believe the market environment for HVAC products stabilized this year, and we look forward to helping our customers navigate next year’s regulatory transition toward the new A2L systems. This regulatory change will ultimately impact approximately 60% of our sales and offers our contractor customers the opportunity to upgrade older HVAC systems with new products that are both more energy-efficient and environmentally-friendly.”

Nine-month results 

• Sales increased 3% to a record $5.9 billion (1% increase on a same-store basis)
• Gross profit of $1.58 billion, flat versus the last year (gross margin of 26.9%)
• SG&A expenses increased 5% to $955 million (2% increase on a same-store basis)
• Operating income decreased 6% to $646 million (11.0% operating margin)
• EPS of $10.92 compared to $11.60 in the same period last year
• Operating cash flow improved 50% to a record $394 million versus the same period last year

Sales trends (excludes acquisitions)

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

Mr. Nahmad added: “Overall, we believe that our 2024 performance reflects market share gains and represents solid performance relative to trends in the market and the economy. We see the potential for further improving productivity and are gratified that our focus on the balance sheet has produced record cash flow. Our teams continue to lead and innovate, and I am optimistic that our industry-leading scale, entrepreneurial culture, technology advantage and strong balance sheet position us to capture growth and share.”

Culture of innovation 
Watsco remains committed to scaling the industry’s most robust, user-friendly technology platforms for HVAC/R contractors, which make it easier for customers to interact with the Company and, as a further step, modernize how contractors engage with consumers and businesses. Active technology users continue to grow sales at faster rates than non-users and, overall, we experience 57% less attrition among users of our technology platforms. The Company believes that scaling its technology platform through increased adoption by customers will lead to higher organic growth rates, lower attrition and lower costs to serve.

Specific technology-related updates 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 provides contractors digital access to more than 900,000 SKUs.
• 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 September 30, 2024 expanded 14% to approximately 61,000 users.
• E-commerce sales continue to outpace overall sales growth rates, growing 5% during the nine-month period ended September 30, 2024 and accounting for 35% 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 12-month period ended September 30, 2024. From January 1 to September 30, 2024, OnCallAir® presented quotes to approximately 258,000 households, a 17% increase, and generated $1.2 billion GMV, a 22% increase, versus the same period last year.

A.J. Nahmad, Watsco’s President, added: “Our contractor customers are the backbone of our business, and we are committed to empowering them with the best technology platforms available. Our ongoing investments in advanced digital tools and innovative solutions are designed to streamline their operations, enhance efficiency, and drive their success. We are proud to support our customers and their ambitions with the technology resources they need to thrive in a competitive landscape, and we expect to invest more over time to provide a distinct, long-term competitive advantage.”