Press release·11/01/2024 23:52:34

Watsco’s Steady Performance Amidst Challenges

Watsco, Inc., the largest distributor of air conditioning, heating, and refrigeration equipment in North America, has reported its financial results for the third quarter and first nine months of 2024. Despite facing various macroeconomic and industry-specific headwinds, the company has maintained a steady performance, showcasing its resilience and adaptability.

Financial Highlights

For the third quarter of 2024, Watsco reported revenues of $2.16 billion, a 2% increase compared to the same period in 2023. The company’s gross profit margin, however, declined by 50 basis points to 26.2%, primarily due to the impact of pricing and sales mix for HVAC equipment. Selling, general, and administrative expenses increased by 2% to $326.4 million, but remained flat on a same-store basis.

During the nine-month period ended September 30, 2024, Watsco’s revenues grew by 3% to $5.86 billion, with same-store sales increasing by 1%. Gross profit margin declined by 90 basis points to 26.9%, partly due to the impact of pricing and sales mix, as well as the company’s efforts to regain sales and market share lost in 2023 due to constrained inventory availability from a primary OEM partner.

Selling, general, and administrative expenses increased by 5% to $955.0 million for the nine-month period, with a 2% increase on a same-store basis, primarily due to higher fixed costs and non-recurring items.

Operational Highlights

Watsco’s performance was influenced by several key factors:

1. Climate Change and Emissions Reduction: The company believes it plays a significant role in the drive to lower CO2e emissions, as the replacement of older, less efficient HVAC systems with higher-efficiency systems is a crucial step in reducing energy consumption and carbon footprints. Watsco has invested in tools and technology to capture a richer sales mix of high-efficiency systems over time, and regulatory changes are expected to provide a catalyst for greater sales of these systems.

2. Impact of Hurricanes: While Hurricane Helene and Hurricane Milton disrupted sales and operations in several of Watsco’s Southeastern U.S. markets, the company does not expect these disruptions to have a material impact on its future operations.

3. Acquisitions: Watsco completed the acquisitions of Commercial Specialists, Inc. (CSI) in February 2024, Gateway Supply Company, Inc. (GWS) in September 2023, and Capitol District Supply Co., Inc. (Capitol) in March 2023, which contributed to the company’s revenue growth.

4. Liquidity and Capital Resources: Watsco maintains a strong liquidity position, with $294.4 million in cash and cash equivalents and $255.7 million in short-term cash investments as of September 30, 2024. The company also has access to a $600.0 million revolving credit facility and has been actively utilizing its at-the-market (ATM) offering program to raise additional capital.

Outlook and Challenges

Watsco faces several challenges and uncertainties that could impact its future performance:

1. Macroeconomic Conditions: The company’s operations are influenced by general economic conditions, consumer spending, housing starts and completions, and other macroeconomic factors, which could fluctuate and affect demand for HVAC/R products.

2. Supply Chain and Commodity Costs: Supplier concentration and fluctuations in certain commodity costs, such as those related to the supply chain, could impact Watsco’s operations and profitability.

3. Regulatory Changes: Federal, state, and local regulations, including those related to energy efficiency standards and refrigerant phase-outs, can affect the company’s product offerings and sales mix.

4. Interest Rate and Inflation Impacts: Prevailing interest rates and the effect of inflation could influence Watsco’s borrowing costs and consumer demand for its products.

5. Cybersecurity Risks: The company is exposed to cybersecurity risks that could disrupt its operations and financial performance.

Despite these challenges, Watsco remains optimistic about its future prospects. The company believes that the passage of the U.S. Inflation Reduction Act of 2022, which includes incentives for the installation of high-efficiency HVAC systems, will drive increased demand for its products. Additionally, Watsco’s focus on sustainability and its role in reducing greenhouse gas emissions through the sale of higher-efficiency HVAC systems positions it well to capitalize on the growing demand for energy-efficient solutions.

Liquidity and Capital Allocation

Watsco’s strong liquidity position, with $294.4 million in cash and cash equivalents and $255.7 million in short-term cash investments, provides the company with the flexibility to fund its operations, pursue strategic acquisitions, and return capital to shareholders.

The company’s access to a $600.0 million revolving credit facility and its active use of the ATM offering program further strengthen its liquidity and capital resources. Watsco has been prudent in its capital allocation, using its cash flows and borrowing capacity to invest in growth opportunities, such as acquisitions, while also returning capital to shareholders through dividends.

During the nine months ended September 30, 2024, Watsco paid cash dividends of $7.85 per share on both Common and Class B common stock, reflecting its commitment to shareholder returns. The company also has a share repurchase program in place, with 1,129,087 shares remaining authorized for repurchase at the end of the third quarter.

Acquisitions and Investments

Watsco’s growth strategy includes strategic acquisitions and investments in unconsolidated entities. In 2024, the company acquired CSI, a distributor of HVAC products, and in 2023, it acquired GWS, a plumbing and HVAC distributor, and Capitol, a distributor of plumbing and HVAC products.

The company also has a 38.4% equity interest in Russell Sigler, Inc. (RSI), an HVAC distributor, through its joint venture with Carrier Global Corporation. Watsco’s proportionate share of RSI’s net income is included in its other income, contributing to the company’s overall profitability.

Conclusion

Watsco’s performance in the third quarter and first nine months of 2024 demonstrates its ability to navigate the challenges faced by the HVAC/R industry. While the company experienced some margin pressure and higher expenses, it was able to maintain revenue growth and generate strong cash flows.

Looking ahead, Watsco remains focused on capitalizing on the growing demand for energy-efficient HVAC systems, driven by regulatory changes and consumer incentives. The company’s strong liquidity position, access to capital, and strategic acquisitions position it well to continue its growth trajectory and create value for its shareholders.

Despite the various macroeconomic and industry-specific headwinds, Watsco’s resilience and adaptability have allowed it to deliver a steady performance, reinforcing its position as a leading player in the HVAC/R distribution industry.