Key Points
- Revenue exceeded analyst expectations by $20.42 million, totaling $2,207 million.
- Adjusted Earnings Per Share (EPS) slightly missed estimates by $0.02, coming in at $4.68 per share.
- Revenue grew by 8.07% year-over-year.
Watsco (WSO 1.48%), the largest distributor of HVAC/R equipment in North America, released its Q2 2024 earnings on July 30. The company reported revenue of $2,207 million, surpassing analyst estimates of $2,186.58 million. However, the Adjusted EPS came in at $4.68, slightly below the estimated $4.70 per share. Overall, the quarter showed strong sales growth but pressure on profitability.
| Metric | Current Period | Analyst Estimate | Prior Year | Year-over-Year Change |
|---|---|---|---|---|
| Total Revenue | $2,207 million | $2,186.58 million | $2,042 million | 8.07% |
| Adjusted EPS | $4.68 | $4.70 | $4.46 | 4.93% |
| SG&A Expenses | $212 million | N/A | $208 million | 1.92% |
| Inventory Levels | $1,050 million | N/A | $1,012 million | 3.76% |
| Annualized Dividend Per Share | $10.80 | N/A | $9.82 | 10% |
| Source: Analyst estimates for the quarter provided by FactSet |
Business Overview
Watsco is the largest distributor of heating, ventilation, air conditioning, and refrigeration (HVAC/R) equipment in North America. The company operates from 690 locations, serving over 125,000 contractors and dealers. Watsco focuses on market leadership and growth through strategic acquisitions and organic expansion.
Recently, Watsco has concentrated on enhancing technological capabilities and forming robust partnerships with leading HVAC/R manufacturers. Key success factors include strong supplier relationships, technological innovation, and market focus.
Quarterly Highlights
During Q2 2024, the most notable achievement was the revenue performance, which grew by 8.07% year-over-year to $2,207 million, surpassing the analyst estimate of $2,186.58 million. The company's ongoing strategy of market leadership and expansion via acquisitions contributed significantly to this growth.
Sales of HVAC equipment sourced from about 20 vendors represented 69% of revenues. Strong supplier partnerships, especially with Carrier, were pivotal, accounting for 65% of purchases and 55% of revenues through joint ventures.
The EPS of $4.68 slightly missed the $4.70 estimate but showed a year-over-year increase of 4.93%. Despite the stable earnings, the pressure on profitability was evident. SG&A expenses rose by 1.92%, totaling $212 million, impacting operating margins, which decreased from 10.6% to 8.1%. Inventory levels saw a 3.76% increase, partly due to opportunistic pre-buying.
Management highlighted improvements in sales trends for April ahead of the summer season, which is significant for HVAC/R sales. Record cash flow and a successful equity raise of $282 million also marked the quarter, providing capital for further acquisitions.
The company boosted its annual dividend by 10%, reflecting financial health and a commitment to returning value to shareholders. OnCall Air, a digital sales platform, expanded substantially, presenting quotes to 61,000 households, a 15% increase year-over-year, and generating $269 million in Gross Merchandise Value (GMV).
Looking Ahead
In its forward outlook, Watsco's management emphasized long-term investments. Strategies will continue to focus on leveraging technology to enhance operational efficiencies and customer experience. The company plans to proceed cautiously in transitioning to A2L refrigerants, avoiding speculative buying practices.
Investors should watch for changes in the residential equipment market and the company's ability to manage inventory levels effectively. Additionally, how Watsco navigates regulatory compliance costs and capitalizes on government incentives will be crucial for maintaining its market leadership.
