Watsco, Inc. (WSO) Q2 2023 Earnings Call Transcript

For the period ending June 30, 2023

August 1, 2023 10:00 a.m. ET

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Watsco Second Quarter 2023 Earnings Call. [Operator Instructions] This event is being recorded.

I would now like to turn the conference over to Albert Nahmad, Chairman and CEO. Please go ahead.

Albert Nahmad

Good morning, everyone. Welcome to our second quarter earnings call. And this is Al Nahmad, Chairman and CEO. And with me is A.J. Nahmad, President; Paul Johnston, Barry Logan and Rick Gomes. Now before we start, our cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements.

Watsco delivered a solid quarter against a challenging backdrop. It was the second strongest quarterly performance in our history, which is about 50 years, only surpassed by last year's record-breaking second quarter when sales were up 15% and earnings per share was up 33% last year. Our teams executed very well to generate this quarter's results, which came with considerable challenges, including product availability, as mentioned in our press release. The product shortages are a consequence of an immense product transition that is playing out this year following the step-up of minimum efficiency standards mandated across the United States.

Approximately 60% of the equipment we are selling today represents new or revamped products. Pricing capture and margins consistency have done well, as evidenced by our gross margin performance for the quarter and the year-to-date. We are converting inventory and balancing our product offerings across our footprint. We have trained thousands of customers on the new products. We have updated our digital library to include all of the new products, adding over 400,000 new SKUs since the start of the year.

The transition, however, has been uneven. One of our primary OEM partners was disproportionately impacted, affecting product availability of higher efficiency systems and, therefore, affecting our sales. We estimated a second sales impact of $75 million to $80 million, and as much as $125 million for the 6-month period ended June 30. The reality is all of our OEM partners have been affected to some measure and all are working to improve supply chain and help us meet the needs of our customers.

As we mentioned, beyond the tough comps and supply chain issues, the arrival of a hot summer weather was delayed this year as evidenced by the decline in cooling degree days. Cooling degree days is measured by the U.S. government, so we have a lot of information as to the demand for cooling systems during the year. Summer has now arrived and current business conditions are encouraging. Apart from the product transition, which largely affected our residential business, other facets of the business are performing very well.