Watsco, Inc.

Good day and welcome to the What's Co first quarter 2025 earnings conference call. All participants will be in lesson only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your questions, please press star, then two. Please note, this event has been recorded. I would now like to turn the conference over to Mr. Albert Nahmad, Chief Executive Officer. Thank you, and over to you, sir.

Good morning, everyone. Welcome to Watsco's first quarter 2025 earnings call. And this is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President, Paul Johnston, Barry Logan, and Rick Gomez. 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. Pulsement results may differ materially from the forward-looking statements. I'm moving on to our report. Whatco reported a good first quarter. We have a lot of positive things going on related to the transition of products to the new A2L system. They will ultimately impact around 55% of our total sales. Our teams are working to convert nearly $1 billion in inventory to the new system. We have trained thousands of customers, and we have updated our technology platform to provide the needed functionality to our customers ahead of the selling season. Similar regulatory, let me start again, similar regulatory mandates have occurred every 10 to 15 years and have historically been good for business. The new systems offer solutions to homeowners and businesses that are both more efficient and more sustainable and provide enhanced sales and profitability for both us and our customers. In terms of trends, our core HVAC replacement business is off to a strong start. Sales and replacement systems, the core of our business, increased 10% on higher volumes. New pricing was introduced and realized in the market, and we also saw the richer mix of high-efficiency systems. Gross margins also improved, an important benchmark following the launch of their new systems, which we believe continues to be an area of future opportunity. I want to emphasize that the first quarter is the smallest and most seasonal quarter of the year, and while they deserve Early in the selling season, recent sales and margin trends have improved. Looking forward, we expect the benefits of the new A2L products will become proportionally larger over the remainder of the year, especially during the seasonally stronger second and third quarters. Our balance sheet remains in pristine condition with $430 million in cash, no debt, and over $3 billion in equity. We raised our annual dividend 11% to $12 per share in April. 2025 marks our 51st consecutive year of paying dividends. Now, turning to current events, we are carefully monitoring the potential impact of proposed tariffs on our business. On our domestic front, on the domestic front, which represents 91% of first quarter sales. We are collaborating closely with our OEM partners on current and future pricing actions that may be required in response to the tariffs. We see greater uncertainty for 9% of our sales that are in Canada and Latin America, and we will likely react as needed to grow sales and profitability in those markets. Big picture, We possess the scale, the technology, and the relationships to act quickly and efficiently to these changing market conditions. As always, we feel it's important to keep the long-term perspective in mind. Wattsco has delivered superior long-term returns over most any time period. We are the market leaders in a highly fragmented $74 billion distribution market. The products we sell are a necessity, and the install base continues to grow. We have deep collaborative relationships with the industry leaders, OEMs. We offer the broadest product variety and operate the largest network. And our unique ownership culture, which is shared by more than 4,000 employees, rewards and incentivizes long-term performance. As always, we invite you to come and visit Miami if you want to learn more and share the continued optimism that we have for our company. With that, let's turn to Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one, on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.