Watsco’s first quarter fell short of Wall Street’s expectations, prompting a notably negative market reaction. Management pointed to the ongoing industry-wide transition from legacy 410A refrigerants to new A2L systems as a major operational focus, impacting about 55% of total sales. CEO Albert Nahmad described the shift as “a lot of positive things going on,” while acknowledging the logistical complexity of converting nearly $1 billion in inventory. Although the core HVAC replacement business saw volume growth and improved gross margins due to favorable product mix and pricing, weaker performance in international markets and non-equipment product lines weighed on results. Management’s comments reflected a cautious outlook on certain segments, particularly commercial and international, citing both the smaller seasonal impact of the first quarter and near-term disruptions from the refrigerant transition.
Is now the time to buy WSO? Find out in our full research report (it’s free).
Watsco (WSO) Q1 CY2025 Highlights:
- Revenue: $1.53 billion vs analyst estimates of $1.65 billion (2.2% year-on-year decline, 7.3% miss)
- Operating Margin: 7.3%, in line with the same quarter last year
- Same-Store Sales fell 2% year on year, in line with the same quarter last year
- Market Capitalization: $16.19 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions Watsco’s Q1 Earnings Call
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Stephen Volkmann (Jefferies) asked how much of the replacement business was legacy 410A versus new A2L systems; President Paul Johnston clarified that about 20-25% was A2L in Q1, with the remainder 410A and a rapid shift expected in coming months.
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David Manthey (Baird) inquired about the softness in residential new construction and share retention; management responded that the primary headwinds were related to the refrigerant transition and fewer selling days, and affirmed they have not lost share in new construction.
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Jeffrey Sprague (Vertical Research) questioned the effect of OEM price increases and whether price surcharges or permanent increases were being used; Johnston explained that nearly all OEMs opted for price increases rather than surcharges, and that Watsco can implement these changes instantaneously using its technology.
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Tommy Moll (Stephens) asked how Watsco’s technology enables more precise pricing at the branch level; President A.J. Nahmad detailed how proprietary analytics tools allow the company to set differentiated pricing for each product and customer, enhancing margin management.
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Chris Snyder (Morgan Stanley) probed whether competitors still had significant legacy 410A inventory and how fast 454B (A2L) adoption is progressing; management said most distributors will exhaust 410A by Q2, and that over 60% of recent sales are already A2L products.
Catalysts in Upcoming Quarters
In coming quarters, the StockStory team will be watching (1) the pace and margin impact of the A2L refrigerant transition and whether gross profit improves as legacy inventory phases out, (2) the company’s ability to manage price increases and maintain customer demand in the face of new tariffs and cost pressures, and (3) recovery trends in commercial and international segments, which underperformed this quarter. The evolution of supply chain bottlenecks and OEM pricing actions will also be important signposts.
Watsco currently trades at $423.41, down from $504.22 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free).
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