A slow Q2 for the largest HVAC distributor, Watsco, but record gross profits and climbing GM% helped offset some of the headwinds.
Watsco – Watsco, headquartered in Miami, Florida, is the largest distributor in the North American market for HVAC products, with over 375,000 contractors, technicians, and installers visiting or calling one of its 701 locations each year, reported second quarter 2025 results on July 30, 2025.
During this period of ongoing regulatory transition to next-generation HVAC equipment that incorporates A2L refrigerants, revenues decreased 4% to $2.06 billion in the quarter. Despite the revenue decline, Watsco achieved record gross profits, which increased 4% to a $603 million and record gross profit margin, which expanded 220 basis-points to 29.3%.
The miss on both the top and the bottom line, despite record profit margins was driven by weak demand. In addition, dragging sales down was the cautious consumer, weak housing market, poor spring weather, A2L disruption, tariffs hurting international markets, and R454B refrigerant shortages.
The refrigerant transition encompasses HVAC equipment for residential and commercial applications and will ultimately result in the conversion of nearly $1 billion of inventory (55% of all products sold) across more than 650 locations in the U.S. To capitalize on the transition, Watsco has made substantial investments in customer training, technology enhancements and new inventory to support customers during the transition.
Second quarter sales reflect double-digit pricing realization primarily attributable to the A2L product transition, offset by lower unit volumes resulting from more temperate weather conditions, lower homebuilding activity and transition-related impacts on new system installations. These impacts are expected to diminish as the market fully converts to the new products over the second half of the year.
Additional Watsco sales details:
- 3% decline in domestic markets and a 12% decline in non-US markets
- 6% decrease in HVAC equipment (68% of sales)
- Flat sales for other HVAC products (28% of sales)
- 3% increase in commercial refrigeration products (4% of sales)
The company provided additional details on their innovation and strategic technology initiatives, calling out:
- Watsco’s HVAC Pro+ Mobile Apps and E-Commerce platform – these technologies provide contractors with a seamless digital experience in every aspect of their business from sourcing products, accessing technical help, real-time inventory, pricing, product information and more. These tools empower customers to self-serve, place orders quickly 24/7 and benefit from features like intelligent search, dynamic reordering, technical knowledge and product recommendations.
- The user community of HVAC Pro+ Mobile Apps grew 17% to more than 70,000 users over the last 12 months
- E-commerce sales totaled approximately $2.5 billion in the last year and comprise 34% of the Company’s overall sales
- OnCallAir® is Watsco’s digital sales platform used by HVAC/R contractors to engage, present and quote solutions to homeowners. The gross merchandise value (GMV) of products sold by customers through OnCallAir® was approximately $1.6 billion. During the first half of 2025, contractors using OnCallAir® presented quotes to approximately 177,000 households, an 11% increase, and generated $886 million GMV, a 19% increase versus the same period last year.
- Watsco’s pricing optimization platform has contributed to the Company’s record gross margin performance in 2025. The platform manages and optimizes the vast number of pricing records across the business. Examples include the application of sophisticated pricing rules and strategies for specific products, across various geographic markets and for a variety of customer segments. This data-driven approach also enables Watsco to react swiftly to changing market conditions.
- Artificial Intelligence (AI) tools have been deployed both customer facing and internally and are gaining traction to further enhance the customer-experience, drive efficiency and extend competitive advantage.
- Initiatives to grow sales of non-equipment and enhance gross margins were also launched in 2025. The Company estimates that nearly half of the HVAC/R products sold in its marketplace represent non-equipment products.
- Innovative strategies to target the institutional channel for HVAC/R products. In recent years, large enterprise/institutional customers have emerged offering an incremental growth opportunity by further leveraging Watsco. Watsco expects to begin offering enterprise-wide solutions to institutional customers (termed Project “WatscoOne”) in early 2026 that deliver a seamless experience across sales, marketing, pricing, product assortment and order management. As the contractor market consolidates, Watsco can position itself for outsized share with the largest players.
While the financial health, balance sheet, margins, no debt, substantial shareholder equity and cash flow remain strong, major concerns remain regarding Watsco’s results, specifically on the complex, multi-year A2L transition impacting over 55% of sales, driving lower sales and earnings, with additional impact from international volatility and tariffs. When will Watsco fully recover revenue growth? The A2L transition should be moving towards and end, and there should be better volumes and price 2H 2025.
It remains to be seen how Watsco can fully leverage technology and AI to mitigate those transition risks?
Will it be enough? Can Watsco emerge from the transition to capitalize on emerging growth opportunities from a position of strength? Another concern is operating cash flow using cash totaling $185 million during 1H25, raising concerns about cash generation amidst significant inventory and technology investments and seasonal operating costs.
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