Home » Watsco Reports Record-Breaking Third Quarter
Watsco Reports Record-Breaking Third Quarter
October 20, 2023
Watsco Inc. announced its results for the third quarter and nine-month period ended Sept. 30, 2023. Third quarter records were achieved for sales, operating income, operating margin, net income and earnings per share. The company also provided commentary on trends, growth opportunities, technology innovation and its financial strength.
Through its entrepreneurial and technology-driven culture, Watsco has established itself as the largest participant in the highly fragmented $50+ billion North American HVAC/R distribution market. Since entering distribution in 1989, sales and operating income have grown at compounded annual growth rates (CAGRs) of 15% and 19%, respectively, reflecting strong and consistent performance across various macroeconomic and industry cycles. Over this period, Watsco’s dividends have grown at a 21% CAGR while maintaining a healthy balance sheet and strong cash flow.
Highlights Related to Third Quarter and Nine-Month Performance
Watsco’s strong performance in 2023 comes against the backdrop of record-breaking comparable performance in 2022, when sales and EPS grew 19% and 36%, respectively, for the nine-month period ended September 30, 2022 versus the same period in 2021 (14% sales growth and 11% EPS growth for the comparative third quarter). Last year’s outperformance was driven by robust replacement demand, above-average OEM pricing actions and relatively stronger end-markets. In contrast, OEM pricing actions in 2023 have been more moderate and unit volumes have reflected more conventional rates of replacement. 2023 results also reflect benefits from investments made to improve productivity and efficiency as evidenced by lower SG&A as a percentage of sales.
Results also reflect a significant product transition to new, higher-efficiency HVAC systems in response to regulatory requirements that took effect on January 1, 2023. The Company estimates that 60% of the HVAC equipment SKUs presently carried at its locations represent new products. Watsco’s teams executed on several fronts, including the conversion of inventory for 25+ brands of HVAC equipment across 630 locations in the U.S., implementation of pricing programs to sustain margin and competitiveness, coordination and execution of large-scale movement of products and logistics with OEM partners, development and delivery of contractor training and support and more.
Third Quarter Results
4% sales growth to a record $2.13 billion
3% increase in gross profit to a record $567 million (gross margin of 26.7%)
1% decrease in SG&A expenses (2% decrease on a same-store basis)
80 basis-point decline in SG&A as a percentage of sales
9% increase in operating income to a record $257 million (8% increase on a same-store basis)
50 basis-point increase in operating margin to a record 12.1%
8% increase in EPS to a record $4.35
Sales trends (excludes acquisitions)
6% growth in HVAC equipment (70% of sales)
3% decline in other HVAC products (26% of sales)
9% growth in commercial refrigeration products (4% of sales)
Albert Nahmad, chairman and CEO commented: “We are pleased to deliver record results this quarter, a testimony to the strong execution by our leadership teams and associates. Watsco delivered record sales, profitability and operating margins, driven by improved operating efficiency. We see the potential for further productivity gains as the operational complexities of the past few years abate. Looking ahead, our confidence in our business remains strong, particularly given the proven strength of our entrepreneurial culture, substantial scale, technological advantage and financial resources. We are also pleased with the acquisition of Gateway Supply Company and we welcome their employees and customers to the Watsco family. We look forward to supporting them and their growth strategy.”