Watsco WSO Q4 2025 Earnings Call Transcript

DATE

Tuesday, February 17, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Chairman & CEO — Albert H. Nahmad
• Executive Vice President — Barry S. Logan
• President — Paul D. Johnston
• Chief Financial Officer — Rick F. Gomez

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TAKEAWAYS

• Annual Dividend Increase -- Dividend raised 10% to $13.20 per share, marking fifty-two consecutive years of payments.
• Gross Margin -- Up 40 basis points to 27.1% with a long-term goal reiterated at 30%.
• Unit Volumes -- Declined 17% for the year and were driven in part by a tough comparison to the prior year's 20% unit growth in the fourth quarter.
• Aftermarket/Replacement Market -- Estimated to have declined approximately 6% in 2025, according to management's analysis.
• Pricing -- Achieved average price benefit of 9% for the year and 11% in the fourth quarter, attributed primarily to the transition to higher-priced A2L refrigerant products.
• SG&A Expenses -- Decreased 2% in the quarter, including costs related to newly acquired businesses and new locations.
• Cash Flow -- Record fourth-quarter cash flow of $400 million, driven by inventory reduction and operating performance.
• Inventory -- Met $500 million inventory reduction target; year-end inventory positioned at approximately 18%-19% of trailing twelve-month sales, matching the ten-year average.
• Leverage -- Maintained a debt-free balance sheet for the entirety of 2025; no borrowing activity during the year.
• E-commerce Penetration -- E-commerce now accounts for 35% of sales, exceeding 60% in certain U.S. markets.
• Mobile App Engagement -- Contractor engagement with the company's mobile app increased 15% to 73,000 users.
• OnCallAir Digital Platform -- Gross merchandise value through OnCallAir increased 20%, reaching an annual run rate of $1.8 billion.
• International and Commercial Sales -- Commercial products declined high single digits in the quarter; international business remained challenged, with Canada improving sequentially, but Latin America described as persistently weak.
• Non-Equipment Segment -- Parts and supplies represent approximately 30% of sales, and management is initiating efforts to expand this share.
• Commodity Exposure -- Commodity-related products (including copper, ductwork, and refrigerants) constitute roughly 5% of total revenue, and are actively managed to minimize margin volatility.

SUMMARY

Management highlighted that the disruptive regulatory transition to A2L refrigerants is complete, leading to a more normalized operating environment and increased clarity in sales, pricing, and inventory management. The company executed twelve acquisitions contributing $1.6 billion in sales, and continued focus on technology investments is driving growth in digital and e-commerce channels. Management stated that the pricing environment remains disciplined, with no expectation of significant incremental OEM increases compared to historical norms. The dividend increase, despite earnings pressure, was positioned as consistent with Watsco (NYSE:WSO)'s long-term philosophy and underpinned by strong cash flow. Strategic initiatives to expand the non-equipment business and deploy pricing optimization technologies were emphasized as levers supporting the company's gross margin target. Integration of artificial intelligence and ongoing rightsizing of inventory and SG&A are expected to enhance operating efficiency and free cash flow in subsequent periods.

• Albert Nahmad said, "Don't you tell them what I do? Tell tell tell everyone what our dream plan goal is? In terms of inventory turns. And where we are now, where we like to be. Our our dream plan, which is which is very well acclimated amongst our business units, is to get to a total of five turns. You know, we used to operate pre pandemic around four. That dropped into the low threes given all the the the noise. Rick Gomez: And we're gonna climb up that ladder. And when we do that, you guys can do the math."
• Gross margin progress reflects ongoing adoption of pricing technology, as well as initial results from a new "VCR" initiative to optimize purchasing and redistribution of non-equipment products.
• E-commerce and digital engagement are scaling, as demonstrated by growth in OnCallAir platform sales and increased app utilization among contractors.
• Management will calibrate SG&A spending as seasonal demand increases, with technology adoption cited as a driver of further efficiencies.
• Unit declines were described as a normalization following outsized comparisons, and management did not provide a forward unit growth forecast, stressing uncertainty about future seasonal trends.
• Commodity volatility, particularly in copper and refrigerant, is capped due to deliberate short-cycle inventory management of products that represent minimal revenue share.

INDUSTRY GLOSSARY

• A2L Refrigerants: Low-global warming potential refrigerants with mild flammability, newly mandated for HVAC transition in 2025.
• OnCallAir: Watsco's proprietary digital sales platform for HVAC contractors.
• SEER: Seasonal Energy Efficiency Ratio, a regulatory standard for HVAC efficiency that impacts product specification and pricing.
• VCR: Internal Watsco initiative focused on optimizing non-equipment purchasing and redistribution to enhance gross margin.

Full Conference Call Transcript

As we all know, 2025 marked the year of significant regulatory change to next generation equipment containing A2L refrigerants. This transition follows several busy, volatile years beginning after 2019. We navigate it through the COVID supply chain disruptions. Steer an energy rated transitions, refrigerant changes, and now the conversion to new A2L equipment. It has certainly been an adventure, and we look forward to a simpler operating environment this year. Through it all, Watsco, Inc. achieved terrific results, and created immense value for our shareholder. We grew our scale and market share and we adopt added 12 business acquisitions, representing over $1,600,000,000 sales. As announced today, we boosted our annual dividends by 10% to $13.20.

This marks Watsco, Inc.'s fifty second consecutive year of paying dividends. And speaks to the confidence we have in our business. We also continue to build and expand our technology platforms. Which provide an immense long term competitive advantages. We believe we operate in a great industry, with strong long term fundamentals and the industry most accomplished leadership team. All with focus on building our long term success. The building on our long term success. Turning to our fourth quarter results. We achieved double digit pricing gains on the new A2L products and raise gross margins by 40 basis points to 27.1%. We have several ongoing initiatives to enhance gross margins with the long term goal of achieving 30%.

Unit volumes declined during the quarter, which does not come as a surprise given the strong 20% comparison unit growth rate last year. Let me repeat that. Unit volumes declined during the quarter. Which does not come as a surprise given that last year, unit growth was had a 20% growth rate. Operating efficiency improved as SG&A dropped 2% and this included newly acquired and open look new locations. I expect overall sales performance and operating efficiency to improve now that A2L product transition is largely behind us. We continue to fortify our balance sheet, and we were debt free for the entire entirety of 2025.

We also met our $500,000,000 inventory reduction goal established at the end of the second quarter and generated record fourth quarter cash flow of $400,000,000 Looking forward, we are focused on improving inventory turns and generating incremental cash flow. We expect margins to gradually improve as the transition matures, the balance of the SEER. We continue to invest in innovation and technology that separate us from competitors. We have made terrific progress in driving adoption. Ecommerce continues to grow and accounts for 35% of sales. And exceeds 60% in certain US markets. This year, contractors engagement with our mobile app expanded 15% to 73,000 users.

The annual run rate of sales through OnCallAir, which is our digital selling platforms used by contractors, saw a 20% increase in gross merchandise value. Of products sold through the platform and reached $1,800,000,000 for the year. We've also made incremental investments to enhance our competing competitive position and add to our long term growth. Yeah. And margin profile. For example, we are developing new technology aimed at capturing more sales to institutional customers. We are accelerating the use of our pricing optimization tools to make the further progress toward our 30% plus gross margin target. We have launched a new initiative to compete in gross sales in the fragmented nonequipment market.

It's parts and supplies we're talking about, which today is roughly only 30% of our sales. And we have begun to harness the power of artificial intelligence, offering potential to further transform our customer experience improve operating efficiency, and create new data driven growth strategies. These investments, along with our scale, entrepreneurial culture, capacity to invest, unmatched in our industry. With that, let's turn to Q and A.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you were using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from David Manthey with Baird. Please go ahead.

Albert Nahmad: Good morning, David. Thank you. Good morning, Al. First question on the pricing dynamic. Obviously, with the mix shift that happened materially last year, We had a big increase in the price of units. I think, there's been some hesitancy on the

Barry Logan: on the part of OEMs when they're talking about 2026 and price increases. And maybe not getting the typical increase. But beyond that, I think last year, there was also some commentary around some of the contractors maybe not feeling comfortable with the new product, etcetera. And the broad question here, Al, is as we enter 2026, do you feel like we're in a year of sort of normalization and that the channel is prepared to sell this new technology completely as opposed to last year where there was sort of this hesitancy around the transition?

Albert Nahmad: That's a terrific question. I'm gonna let several people here answer that. Do you wanna start, Barry?

Barry Logan: Sure. Morning, David. Yeah. Well, first, it is a, you know,

Paul Johnston: the product line is in place. There aren't two product lines in place. There's one set of pricing for our customers, not two sets of pricing. So I won't belabor that point other than saying it's a much more stable channel this year than really as we said in the press release almost at any time over the last probably four or five years.

Secondly, I think contractors you know, when they have one thing to sell, are going to be better at it and more likely, to sell product If we try to evaluate just the overall trend of things and where the year ended and try to sift through the unit decline in 2025 and parse it out and say, where are we now? We feel better about it. First, new construction had, you know, an impact into that 17%. Oh, by the way, overall, 17% unit decline in 2025, just to level set. The conversation. New construction, you know, had a impact on that percentage.

Clearly, in the fourth quarter a year ago, when we say unit growth in the fourth quarter a year ago was 20% plus, That plays a role in 2025's analysis. And in fact, it's about a 7% component of the 17% just talking about what happened in the fourth quarter of last year. So if I try to summarize that in some way, and other people should chime in on this because a critical question. We think, you know, my best guess, I should say, is the aftermarket and on replacement market was down 6%, and in 2025. In parsing out the

Barry Logan: the actual pieces.

Albert Nahmad: Yeah. And so 6% is that disruption of

Paul Johnston: the channel? Yes. It is. Is that a weaker consumer? Yes. It is. Is it a contractor who's uncertain of themselves doing this stuff? Yes. It is. And so it's probably a better starting place again, than we've seen in the last several years Time will tell, Dave, that we're not ready to call the season yet because it's not the season But I would say that the beginning line is in a much better place. Yeah. The and I would say the contractors been well trained. He understands the A2L product. He knows how to do the installation now. He knows he's gotta replace the indoor and the outdoor unit.

So I think the training part of it is behind us. I think they're they're ready to go and offer consumers a good installation on the product. So I don't think there's any issue on that side right now.

Albert Nahmad: Yeah, Dave. I think you know as well as all of us that the last five years have been a wild ride. You know, there's been macroeconomic issues. There's been geopolitical issues. There's been industry specific stuff. There's been wild supply and demand dynamics. There's been, you know, regulatory changes, etcetera, etcetera. You use the world normalization. That's what we're hoping and expecting. And, obviously, we can't control the macroeconomic or geopolitical, but it doesn't seem like the industry has anything teed up to the extent certainly that it did over the last five years. I mean, the regulatory changes are behind us.

Paul Johnston: Hopefully, there won't be another shortage refrigerant canisters. I mean, that kind of thing is behind us.

Albert Nahmad: So we don't have a crystal ball, but we certainly like the starting point than we more than we do others or less.

Paul Johnston: Years. And no matter what, though, our job is to grow and to

Albert Nahmad: inroads with our customers and in this industry.

Paul Johnston: And control what we can control and that we should be investing.

Albert Nahmad: That's what we're focused on is finding ways to win given this environment or any environment. Way to be able to balance sheet as clean as ours. Feel very limited.

Paul Johnston: And Dave, you mentioned pricing. The face of all this. And a year ago, when we commented on pricing, we thought that the new product would end up being 8% to 10% higher in price. Our price benefit in '25 for the year was 9%. For the fourth quarter 11%, And so pricing as a as just a general theme and it's it's of course, it's the mix of the new products that's that's accounting for most of that. That's been a very stable part of our business. And the margin opportunities in flows from that has been yielded in a good result this year. And that maturity didn't stop January 1 this year. It continues into 2026.

As the as the full maturity of the new products, you know, alphabetically play out So I think pricing and margin and discipline and industry discipline and OEM channel partner discipline across the board has been pretty consistent and good this year I don't think that changes or stops I just think maybe the yield is lower, just as, again, as things become more normal. But price in general has been a good theme for a while now.

Barry Logan: Alright. Thanks for all that context. I'll pass it on.

Operator: Our next question comes from Tommy Ma with Stephens. Please go ahead.

Albert Nahmad: Morning, Tom. Morning, Al. Thanks for taking my questions. Sure.

Operator: I want to start on the dividend increase you announced

Paul Johnston: today, another 10%.

Operator: Increase. This

Albert Nahmad: has been a key part of the Watsco, Inc. story for a long, long time now, over years. I think you called out Yeah. My question is, if we just look at what was announced today, the annualized rate is a little bit above the earnings you just generated in 2025, so the LTM period. Granted, that was an abnormal year, but I don't know if you've ever been in this situation before

Paul Johnston: where the outlook for the dividend exceeds that earnings rate From a cash flow standpoint,

Albert Nahmad: clearly, you can do it without breaking a sweat. But I just wanna wanted to ask what's the message here

Paul Johnston: on, on the confidence on the earnings line going forward? Thank you.

Albert Nahmad: That's a very good question, and I'm gonna go to my number one adviser on dividends, which is Barry Logan.

Paul Johnston: Hey. Good morning. Well, I think 2020, by the way, is the last year where that kind of ratio, if you will, earnings per share to dividend was near 100% And I would like for what happened after 2020 to occur again to, to, you know, relax people on that theory.

Barry Logan: Mhmm. Because that

Paul Johnston: the dividend was $7 and 10 and 10¢ 10¢, and earnings per share was $7 in 2020. So, yeah, I think it is a track record that's important and somewhat sacred to us. And your consistency that means you should own Watsco, Inc. forever. So that's the pretense of what the board discusses in sustaining that. And you're right. Cash flow is actually how the dividend is paid and cash flow is probably closer to $16.18 dollars a share today And, you know, that's, you know, that's the pool of capital that we look at to say, can we you know, can and how much and when? And we're satisfied with that concept.

And I like that Watsco, Inc. was not just debt free at December 31. In fact, we didn't borrow a penny every day of 2025 And we're looking for acquisitions. We're looking for investment. We're looking for what our imagination can do with OEMs to grow our business. At the same time, the dividend is a critical theme, and we're going to raise it if we feel comfortable, and we do. So let's hope earnings, you know, is a reset following this past year. Time will tell. Comfortable with cash flow. And keep the track record in that, you know, that important part of the Watsco, Inc. story going

Albert Nahmad: Thank you, Barry. Mentioned OEMs. And for my question, I wanted to hit that theme

Paul Johnston: If we look back at what

Rick Gomez: carrier communicated to the market regarding their 2026 outlook for resi, They're calling for industry unit volumes down 10 to 15%. They're calling for their own residential sales down 20%. In the first half of the year. What are we to make of how to translate those kind of comments to what you might expect. Are these reasonable proxies for Watsco, Inc., or are there some differences that you wanna call out today? Thank you.

Operator: Go ahead, Barry.

Paul Johnston: Yeah. I think well, first, there's always and forever a disparity in the timing of OEM, you know, seasonality versus distributor and contractor seasonality. And that's even been more amplified or magnified by the 14 a conversion, which started this time last year for us, but had already begun three months before for the OEM. So that the channel has not been a easy thing to analyze at any time. I think, if my memory is right, carriers unit volumes were down in the 40% range this past quarter. If you if you look at our math, it's it's somewhere down in the twenties, mid twenties. And a year ago, we were up 20.

So it's just a different it's not simple to analyze when there's that type of variation in the spectrum. Spectrum. But I think if I look forward, two things I know is we will we will sell the exact number of systems that contractors are going to install in people's homes or businesses. We're not selling into inventory. We're not waiting for inventory to clear. We're not wondering if inventory is going to clear. You know, our business is selling into the contractor channel in real time based on what's being installed. And that's comforting because that's always going to be more stability you know, a much higher level of stability than otherwise.

Now, of course, you know, with unit volumes down in the fourth quarter, they don't instantly start going up January 1. We're still working through some of the four ten a kinda conversion and activity and pull in the fourth in the first quarter but I think that begins to clear on our on our side of the ledger, you will, sometime by the second quarter. So I think it's just always a lag or always a leading indicator or a lagging indicator and it's been impossible for anyone to analyze this in the last you know, few years.

But I think the curvature and the and the spectrum will narrow and be a little simpler for everyone as the year goes on. Tommy, I'll add some color too, which is not

Rick Gomez: data driven, but it's culture driven and focus driven, which is and this is what we're talking about internally with our leadership teams is the last ten, fifteen years, I think it's safe to say

Albert Nahmad: a good job of modernizing its people, its team. Teams, systems, its processes, technology.

Rick Gomez: And then as I said earlier, the last five years, I've been

Albert Nahmad: think it's fair to call chaos between all the implications of the pandemic and everything else that's been solved now. So here we are in these days where it worked. We're hopefully reaching some level of normalization

Rick Gomez: And so what is our priority? It's sales.

Albert Nahmad: It's take all this new skill and muscle and capabilities that we have as a company and focus on taking it to the street, driving more customer relationships, driving more sales and more products, and winning in the marketplace. That's our focus. That's where 90% of our conversations are about right now. And so in this new environment, whatever it may bring, that's what we're that's where our priority is sales.

Rick Gomez: Thank you both. I'll turn back.

Paul Johnston: Yeah. Just to up even a to completely exhaust that. You know? We have about 15 primary equipment OEMs. And it to start a year where we can have strategic growth market share driven you know, tactical discussion in our markets about product, about, you know, how does this market grow How do we grow the market? You know? That's refreshing. I can assure you a year ago, it wasn't about that. It was about getting the product and then having the panic attack of having over half our business change into new products. Yeah. That's done. And so now it's about growth.

Albert Nahmad: I hope that was helpful.

Operator: Our next question comes from Ryan Merkel with William Blair.

Albert Nahmad: Hi, guys. This is Mike Francis on for

Rick Gomez: for Ryan. I don't know. How are you doing?

Albert Nahmad: Yeah.

Paul Johnston: Great.

Rick Gomez: I wanted to start just asking how January and February are going to date. Now there's still some softness on the on the compare side of things. We'd just love to see how the year's off to or how the year's starting off.

Albert Nahmad: Well, Barry, you're my go to guy so far. Alright. I can answer that, but I'd rather you answer it.

Barry Logan: Yeah. It's down in the mid single digit range, so it's better than

Paul Johnston: if I wanna feel better, I don't feel good, but I feel better. It's down 5% or so in the first part of the year. And That's what it is. Very clearly you know, there's very clearly some severe weather that closed in stores that you know, for now, I believe it could have been a bet bit better than that, but it's still not indicative or an inference into the season. And Watsco, Inc. becomes a 40% larger business. In about ninety days when the summer season hits. So that's that's the data, but I try to draw important inference out of it.

Albert Nahmad: K. And then, s g and a, nice job on that.

Rick Gomez: In April. It's down 2% for the next couple of quarters, a good assumption, or are there any sort of puts and takes that would swing that higher or lower?

Albert Nahmad: Very

Paul Johnston: Yeah. I think, it's progress. Right? So a lot of reduction, and really taking make making taking action happen during the fourth quarter. It didn't start January October 1. It was throughout the quarter. So I think there's an opportunity for further reduction especially out of season As we get into season, we'll calibrate what we think we need and what we have and serve customers a proper way. And calibrate our SG&A then. But I do think some of our growth investments, new branches, new technology, you know, investments we are making can largely be offset by some of the reductions that are in place. So time will tell.

What can make it go up would be variable expenses like commissions, bonuses, that would be driven by volume. I want SG&A to be higher as a result of that discussion. Because earnings would be a multiplier against that type of growth. But in terms of calibrating and starting the year, I think we're in a lower place than a year ago. And again, we'll recalibrate that as we get closer to the season and see.

Albert Nahmad: Alright. I appreciate it. Again. Let's

Rick Gomez: add a little color there too. I mean, we our business unit leaders did a good job rightsizing the business for the current market environment. And we hope and expect, and they are certainly planning using

Albert Nahmad: technology and so forth to drive efficiencies for now and forever. We are a continuous improvement business. Like Barry says, we're we're not gonna be shy to invest where we see growth opportunities. Alright. Passing on. Thanks, guys. Our next

Operator: question comes from Brett Linzey with Mizuho. Please go ahead.

Rick Gomez: Hey. All. Wanted to come back to gross profit margin, so up 40 bps in the quarter. For the full year, I was hoping maybe you could give us some of the building blocks to get to the 28. How much was the pricing optimization versus maybe mix on parts versus equipment And then do you think this 28% is the new bouncing off point as we look into 2026 here on gross margins? Hey, Brad. It's Rick. I'll

Albert Nahmad: I can take a I can take a stab at that. Yeah. I think, first of all, you know,

Rick Gomez: the

Albert Nahmad: the importance of margin, I think, really shows over the course of a year. And, so you're right that, you know, we should focus on that as being

Barry Logan: the starting point for what comes next. It's not a floor.

Albert Nahmad: It's not a you know, we're not saying that 28 is the new 27. We're saying we've done good at many things over the course of a year to help improve margins. Yes. OEM price increases springtime last year helped, Yes. We made more progress on all the pricing technology The we're we're very excited about it because it's not yet touching every customer, every branch, every SKU. There's still more to go there. And then the third component that I think is exciting is

Paul Johnston: we talked at our Investor Day about

Albert Nahmad: a new initiative that we're affectionately calling VCR, and that has to do with getting smarter, more strategic about purchasing within the nonequipment space and not just purchase purchasing really, but how we bring it in and how we redistribute it across our network. We think that's ultimately margin enhancing at the end of the day, and, and that initial is early days. But good progress so far. So I think the controllables of margin that we are that are within our portfolio, let's say, we feel relatively good about And if this is a year where you could have know, conventional OEM pricing,

Paul Johnston: I think that also is favorable to margin.

Albert Nahmad: So no flashing red. I think there's there's you know, good optimism and

Paul Johnston: and also just a well thought out strategy to

Albert Nahmad: know, grind at this over the next several years to get to our ambition of 30%. Yeah. We don't wanna swing for the fences on this.

Paul Johnston: We wanna do it responsibly, and we wanna do it in a measured and make

Barry Logan: just

Albert Nahmad: love to be able to say,

Rick Gomez: we grew x to y every year for the next, you know, y number of years and

Albert Nahmad: we'll get to 30%. So it's not that linear, but, that's what we're aiming for is progress along the way and, someday we'll tell you we got to 30%.

Rick Gomez: And then the goal will be over 30%.

Albert Nahmad: Yep. No. Appreciate that. And then maybe just

Rick Gomez: a follow-up on inventory and more Watsco, Inc. inventory. From an equipment standpoint, where do you think you guys are on units as you enter 2026 and exit last year? From a from a positioning standpoint? Do you think there's more rightsizing that needs to take place, or you think you're in pretty good shape?

Paul Johnston: There's yeah. There's always going to be right sizing taking place in our inventory. Know, there are there are things that we need to do to further improve the quality of our inventory, which we're constantly working with our subsidiaries on. However, when you look at the number of

Albert Nahmad: if you just take residential units residential units,

Paul Johnston: you know, ended the year down. Dollars ended up know, pretty close to what they were last year. At this point, you know, I would say our inventory is in great shape. Compared to where it was a year ago. A year ago, we were we were in the transition period. And now we're out of the transition period. We're pretty much through with the 04/10. We've got some left that needs to be moved. But I think overall, our inventories in a great position right now to face the market.

Barry Logan: And, Paul, why don't you say also that our OEMs and

Rick Gomez: a nice position

Albert Nahmad: getting through all the noise of the regulatory changes and so forth and getting back some level of normalization in terms of lead times.

Rick Gomez: Etcetera. And I think that provides a good base on top of which we can

Albert Nahmad: further optimize our

Barry Logan: turns and

Albert Nahmad: be a more efficient business in that regard. Yeah. We've Did you guys hear me?

Rick Gomez: Yeah.

Albert Nahmad: Don't you tell them what I do? Tell everyone what our dream plan goal is? In terms of inventory turns. And where we are now, where we like to be. Our dream plan, which is which is very well acclimated amongst our business units, is to get to a total of five turns. You know, we used to operate pre pandemic around four. That dropped into the low threes given all the noise.

Rick Gomez: And we're gonna climb up that ladder. And when we do that, you guys can do the math.

Albert Nahmad: Every turn of inventory, what that means in terms of free cash flow.

Rick Gomez: Can then be used to reinvest in the business.

Paul Johnston: Appreciate all the detail. Yeah. Just to add one analytical thought to it. You know, units are down double digits at the end of this year. Equipment units are down double digits, so that's okay. You know, that's where you know, the progress we've made. But if you look at it analytically, I think in the in the inventory now is around 18, 19% of the prior twelve month sales. Just use that as an index. And if you looked at ten years, that's the average. So I think that the beginning the beginning, you know, point is a good beginning point. Where the turns come is trying to not spike inventory know, as we go through the year.

Work with our OEMs, count on lead times, have dependable lead times, replenish to what we're selling, then you have a much, you know, again, simpler curve you're managing throughout the year for reframeatory. And it may take a year or two to have that full confidence in lead times and dependability of lead times. But that's that's what we're up to, and that's how it could happen. Won't happen in one quarter all at once. But over the next couple of years, as the simplicity is now in place, that's the big opportunity. Thank you.

Operator: Our next question comes from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Paul Johnston: Hey. Good morning, guys.

Barry Logan: Just back on gross margin. So I understand that

Jeffrey David Hammond: the 30% target and can you continue to drive for that. But you know, it seemed like the second half, you were kinda getting back down to kinda low 20 sevens, and you had some maybe temporary goodness in the first half. So I'm just trying to level set you know, if we take out that

Rick Gomez: maybe

Jeffrey David Hammond: pricing arbitrage in January, you know, are we looking at you know, gross margins flat, down 50 basis points, or just you know, level set us a little more know, given that benefit last year?

Paul Johnston: Well, the reason that you see that variation in

Albert Nahmad: GPM is the seasonality that they and the product mix that goes along with that seasonality. Anybody else wanna add something to that? Yeah. Yeah. Rick, why don't you fill in some because you and I had a good chat earlier. Yeah. I think that what Al just said is correct, Jeff. You have to look at this firstly on a seasonal basis, which is know, my preference for then looking at the overall year to smooth that out. And 28% is great progress versus last year. If your question is, did the OEM price increases earlier in the year distort that in some way that would be a headwind going forward? The answer is not really.

If it you know, if that round of springtime OEM price increases amounted to mid single digits, that's been exactly what's what's been announced so far. Coming in a little bit later, in the season. So nothing that I think would distort or that we need to tell you about, as a watch item on gross margin. Fundamentally, what drives gross margin is, remember, the pricing and inflation and all that, that is not something we control, and that's really a function of timing

Rick Gomez: at the end of the day.

Albert Nahmad: What really derives a gross margin is the transactional margin

Barry Logan: at which we sell the customers, 130,000 of them out in field in 700 locations.

Albert Nahmad: That'll be over a longer period of time, the more important ingredient whether we can sustain and grow gross margins.

Paul Johnston: And as I said earlier, I think there's there's

Albert Nahmad: optimism and upward bias to that because that technology is still proliferating and still scaling as we go.

Paul Johnston: The other,

Albert Nahmad: again, just component to that I think is underappreciated margin is the of the mix between your equipment and your nonequipment. Right? So, obviously, we saw just a relative difference there in sales trends and that, you know, is good for margin. What we wanna do, forget about twenty five, whatever the market grows on equipment, great. Let's do better than that.

Rick Gomez: But

Albert Nahmad: the whole point of ECR is not just to get smarter about purchasing and redistribution, It's about growing the nonequipment base. It's a $2,000,000,000 segment of our business and 1 and a half billion in purchases. If we're you know, some percentage there bigger, going forward, that will be helpful to margin along you know, just from a from a growth and volume standpoint in addition to all of the purchasing and redistribution benefits we gain along the way. So that transactional margin, the pricing technology, and the success of VCR is what really will, I think, govern our long term success on gross margin.

Rick Gomez: I also think whenever we have this conversation, it's important to reiterate that

Albert Nahmad: the mission to expand gross margin does not necessarily mean raise prices across the board and suffer the consequences of

Rick Gomez: of

Albert Nahmad: higher prices, meaning lower sales. That does not the mission. That is not the approach. The approach is to match the right price for the right products for the right customer given that market's dynamics and that product's dynamics and that for that customer's purchasing behavior with us. And because we have such scale across so many different products, There's a lot of detail around that, a lot of complexity in that analysis. And so what our tools and our teams are able to do more than ever, and by the way, AI is helping with this now, is identify opportunities to match the right price for the right product for the right customer.

And when we do that at scale, it's a lot of slices at the apple that add up over time. But it's not just dry price and some of the consequences of elasticity. That's not it.

Jeffrey David Hammond: Okay. Great. And then Barry, maybe you can give four q what international and commercial was and then just speak to you know, what trends you're seeing or what the outlook is. So, you know, I think international is particularly challenging

Paul Johnston: last year and maybe

Jeffrey David Hammond: you know, commercial started the year better and then and then softened. But maybe just update us. I mean, commercial, was

Paul Johnston: for the for the quarter, Jeff, is that what you asked? Yep. Yeah. Commercial for the product was down single digits. High single digits, and know, obviously, not as no giant influence there the way that residential was influenced by the four ten a change. So a little better result in the fourth quarter with light commercial. And that includes a weaker international business. So just overall, let's call it 9%. International, again, we have to be clear, we have really two international businesses, Canada and Latin America, including Mexico. And Canada did have a better a better quarter, and Latin American business, which has kinda been weak all year, was kind of the same kind of quarter.

The planning, the programming for next year is better in both markets.

Albert Nahmad: But

Paul Johnston: again, that we said the word geopolitical earlier in the call. Those were two markets that certainly had some influence with geopolitical issues and tariffs and the like. But not necessarily much better, but not certainly not worse. As we as we closed out this year.

Albert Nahmad: Okay. Thanks.

Operator: Our next question comes from Steve Tusa with JPMorgan. Please go ahead.

Albert Nahmad: Morning, Steve.

Rick Gomez: Good morning. How are you?

Albert Nahmad: Good.

Paul Johnston: Good.

Rick Gomez: The can you just parse out the resi performance a bit Was there like on the ductless side, how did that perform versus kind of the traditional ducted products?

Paul Johnston: Well, they were affected by know, 14 a and A2L as well, Steve. So I'm not sure there's any real divergence in result in the quarter.

Rick Gomez: And for the year as well?

Jeffrey David Hammond: For the year.

Paul Johnston: Let me look at the quarter. For the year, And, I mean, kind of as it should, Douglas has been outgrowing No. I'm sorry. No. So It's it's exactly the same.

Albert Nahmad: Yeah. Okay. Interesting. The decline in, yeah, decline in ducted ductless is identical.

Paul Johnston: You know?

Barry Logan: And as far as the, like, the parts and the repairs and things like that,

Rick Gomez: was there any sort of like trade down in that channel that you're seeing at all? I mean, we're just trying to kind of gauge what appetite is from an inflationary perspective from your customers really across a range of products, not just the boxes. Was there any sign of like a trade down on that front at all?

Barry Logan: Well, if you look at Like more like more price sensitivity, you know,

Rick Gomez: from the contractor and not just on the box side?

Paul Johnston: I don't think there was price sensitivity. I think, you know, if you look at the you know, compressors and motors really represent the bulk of our of our part sales, not our supply sales, but our part sales. And if you look at that, overall, they're up for the year. Sales are up double digit. But for the quarter, they were actually flat to down. It only represents about eight fourth quarter only represents about 18% of the of the annual sales of parts and parts business. So it's not a significant quarter.

Rick Gomez: Okay. And then just one final one. I'm not sure anybody asked, but

Stephen Volkmann: the kind of prevailing consensus from your OEMs or from the OEMs out there is for them a down unit market so far, again, like that may be conservatism. What is your market call kind of for this year? For the industry? The you know, if I think trains down zero to five, Lennox down zero to five, and then, I mean, Carrier put out like a down 15 or something like that or down to 10 to 15. What is kind of your call on sell through volumes this year? Are we just kind of like starting it flat? Or do you think it can grow?

Paul Johnston: Oh, that's like the most that's like the most difficult crystal ball question of all, Steve. And I never I never answered that the answer it in normal years in February.

Albert Nahmad: Do you do you have the answer? No. We know the answer. We're just not gonna

Paul Johnston: tell you. Right. Yeah.

Stephen Volkmann: Alright. Well, I guess I guess I had to ask.

Rick Gomez: Thanks a lot for all the details. We'll we'll be very we'll be we'll be very

Paul Johnston: you know, have better information in ninety days. Like, I wanna take one of those, like, eight ball Remember the eight balls when you're a kid and you shake it and it gives you an answer? That's It's it's too early to tell. If I shake the eight ball, it's gonna say too early to tell.

Stephen Volkmann: I've I've got a broken clock in my in my room and it's it's right, you know, twice a day. So, that's what I'm shooting for. Thanks, guys. But I but I

Paul Johnston: but I again, I'll just say this just to have a little bit of fun with this. I wanted to understand our day our data, not Hardy data,

Barry Logan: OEM data, not HR ID, our data.

Paul Johnston: So I went back to 2018 said how many units did we sell in The United States? I compounded that at 3% through '25. I added up the numbers and said we should have sold x number of units. And then I glanced over, and I used 3% compounding, which is less than the twenty, thirty year long term average. Unit growth rate in this industry. I use 3% just to pick a number. That was more conservative than that, the long term average. So then I said, how many units did we sell the last eight years? And it's within 1%, if not half a percent, of the linear compounding at 3% for eight years.

Now it took this year's unit decline of 17% for that algebra to come in line. It took the correction of this year for the data to work. Where the beginning part beginning point seems where it should be. But then but then if I know, say the rest of the sentence, I have no idea if that will if it's right. But, intellectually, I feel a lot better looking at our data and that kind of that kind of projection I don't feel intellectually worse. I feel better.

Albert Nahmad: Right. So it's so it's so it's normal.

Stephen Volkmann: So you're at kind of a normal you're you're you're at a normal level is the point.

Paul Johnston: Yeah. And nor normal meaning that if there was an oversold market in our markets coming into the into '25, this year's correction helps that equation for sure. There are other variables than just the ones that I'm thinking of, but I would say I don't like the word normal. I think it's a more conventional starting place. This year than after this year this past year's correction. The data suggests that but we don't know it until we see it play out.

Stephen Volkmann: And so you're making it a yeah. Go ahead. Sorry. Say, Steve. Yeah. Which is it

Albert Nahmad: feels more normal. I'm not sure it actually is normal yet. But it is it does feel more normal. And the balance of the season will kinda tell us if that theory holds or not.

Stephen Volkmann: And sorry. One more for you on this front. Do you finally kinda have visibility into, like, what the actual number for pre buy you think in the industry was? Is that what you're saying basically? It's like 7%. Or less than that? Like, what do you looking back, what do you now think the pre buy was last year?

Paul Johnston: Yeah. Well, it's not no one no one pre bought them. We sold we sold them and they installed them.

Barry Logan: Right. Our contract For you guys. Right?

Paul Johnston: Right. So last in last year in the fourth quarter, our guess is we sold you know, four ten a systems as we closed out the year. 20% unit growth was the metric that we gave you this quarter. Happened a year ago. And if we do the algebra and saying what would have been normal a year ago, and project that into this year as a 7% you know, change in actual unit The actual unit change is 17%. Got it.

Stephen Volkmann: Okay. And Alright. Thanks. Thank you very much. And we can

Rick Gomez: So I sorry. I can't help myself here. I have to make a central point, which I think we do every quarter, which is that these are these are the right questions and good conversation, but

Albert Nahmad: what we're here for is not Q1 or Q2 or even 2026. Our north star, our guiding light is long term, long term, long term. So you know, we certainly do our best each quarter, each day, each month, each in year. But our decision making, our investments, our leadership philosophy, is all about the long term. We will never the long term for some short term benefit. So just know that's at the core of Watsco, Inc.'s culture.

Stephen Volkmann: Loud and clear. Amen.

Albert Nahmad: Well said, mister president.

Paul Johnston: Alright. Are we done?

Operator: Next question comes from Chris Snyder with Morgan Stanley. Please go ahead.

Jeffrey David Hammond: Thank you, guys. I think earlier, you talked about, you know, consumers or homeowners having to buy two units. Now with the, you know, Ford 10, I guess, fully in the rearview at point. And I think that comment was tied to the April transition. Yeah. So I guess, you know, I think the question is I guess I understand that's positive would be positive for your volumes, you know, selling the homeowner two units more so now than in the past for selling them one. But do you also think it could just keep the homeowner in repair mode for longer because it feels like the replace bill in that example would be effectively doubled

Rick Gomez: and it would just be a wider delta versus the repair.

Jeffrey David Hammond: And any way you can help me think through that? Thank you.

Barry Logan: Yeah. When we say two units, we mean

Paul Johnston: you're gonna have your outdoor unit, and then you're gonna have to install a separate coil on the inside. The four fifty four and the 32 a product that we sell, it's powering these units now. Is slightly flammable, so it has to have a detector on the inside in the event of a leak. So that the gas is then dispersed by a blower fan switch. That goes on in the coil. So there's that two units you have to buy. It's just you have to buy the entire system. You can't just replace the outdoor unit. Okay?

And, Chris, I think it's it's important definitionally The ARTI data that is published Those are the outdoor units that have a compressor in it. That's the definition of a unit in the industry is a compressor bearing unit And all the OEMs and HRI and in our comparison data when we talk about units, that's what we're talking about. So it's definitionally consistent And what will happen is as distributors run out of four ten a indoor and outdoor systems, where maybe a Band Aid could have been put in place to sustain an existing system longer Maybe my indoor unit is fine. My outdoor unit is condemned.

A year ago, I could fix that by only replacing the outdoor system. Today, with the new systems, my choice is to repair or maybe I can't repair. Maybe it's chronically broken. And this coming year, the contractor will must replace both indoor and outdoor And I can tell you even more certainty next year, twenty seven, distributors will not be really carrying any product that can sustain the old system it's chronically failed. So it's it's a migration. It's a it's a progression. But that gives you some color on it.

Jeffrey David Hammond: Thank you. That's really, really helpful. And it I guess, do you have any idea as to how often the contractor repairs the entire system versus, say, a year ago just repairing the outdoor unit. Because it does feel like we're you know, in your example, if your indoor unit's still fine, they have to replace both. So the replacement bill is going up materially versus a year ago. Was just trying to get a sense for, like,

Albert Nahmad: how common is that

Jeffrey David Hammond: you know, that you maybe a year ago would only just replace one of the two.

Paul Johnston: But you gotta remember, a unit has a warranty to it. And that warranty on the compressor and the motor goes for five years in most cases, it moves to ten years.

Albert Nahmad: So if

Paul Johnston: the average lifespan of a product, let's say, in the in the entire US is fourteen to fifteen to sixteen years, only got a window of five to six years where the consumer's gonna be paying for the replacement

Albert Nahmad: of the compressor or the motor.

Jeffrey David Hammond: Thank you. So, yeah, it really

Paul Johnston: yeah. You know, a lot of probably 50% of the compressors that we move will go to warranty. 50% will be sold. Yeah. Don't think we would have data to answer how many chronic failures were replaced by half a system. I don't think we have that data. No. No. We don't. But what we but what we know is as we move away from 04:10 a availability, which is near zero today and will be at zero soon, that capability, you know, you know, moves away and contractors' preference is to is to upgrade a system, not put a Band Aid on it because if there's a warranty issue on a repair, it's his warranty issue.

And so, you know, you're right. That the affordability and consumer, you know, capability of paying for things is still important. But as we move away from 04:10 a availability, the choices become less, not more.

Jeffrey David Hammond: Thank you for all that color. Really helpful.

Albert Nahmad: Our next question comes from Patrick Baumann with JPMorgan.

Operator: Please go ahead. Good morning, Patrick. Thanks for

Barry Logan: good morning. Thanks for letting me sneak in here. Steve asked questions earlier, but I appreciate you

Jeffrey David Hammond: Let me hop on. A quick one on the volume

Barry Logan: for the year, the 17%. Can you give us any information on the disparity you're seeing in some of your major ducted OEMs there? I'm I'm really just trying to understand if you've seen volumes recover for the noncarrier vendors. We had, obviously, some issues at, Bank and Goodman with the transition, I think, in '24, and then as well with Rheem just curious if those OEM volumes have had fully recovered now or if there's more room to go kind of normalize their share?

Paul Johnston: Yeah. The opportunity for Breen and Daikin, they're performing very, very well for us right now.

Albert Nahmad: This lady Were they able did they grow their volumes last year?

Paul Johnston: Not gonna get into that. No.

Operator: Okay.

Barry Logan: And then last one for me on the HVAC product segment side. Can you remind us what the commodity related product exposure is there as a percentage of the total You've historically talked about, like, copper tube and ductwork and refrigerants and things like that. Being more commodity sensitive And I'm just curious what you're seeing in terms of inflation driven price there currently. Okay. Copper is always

Paul Johnston: up and goes down daily. So it's copper is a hard one to track. You know? Today, it's down two and a half percent. Down to $5.72. It's been as high as $6 a pound. Refrigerant has been holding its pricing. It's not been increasing yet. So we really haven't seen a lot of fluctuation on the refrigerant side.

Albert Nahmad: Hey, Pat. In the aggregate, just to just to dimensionalize it, in the aggregate, it's about 5% of total volume. So it's really not significant. And we very deliberately keep or, you know, we count inventory in days and weeks, not months there because we don't want any of that price volatility to creep into sales and margin. So it's very conservatively managed, and it's only 5% of the business.

Paul Johnston: Understood. Yeah. Well, thanks for the color. I'm just going I'm going just glancing at some volatility across four quarters this past year, and there's none. I mean, it's as Rick is suggesting, it's a little bit of a real time inventory turn for those products and

Albert Nahmad: is

Paul Johnston: precisely 5% of overall revenue.

Albert Nahmad: Yep. Let's move on, Barry. Let's move on. Thanks a lot, guys.

Operator: This concludes our question and answer session. I would like to turn the call back over to Albert Nahmad any closing remarks.

Albert Nahmad: I appreciate your interest in Watsco, Inc.. Some of you have been with us for decades, and I appreciate that. So thank you very much for your interest, and we'll speak to you next quarter.

Paul Johnston: Bye now.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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