Watsco Inc Q4 FY2025 Earnings Call

Good day, and welcome to the Watsco, Inc. Fourth Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the call over to Albert Nahmad. Please go ahead.

Good morning, everyone. Welcome to our Fourth Quarter Earnings Call. This is Al Nahmad. With me is A.J. Nahmad, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start, a cautionary statement as always. This conference call contains forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. 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 navigated it through the COVID supply chain disruptions, the 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 shareholders. We grew our scale and market share and we added 12 business acquisitions, representing over $1,600,000,000 in 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 immense long-term competitive advantages. We believe we operate in a great industry, with strong long-term fundamentals and the industry's most accomplished leadership team, all focused on building our long-term success. Turning to our fourth quarter results, we achieved double-digit pricing gains on the new A2L products and raised 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 had a 20% growth rate. Operating efficiency improved as SG&A dropped 2%, and this included newly acquired and opened locations. I expect overall sales performance and operating efficiency to improve now that the A2L product transition is largely behind us. We continue to fortify our balance sheet, and we were debt-free for the 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, with the balance of the SEER. We continue to invest in innovation and technology that separates 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, contractor engagement with our mobile app expanded 15% to 73,000 users. The annual run rate of sales through OnCallAir, which is our digital selling platform 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 competitive position and add to our long-term growth 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 further progress toward our 30% plus gross margin target. We have launched a new initiative to compete in gross sales in the fragmented non-equipment 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, and capacity to invest, are unmatched in our industry. With that, let's turn to Q&A.

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 are 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.

Good morning, David. Thank you.

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 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?

That's a terrific question. I'm gonna let several people here answer that. Do you want to start, Barry?

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 an 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% in 2025.

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.

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 don't think there's any issue on that side right now.

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 have been macroeconomic issues, there have been geopolitical issues, there have been industry-specific stuff, there have been wild supply and demand dynamics, there have been regulatory changes, etcetera, etcetera. You use the word 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.

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

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

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, it was 11%. And so pricing as a general theme has been a very stable part of our business. And the margin opportunities in flows from that have yielded good results this year. And that maturity didn't stop January 1 this year. It continues into 2026 as the full maturity of the new products, you know, alphabetically play out. So I think pricing and margin 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 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. Alright. Thanks for all that context. I'll pass it on.

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

Morning, Tom. Morning, Al. Thanks for taking my questions.

I want to start on the dividend increase you announced today, another 10% increase.

This has been a key part of the Watsco, Inc. story for a long, long time now, for over years. I think you called out.

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 for the LTM period. Granted, that was an abnormal year, but I don't know if you've ever been in this situation before.

Where the outlook for the dividend exceeds that earnings rate from a cash flow standpoint, clearly, you can do it without breaking a sweat. But I just wanted to ask what's the message here on the confidence on the earnings line going forward? Thank you.

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

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 relax people on that theory.

Because that the dividend was $7 and 10 and 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 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 per share today. And, 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.

Thank you, Barry. Mentioned OEMs. And for my question, I wanted to hit that theme. If we look back at what Rick Gomez: carrier communicated to the market regarding their 2026 outlook for residential, 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 want to call out today? Thank you.

Go ahead, Barry.

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 14A 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 an easy thing to analyze at any time. I think, if my memory is right, Carrier's unit volumes were down in the 40% range this past quarter. If you look at our math, 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. But I think if I look forward, two things I know: 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. 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 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 410A conversion and activity and pull in the fourth in the first quarter, but I think that begins to clear on our side of the ledger sometime by the second quarter. So I think it's 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 few years. But I think the curvature and the spectrum will narrow and be a little simpler for everyone as the year goes on.

Tommy, I'll add some color to which is not 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 to fifteen years, I think it's safe to say Watsco has done a good job of modernizing its people, its team, systems, processes, and technology. And then, as I said earlier, the last five years have been, I think it's fair to call chaos between all the implications of the pandemic and everything else that's been resolved now. So here we are in these days where we're hopefully reaching some level of normalization. And so what is our priority? It's sales. It's taking 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 where our priority is sales.

Thank you both. I'll turn back.

Yeah, just to completely exhaust that. You know, we have about 15 primary equipment OEMs. And to start a year where we can have strategic growth market share driven 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.

I hope that was helpful.

Our next question comes from Ryan Merkel with William Blair.

Hi, guys. This is Mike Francis on for Ryan. How are you doing?

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

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

Yeah. It's down in the mid-single digit range, so it's better than 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 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 the data, but I try to draw important inference out of it.

K. And then, SG&A, nice job on that.

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?

Yeah. I think it's progress. Right? So a lot of reduction, and really taking action that happened during the fourth quarter. It didn't start January 1. It was throughout the quarter. So I think there's an opportunity for further reduction especially out of season. As we get into the season, we'll calibrate what we think we need and what we have and serve customers in 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.

Alright. I appreciate it. Again. Let's 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 technology and so forth to drive efficiencies for now and forever. We are a continuous improvement business. Like Barry says, we're not gonna be shy to invest where we see growth opportunities.

Alright. Passing on. Thanks, guys. Our next question comes from Brett Linzey with Mizuho. Please go ahead. 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 I can take a stab at that. Yeah. I think, first of all, you know, 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 the starting point for what comes next. It's not a floor. It's not a, you know, we're not saying that 28 is the new 27. We're saying we've done well in 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. 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 we talked at our Investor Day about a new initiative that we're affectionately calling VCR, and that has to do with getting smarter, more strategic about purchasing within the non-equipment space and not just 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 that initial is early days, but good progress so far. So I think the controllables of margin that we have within our portfolio, let's say, we feel relatively good about. And if this is a year where you could have, you know, conventional OEM pricing, I think that also is favorable to margin.

So no flashing red. I think there's good optimism and also just a well-thought-out strategy to, you 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. We wanna do it responsibly, and we wanna do it in a measured way. And, Barry Logan: I'd love to be able to say we grew x to y every year for the next, you know, y number of years and 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%.

And then the goal will be over 30%. Yep. No. Appreciate that. And then then maybe just 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 positioning standpoint? Do you think there's more rightsizing that needs to take place, or do you think you're in pretty good shape?

There's always going to be right sizing taking place in our inventory. Know, 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 residential units, residential units, you know, ended the year down. Dollars ended up know, pretty close to what they were last year. At this point, I would say our inventory is in great shape compared to where it was a year ago. A year ago, we were in the transition period. And now we're out of the transition period. We're pretty much through with the 410. We've got some left that needs to be moved. But I think overall, our inventories are in a great position right now to face the market.

And, Paul, why don't you say also that our OEMs are in a nice position getting through all the noise of the regulatory changes and so forth and getting back some level of normalization in terms of lead times, etcetera. And I think that provides a good base on top of which we can further optimize our turns and be a more efficient business in that regard.

Did you guys hear me?

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 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. And we're gonna climb up that ladder. And when we do that, you guys can do the math. Every turn of inventory, what that means in terms of free cash flow can then be used to reinvest in the business.

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 the progress we've made. But if you look at it analytically, I think 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 point is a good beginning point. Where the turns come is trying to not spike the inventory, you 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 what we're up to, and that's how it could happen. It 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.

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

Hey. Good morning, guys.

Just back on gross margin. So I understand that the 30% target and can continue to drive for that. But, you know, it seemed like the second half, you were kinda getting back down to kinda low 20's sevens, and you had some maybe temporary goodness in the first half. So I'm just trying to level set if we take out that 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, you know, given that benefit last year?

Well, the reason that you see that variation in GPM is the seasonality 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 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 that round of springtime OEM price increases amounted to mid-single digits, that's been exactly 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 at the end of the day.

What really derives a gross margin is the transactional margin at which we sell to the customers, 130,000 of them out in the field in 700 locations. That'll be over a longer period of time the more important ingredient, whether we can sustain and grow gross margins.

And, as I said earlier, I think there's optimism and an upward bias to that because that technology is still proliferating and scaling as we go.

The other, again, just component to that that I think is underappreciated margin is the mix between your equipment and your nonequipment. Right? So, obviously, we saw just a relative difference there in sales trends, and that 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.

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 bigger going forward, that will be helpful to margin along, you know, just from a growth and volume standpoint in addition to all of the purchasing and redistribution benefits we gain along the way. So the transactional margin, the pricing technology, and the success of VCR is what really will, I think, govern our long-term success on gross margin.

I also think whenever we have this conversation, it's important to reiterate that the mission to expand gross margin does not necessarily mean raise prices across the board and suffer the consequences of higher prices, meaning lower sales. That does not mean 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.

Okay. Great. And then Barry, maybe you can give for Q 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 last year and maybe, you know, commercial started the year better and then softened. But maybe just update us. I mean, commercial was 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 quarter, and Latin America 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. But again, 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 certainly not worse as we closed out this year.

Okay. Thanks.

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

Morning, Steve.

Good morning. How are you?

Good.

Can you just parse out the residential performance a bit? Was there like on the ductless side, how did that perform versus kind of the traditional ducted products?

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

And for the year as well?

Let me look at the quarter. For the year, I mean, kind of as it should, ductless has been outgrowing. No. I'm sorry. No. So it's exactly the same. The decline in, yeah, decline in ducted ductless is identical.

And as far as the parts and the repairs and things like that, 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? Well, if you look at, like more price sensitivity, you know, from the contractor and not just on the box side?

I don't think there was price sensitivity. I think, you know, if you look at the compressors and motors, they really represent the bulk 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 annual sales of parts and parts business. So it's not a significant quarter.

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

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

Do you have the answer? No. We know the answer. We're just not gonna tell you. Right. Yeah.

I've got a broken clock in my room and it's right, you know, twice a day. So that's what I'm shooting for. Thanks, guys. But I guess I had to ask.

But I again, I'll just say this just to have a little bit of fun with this. I wanted to understand our data, not Hardy data, OEM data, not HR ID, our data. So I went back to 2018 and 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 used 3% just to pick a number that was more conservative than 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 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 projection. I don't feel intellectually worse. I feel better.

Right. So it feels more normal. I'm not sure it actually is normal yet, but it does feel more normal. And the balance of the season will kind of tell us if that theory holds or not.

And so you're making it a yeah. Go ahead. Sorry. Say, Steve.

Yeah. Which is it feels more normal, but I'm not sure it is. You know, but it is, it does feel more normal. And the balance of the season will kind of tell us if that theory holds or not.

And, sorry. One more for you on this front. Do you finally kind of 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?

Yeah. Well, it's not, no, no one pre-bought them. We sold them and they installed them.

Right. Our contract for you guys. Right?

Right. So last in last year in the fourth quarter, our guess is we sold, you know, 410A 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% change in actual units. The actual unit change is 17%.

Got it.

Okay. And, alright. Thanks. Thank you very much.

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 the right questions and good conversation, but 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 year. But our decision-making, our investments, our leadership philosophy, is all about the long term. We will never trade the long term for some short-term benefit. So just know that that's at the core of Watsco, Inc.'s culture.

Loud and clear. Amen.

Well said, Mr. President.

Alright. Are we done?

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

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, and it would just be a wider delta versus the repair. Any way you can help me think through that? Thank you.

Yeah. When we say two units, we mean 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 thirty-two 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 I think 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 certainly next year, twenty-seven, distributors will not be really carrying any product that can sustain the old system that's chronically failed. So it's a migration. It's a progression. But that gives you some color on it.

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. I was just trying to get a sense for, like, how common is that you maybe a year ago would only just replace one of the two.

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.

So if the average lifespan of a product, let's say, in the entire US is fourteen to fifteen to sixteen years, you've only got a window of five to six years where the consumer's gonna be paying for the replacement of the compressor or the motor.

So, you know, a lot of probably 50% of the compressors that we move will go to warranty. 50% will be sold. Yeah. I 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 know is as we move away from 410A availability, which is near zero today and will be at zero soon, that capability, you know, moves away and contractors' preference 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 capability of paying for things is still important. But as we move away from 410A availability, the choices become less, not more.

Thank you for all that color. Really helpful.

Our next question comes from Patrick Baumann with JPMorgan.

Please go ahead. Good morning, Patrick. Thanks for letting me sneak in here. Steve asked questions earlier, but I appreciate you letting me hop on. A quick one on the volume 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 really just trying to understand if you've seen volumes recover for the non-carrier vendors. We had, obviously, some issues at Goodman with the transition, I think, in '24, and then as well with Rheem just curious if those OEM volumes have fully recovered now or if there's more room to go kind of normalize their share?

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

Were they able to grow their volumes last year?

Okay.

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.

Copper is always 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.

In the aggregate, 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 we count inventory in 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.

Understood. Yeah. Well, thanks for the color. I'm just going, I'm glancing at some volatility across four quarters this past year, and there was none. I mean, it's as Rick is suggesting, it's a little bit of a real-time inventory turn for those products and is precisely 5% of overall revenue.

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

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

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.

Bye bye now.

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