Earnings Call Transcript - WSO Q1 FY2026

Operator

Good day and welcome to the Watsco First Quarter 2026 Earnings Conference Call. All participants will be in the listen-only mode. Should you need assistance, please signal your conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touchtone phone. To withdraw your question, you may press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Albert Named. Thank you, and it would to you.

Albert Nahmad, Chairman

Welcome to our first quarter earnings call.

Al Nahmad, CEO

This is Al Namid, chairman and CEO. With me is A.J. Namid, the president, Paul Johnson, Barry Logan, and Rick Gomez. Before we start our cautionary statement, this conference call has 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, they differ materially from the forward-looking statements. First quarter results point to improving stability now that the transition to ATOL products has matured. We expect a more simplified business environment this year, but it is still early in our summer season, but so far so good. We're also excited to announce our agreement to acquire Jackson Supply, a legendary market-leading Sunbelt distributor with $230 million in annual sales. We are fortunate to know many great entrepreneurs in our industry. Jim Durrett, Jacksonville owner, and his talented group of leaders, all of whom will remain with the company, certainly meet the definition of great entrepreneur. Our relationship with Jackson dates back more than 20 years, and we are grateful to Jim for entrusting us with his company's next chapter. Jackson will expand their sub-belt presence by 25 locations and provide diversification of brands and products, giving their strong presence in parts and supplies. As I mentioned, and is our culture, Jackson team will continue to operate and grow the company with our full support. In addition, our community of leaders, along with Jackson, will collaborate and learn from each other, as is also our culture.

Albert Nahmad, Chairman

We expect to close the transaction sometime in the second quarter.

Al Nahmad, CEO

Within our existing business, we continue to build and expand our technology platforms, which provide us an immense long-term competitive advantage. E-commerce sales increased 16% during the quarter, while outpacing overall growth rates. On-Call Air, our digital platform that helps contractors present and sell solutions to homeowners, increased customer sales by 20%, reflecting a rich sales mix of high-faceted systems. We expect the gross merchandise value for On-Call Air to exceed $2 billion this year. Let me say that again. We expect sales of on-call air to exceed $2 billion this year. We feel like this is a good start and expect more progress as adoption by contractors gain momentum in years ahead. Turning now to our first quarter results. Sales increased 2% in U.S. markets, reflecting a mature mix of A2L products, as well as an improved mix of high-efficiency systems, offset by lower unit sales. Unit volumes stabilized as the first quarter progressed. Gross margins remain largely intact, affecting good execution for our leadership teams to sustain price and competitiveness. We continue to execute on several ongoing initiatives to enhance gross margins with the long-term goal of achieving 30 percent. SG&A remain flat as improved operations efficiency offset incremental technology investments and new locations. We expect overall operating efficiency to further improve, and our technology can now show its mettle in a simpler operating environment. Our balance sheet continues to be strong and remain debt-free. Let me repeat that. We remain debt-free. As I mentioned, we continue to invest in innovation and technology to separate us from our competitors, and we are making incremental investments to enhance our competitive position and add to our long-term growth and margin profile. For example, we are developing new innovations aimed at capturing more sales to large institutional customers, which is set to launch during the second quarter. We are excelling the use of our pricing optimization tools to make further progress towards a long-term target. We have launched a new initiative to compete in growth sales in the highly fragmented parts and supply segment, which comprise almost 50% of the interest market share. And we have begun to harness the power of artificial intelligence, offering the 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 a capacity to invest are unmatched in our industry. With that, let's turn to Q&A.

Operator

Thank you. We will now begin the question and answer session. To ask a question, we'll press star and then one on your touchtone telephone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. We have the first question from the line of Ryan Merkel from William Blair. Please go ahead.

Albert Nahmad, Chairman

Morning, Ryan. Ryan, can you hear us?

Ryan Merkel, Analyst — William Blair

Yeah, can you hear me?

Al Nahmad, CEO

Now I can, yes.

Ryan Merkel, Analyst — William Blair

Okay. Hey, everyone. Congrats on the deal and a good start to the year. I wanted to start high level. Al, can you just unpack your comments about improved stability as we head into the summer? And, you know, what's changing? And are you seeing April, you know, positive in terms of year-over-year growth at this point?

Albert Nahmad, Chairman

Well, let me turn to our expert in that sort of thing, Barry Logan. Oh, he just said anything. He dropped off the call. Please let the operator know.

Albert Nahmad, Chairman

Okay. Rick, do you want to jump in there?

Rick Gomez, Analyst — Other

Sure. I'll take a stab, and then Barry can backfill and enhance it running. Good morning. Yeah, look, I think what we – first, if we just look at the first quarter in isolation, and then I'll turn to April, you know, we saw what was the full maturity, really, of the A2L product transition, units still weighing a little bit, which means that the market is not yet fully healed. There's no inflection point here. But things did get incrementally better as the quarter progressed, and we exited the quarter nicely with March up high single digits on the same day basis. And so far, three weeks into April, I can tell you that that momentum has sustained itself, and we are seeing, you know, incrementally more stability in April than we did to start the year, and so April has begun nicely. All of that said, you know, we're still not yet in what is the thick of the selling season, and so we'll be a little bit, a little cautious in our tone and our optimism, but this is certainly, I think, incrementally more stable more positive less complex um and uh and we'll take that in a in a first quarter

A.J. Nahmad, Analyst — Other

okay yeah i'll take that too if that's all right which is uh if you zoom out even further look at the history of this industry for 30 40 50 years it's been a pretty mature slow growth steady as you go industry and then covet hit and it seems like all chaos broke loose over the last five years. We had extreme demand as people were investing their homes. We had extreme supply chain challenges, which constrained the products that we could sell. We had multiple regulatory changes that changed the product that we sold almost 100% of the equipment we sold twice in that period. We've had tariffs. We've had inflation. We've had different tariffs. it's it's uh we've had constraints or limitations on refrigerant canisters it's just been kind of one thing after the other for the next five years uh and it seems like most coming into 2026 most of that stuff was behind us certainly the stuff being driven by the industry in terms of regulatory changes and so forth so we look forward to a more normalized 2026 as we started the year and i think we've got got at least most of the way there uh obviously there's still some things changing with tariffs and and some dynamics but we're looking forward to a quote-unquote more normalized environment and getting back to business and hidden in the streets and and taking care of our customers and growing the business and i think that that's that's materializing

Albert Nahmad, Chairman

I think

Albert Nahmad, Chairman

Go ahead, Barry

Barry S. Logan, Analyst — Other

No, I was going to say I was going to say I think it's interesting too that we see e-commerce sales kind of bloom this quarter. That tells us the contractor's daily life is kind of reset into a good place to start this year. I always mention contractor credit as a critical measurement of how the market looks. And again, that is in very good shape. And also, now that the product line is the product line, we saw an increase in higher efficiency systems being sold. Again, as Rick said, it's early, but those are good indicators. And it's kind of what we have been looking for

Ryan Merkel, Analyst — William Blair

as some indicators. All right. Very helpful. I'll pass it to others and leave it there. Thanks.

Operator

Thank you. We have a next question from the line of David Mante from the bed. Please go ahead.

Al Nahmad, CEO

Morning, David.

David Manthe, Analyst — D.A. Davidson

Morning, Al. Thanks for taking my question. So my question is primarily on the Jackson Supply acquisition. Correct me if I'm wrong, this looks like a Goodman distributor primarily. and as far as I can tell, it looks like a great fit within the CE, Gemair, and Baker footprint that you currently have. Is there anything else you can share with us about mix, margins, growth, what made this an attractive acquisition for Watsco?

Al Nahmad, CEO

Well, this is a relationship we've had for a very long time, and we have seen them succeed in their markets over years. So we know that they have the right leadership. we know they have the right strategy and all we want to do is support it so they can continue to expand and if they need more capital we'll provide that if they need more technology we'll provide that if they need more equity their leadership will provide that so it's just a wonderful business to become part of WatchGo in every respect Texas is where they are mostly and that's always a very good HVAC market. So, I mean, it resonates on all the points that are important.

David Manthe, Analyst — D.A. Davidson

Yes, sounds good. And then as it relates to the stabilization or normalization theme that we're all kind of looking at right now, when we look at your numbers through the year, the volume comps get easier, the price comps get more difficult. I don't want to slice this two things. I know you guys aren't going to do that. But just when we're thinking about sort of normalization through 2026, would we expect sort of a natural handoff just based on where those year-to-year comps are? If we're going to have sort of a normal, stable year that equipment would go the other way, would grow, whereas price would sort of tail off toward the end of the year? Is that how you're thinking about it?

Al Nahmad, CEO

Well, we certainly are hopeful that we're going to grow, and it seems like we will, but it's too difficult, too early, I should say, is a better way to say it, that we're going to have the government market conditions that we have experienced in so many years. And so all I can say is what we've already said is that we're seeing improvements, and we're pretty sure that we're on the right path, but let's wait and see. Regardless of what the markets do, we're going to do well, and we have competitive edge over other distributors that we've told you about over and over again.

Albert Nahmad, Chairman

Yeah, sounds good. Thanks a lot, Al.

Operator

Thank you. We have the next question from the line of Tommy Maul from Stephens. Please go ahead.

Al Nahmad, CEO

Morning, Tommy.

Tommy Maul, Analyst — Stephens

Good morning, Alan. Thanks for taking my questions.

Al Nahmad, CEO

Sure.

Tommy Maul, Analyst — Stephens

To start, I wanted to expand a bit on the year-to-date comments that Rick made. if March exited the quarter in a high single-digit growth range and April has continued that momentum, is it fair to infer that your resi equipment volumes are now flat or maybe even a little bit better than flat in those two months? And how long has it been since that was the case?

Al Nahmad, CEO

All yours, Rick.

Rick Gomez, Analyst — Other

Yeah, Tommy, we're not going to splice it that thinly for three weeks in April here. Again, we're not yet in the full selling season. I think the prior question got at it a little bit, which is, you know, this time last year is when we saw volumes begin to degrade a little bit. And so just on paper, mathematically, it stands to reason that, you know, that looks better. and, you know, price. Obviously, we have pricing actions that took effect last year. And I'll remind everyone that our mix of A2L products in the first quarter of last year was about 25%. And so, like for like, the new equipment is at a double-digit price point above where it was last year. But we had some of that in our first quarter of last year, and it was about 60% of our mix in the second quarter of last year. So, you know, the ultimate comparison here is what did it look like versus two years ago versus three years ago and we'll be in a smarter position to answer that question after the second quarter. So far, so good is how I would describe the start in April.

Tommy Maul, Analyst — Stephens

Fair enough. Al, a question for you on inventory. There have been some big moves in recent quarters and years. As you enter the selling season for 2026, how would you characterize that inventory position?

Al Nahmad, CEO

Well, we expect, given the market conditions, that we will reduce our investment in inventory, which affects our cash flow, of course, because we'll improve the inventory turn. So many changes were occurring recently that it could only get better, so it could get worse. So we expect our inventory terms to increase and contribute to cash flow for the rest of the year.

Paul Johnston, Analyst — Other

Yeah, plus we've got our supply chain is a lot more solid than it was in the past. You know, AJ mentioned that we had COVID and we've had all these changes in models and products. And I think, finally, our manufacturers have an opportunity to make a single line of products continuously throughout the year, and I think that's going to also help the inventory turn.

Albert Nahmad, Chairman

Thank you both. I'll turn it back.

Operator

Thank you. We have the next question from the line of Jeff Hammett from KeyBank Capital Markets. Please go ahead.

Jeff Hammett, Analyst — KeyBanc Capital Markets

Hey, good morning, everyone. um maybe just to start um you know we the the section 232 update seemed to to you know bring about questions about you know follow-on pricing and i'm just wondering if you've seen any pricing from your oems in near term outside of like normal course um that would suggest you know more

Al Nahmad, CEO

more pricing uh upward moving pricing well i do expect it because of the duties that are being paid now uh by some of the manufacturers and uh i can't quantify it yet but yes the pressure is on the manufacturer and they i believe they will raise their prices and we've we've we've had a

Paul Johnston, Analyst — Other

number of price increases to date from several of the manufacturers, which have already become public. So they're well known. And we are going to have a price increase pretty much across the board, I believe. But we'll just have to wait until probably in the second quarter, we'll know for sure exactly what those price increases look like okay great and then um just i'm at you know

Jeff Hammett, Analyst — KeyBanc Capital Markets

there's been kind of increasing questions about price elasticity and you know the unit costs are getting up and there was this debate last year about you know repair replace was that you know this a2l transition or was that the consumer kind of being tight so you know and i noticed your your not equipment or other products was up just wondering what you're seeing and how you're thinking about repair versus replace uh as we go through and into the selling season i think i think

Paul Johnston, Analyst — Other

we're happy with yeah we're yeah we're happy with both you know we're we're seeing a definite uptick in uh in our compressor sales which aren't going to offset any you know by any material stretch of the imagination the the equipment sales but we're also seeing a rebound in equipment sales So I think it's going to be kind of a dual market out there for a while where we're going to have an increase in parts, and at the same time we're going to have an increase, I'm hoping, in equipment.

Albert Nahmad, Chairman

I don't think it's either or anymore.

Rick Gomez, Analyst — Other

Yeah, Jeff, just to expand on that for a second, I mean, remember that non-equipment for us means a lot of things. It's a very broad basket of goods. Parts is actually the minority of what's in non-equipment. Yes, it grew, but so did virtually everything else in non-equipment, including supplies, including our small and growing plumbing business, and including commercial refrigeration, of course, which we report separately. So there's broad-based growth there, and it's not necessarily a read on repair versus replace all the time.

Barry S. Logan, Analyst — Other

Okay, thanks, guys. And to say it analytically, I mean, parts, replacement parts, parts sales are less than 10% of watts go. So when we say 30% is non-equipment, that means 20% is everything else, just from an analytical point of view.

Albert Nahmad, Chairman

Thank you.

Operator

Thank you. Again, if you have a question, please press star and then one. We have the next question from the line of Renagel Koh from Wolf Research. Please go ahead.

Nigel Koh, Analyst — Wolfe Research

Hi, Al. I wanted to go back to your comments on, you know, inventory turns continuing to increase. the the one cube inventory build was a little bit higher than what we expected look actually look quite normal so my initial reaction was that the destalking is behind us it doesn't sound like that's the case i just wanted to clarify that comment and i'm wondering if you you know the inventory build you know is getting ahead of price increases uh slightly better demand just just

Al Nahmad, CEO

wondering anything more there well there's been a shift in in the product innovation so when Product innovates, we have to carry the existing inventory to support what's been out there. And then we have to take inventory in for the new changes in the product. And that does inflate inventory. But that doesn't bother us. It's just part of a normal thing. And we run a very conservative balance sheet. We have no debt, so we can afford to have the swings in inventory perhaps better than our competition can.

A.J. Nahmad, Analyst — Other

Okay, Nigel, I'll take a stab at that, too. I mean, I would not call our expected inventory turns and enhancement and burn through of our inventory more structural destocking. That's not what we're talking about. We're just talking, like Paul mentioned, the supply chain and our OEMs and the whole process is more stable, more reliable than it has been. And so now we bought inventory for the summer selling season to make sure that we have the right amount of products in the right places to support expected customer demand. And we expect to turn inventory better than we have been able to because there's less noise in the system.

Nigel Koh, Analyst — Wolfe Research

Yes, another way to ask it would be, do you expect selling and sell through to equalize now going forward? Just obviously we've seen a big divergence in the past. And then maybe just with these price increases, which it doesn't sound like they've been formalized at this point, you had a big uptick in gross margin last year in 2Q versus 1Q on the price increases. I'm wondering if you expect that still to happen this year with the price increases coming through.

Al Nahmad, CEO

I think that'll probably be a second. Yeah, go ahead. Let me refresh the conversation about that. We have a target of 30% gross profit margin. And a lot of things go into that. And we're not going to get there overnight, but we have a plan to get there. And that involves pricing technology, which we're getting really good at. I'm sure that the sophistication pricing system that we have is superior to anything else on the market. That will help gross profit margins, and our ability to consolidate purchases across the whole company from vendors, manufacturers, will also help improve gross profit margins, if that helps, that explanation.

Albert Nahmad, Chairman

Okay, thanks, Al.

Operator

Thank you.

Barry S. Logan, Analyst — Other

I want to go back, I'm sorry, to the inventory discussion, just to be, again, try to be educational about it, because I think what Rick said is important. This is not a structural further reduction in inventory. That's not what this is. That's not the goal. The goal is to own less inventory on average throughout a given year. That's the equation of inventory turns, right? Cost of sale is divided by average inventory. So just have less load in the branches over a period of time in order to keep our customers exactly happy every single minute of the day. And as some of the metrics with the manufacturers improve in terms of lead times and on-time delivery, things like that, as that improves, it lets us moderate the amount of inventory we carry. So it's much more subtle than the big stick we took to inventory last year. This is the subtlety of improving inventory turns over a period of time and, frankly, going back to where they should be and where they had been for many years before all these changes.

A.J. Nahmad, Analyst — Other

I'll add one more note to that, which is that with our new hydro system, which we talked about thoroughly in our investor day, we can also increase product assortment at each branch while still carrying less inventory because we can turn that inventory faster.

Albert Nahmad, Chairman

Do we move on to the next question?

Albert Nahmad, Chairman

Seems like we're disconnected. Are we disconnected?

Operator

No, sir, you're connected. Do we move on to the next question? Yes, go ahead.

A.J. Nahmad, Analyst — Other

Sure, thank you.

Operator

We have the next question from the line of Stephen Falkman from Jefferies. Please go ahead.

Al Nahmad, CEO

Morning, Stephen.

Stephen Volkmann, Analyst — Jefferies

Good morning. I guess he wanted you to think about it before you took my question. so yeah we reserve the right to change our minds even you know yeah feel feel free so most of mine have been answered but i have a kind of a bigger picture one so back in the before times which i'll define as pre-covid there was often a fairly meaningful difference between announced price increases and what was actually realized in the market And I'm just curious how you're viewing that these days, because, of course, we've seen a number of those announced year to date here and some whispers about more coming. And yet, you know, the demand environment is still not great. And so I'm just curious how you think that plays out as the year progresses.

Paul Johnston, Analyst — Other

If I can make a stab at that, you know, one thing that I think you realize is that we've got a very diverse market out there, both geographically as well as the type of customer. So, obviously, the announced price increase does not always apply completely to certain segments of the market, you know, to some of the people that have longer-term contracts with pricing. And so what we end up with is we end up with an announced price increase, and then we end up with a realized price increase, and it's generally less than what the announced price increase is.

A.J. Nahmad, Analyst — Other

Yeah, I would add to that, though, Paul, which is that the software that we've brought online to help our businesses, not only with analytics and pricing and making sure we have the right price for the right customer, it's also about administrating those price increases. I mean, if you think about every time there's a price increase from OEM, it's touching thousands of SKUs for thousands of customers. And just the number of permutations and the administrative work associated with that, which used to be done essentially, call it by hand, was overwhelming. I mean, that was a lot of work for a few hands on keyboards. But now with the tooling, one of the benefits is that we can appropriately adjust the pricing for all the customers, for all the SKUs that have new pricing. You know, it's not actually instantaneously, but I'll say instantaneously so that we don't have the risk of a lag of price increase where we otherwise did have that risk and sometimes missed making changes that needed to be made, if that made sense.

Albert Nahmad, Chairman

Yes, good morning.

Stephen Volkmann, Analyst — Jefferies

It's interesting. I appreciate that. And then maybe almost a segue there, AJ, is that it feels like you guys are almost talking like there's an inflection here in your e-commerce platform. I don't want to put words in your mouth, but assuming that that growth in that platform is accelerating, does that have an impact on your gross margin target? Is that a tailwind or is it just more sales?

A.J. Nahmad, Analyst — Other

Yeah. Well, all of the above. We do realize a higher gross margin with our online sales and our offline sales. And e-commerce sales are increasing. We expect that trend to continue. And also, our cost to serve is lower with our online sales. And customers are using that tooling because it helps them too. It helps them organize their businesses and how they go to market and how they procure products. So it's really, it's a win for all of us, including and especially the customers. So we very much expect to invest in our e-commerce technologies and our tooling for our customers. And we expect the adoption rate to continue. And just to give you a sense of what's possible, we have markets. And when I say markets, I mean, you know, the state of Florida, which was like an $800 million business for one of our subsidiaries, where they're almost 70% of their sales go through the e-commerce tools. So that's the possible.

Rick Gomez, Analyst — Other

And Steve, if we look even more long-term, this is one of the most underappreciated aspects that we write about it every quarter and tell you guys about it, but it really is meaningful inside our four walls is the future attrition benefits that we get when we have active e-commerce users. that is an incredible moat and an incredible stickiness to future revenues and those customer relationships that really, really matters when you look out three, five, seven years.

A.J. Nahmad, Analyst — Other

And while we're on the subject, we also sell more line items for invoice when we sell online versus offline. So it's a winning formula

Albert Nahmad, Chairman

to sell more products online and we're focused on it. Thank you all.

Operator

Thank you. We have the next question the line of Chris Snyder from Morgan Stanley. Please go ahead.

Chris Snyder, Analyst — Morgan Stanley

Thank you. Hey, I wanted to ask about Q1 inventory. So it was up about 25% quarter-on-quarter, which matches what we saw the last, you know, five, six years. But the last five, six years, you know, OEM inventory was tight. Lead times were long. This year, it feels like the opposite. So I was surprised at how much your guys' inventory came up in that construct. So I guess, is this because you guys feel that demand is turning or there's well-appreciated April price increases coming even before the 232 and there was some building to get ahead of that? Thank you.

Barry S. Logan, Analyst — Other

Let me answer. First, remember that the composite inventory today is all A2L product. A year ago, it wasn't. It was a mixture of old and new product. So if you take the inventory increase for equipment, it's all in the mix of price. It's not units. Actually, we own less units at the end of March than we did a year ago. So that element, that sales mix of A2L is still being compared a year ago to a heavy mix of Fortune A products. So that gets simpler and easier to identify as we get into the second quarter. But to keep it simple in my statement, we do own less units at the end of March than we did a year ago.

Chris Snyder, Analyst — Morgan Stanley

Yeah, but I guess on that, like, sequentially it's kind of the same. Like, sequentially, like the 25% volume are units. So I guess just like that kind of more, like it felt like you guys were building in Q1 the same way you built the last five years. But, you know, you guys, the lead times are a lot shorter. So I would have just thought that you guys would build a little bit more cautiously. So I guess just the question was, like, is that a function of demand turning, and you're more optimistic there, or there's just very well-anticipated price increases? Thank you.

Paul Johnston, Analyst — Other

I think if you look at our March inventory versus our March inventory the year before, you see that the dollars are down. Also, when you sell an A2L product today, you've got to sell an indoor unit and an outdoor unit. So we've had to increase our inventory of indoor units to accommodate the new A2L refrigerant. So that could be part of what you're looking at there also.

Chris Snyder, Analyst — Morgan Stanley

Interesting. I appreciate that. And then just, you know, maybe following up on the inventory point, you know, over the last year, it seemed like it was very difficult for the industry, you know, both the distributors and the OEMs to have a sense of how much product their customer is holding. So I guess just now it feels like there's another round of OEM price increases coming. I imagine here in the early part of Q2 maybe distributors and contractors are all looking to get ahead of that. I guess just like how do you guys think about those channel dynamics? And is there anything that the company has done versus a year ago to just have better visibility or confidence in how much inventory the customers are holding. Thank you.

A.J. Nahmad, Analyst — Other

I mean, I'll take a stab at that and keep me honest, which is that we, WOSCO, did not buy ahead of the expected price increases coming from the 232 tariffs. That's point one. Two is that, yes, some of our customers hold some inventory, uh and no we don't have visibility into what that numbers are but i and maybe paul or somebody can hold me honest i don't think it's particularly material no there were some customers i can tell you that there were some customers that bought ahead of the price increases coming now the 232 tariff price increases uh but that that in the end and when i mean the end i mean the end of the quarter the end of the season will just be noise because it'll smooth out by the end of the quarter by the end of the season now most of the contract not substantial enough it's not not substantial enough to really jolt the

Paul Johnston, Analyst — Other

picture I don't think most of our contractors are not carrying a lot of inventory they don't have mega warehouses where they put inventory in so yes I agree with AJ completely yeah

A.J. Nahmad, Analyst — Other

The reason we have inventory, the reason we have all the convenient locations with, you know, as much product variety as they need is because most customers do not carry inventory because they don't know what they're going to sell that day. And so they go to someone's house and figure out what the problem is and what the solution is. And then they come work with our teams to get the right product out of our stores to go install it in that home or that building.

Chris Snyder, Analyst — Morgan Stanley

Thank you. I appreciate that. And I know it's hard to pinpoint, but it did feel like last year there were some unexpected downstream inventories. That's why I wanted to ask.

Barry S. Logan, Analyst — Other

If I say it this way, it's not one size fits all for any brand that's out there. Our business model with our brands and our customers is to carry it for them. And Florida have 100 locations to take the pressure off of them having to stock anything ever. That's our value in Florida. And there are other business models, other OEM models, factory-operated models that have under 30 branches in Florida. And to get product into the channel, they need their customers to stock product. That's a business model decision. I'm not saying it's right or wrong. I'm saying it's a business model. So just in kind of evaluating the answer and listening to your question, there is a different answer if we go across brands and OEMs as well in that equation. That's a good point. Good point, Barry.

Chris Snyder, Analyst — Morgan Stanley

Thank you. I appreciate that distinction. Thank you, Barry.

Operator

Thank you. We have the next question from the line of Patrick Bowman from J.P. Morgan. Please go ahead.

Patrick Baumann, Analyst — J.P. Morgan

Good morning. Good morning. I know it's early in the season, but wondering if you guys have a view on what do you think unit sell-through will be this year?

A.J. Nahmad, Analyst — Other

Better than last year. I have no idea.

Patrick Baumann, Analyst — J.P. Morgan

There wasn't anyone that was jumping to answer that question.

A.J. Nahmad, Analyst — Other

Yeah, no, I mean, we're obviously shy to answer that question. Sorry, go ahead.

Barry S. Logan, Analyst — Other

Yeah, I mean, Pat, I said this for my career in April, I think. Like, the question is, if I ask it back to you, is do I feel better or worse today? I feel better today, for sure. You know, the other equations of the answer, existing home sales, new home sales, consumer spending, you know, consumer confidence. And contractor confidence, ultimately, is who actually sells the product in someone's home. And, you know, I would say, again, it seems like a better situation, but time will tell.

Patrick Baumann, Analyst — J.P. Morgan

Did you see any regional disparity in performance in March and April? Just asking in context of what seems to have been like a really hot start to the year from a weather perspective in certain areas.

Barry S. Logan, Analyst — Other

Yeah, I would say in the northern market, you had some severe winter. you had a bunch of closed locations a bunch of lost business we really either blame or compliment the weather in our discussion but the northern markets had a bit of disruption in the quarter that was all itself as time goes on too uh so the sunbelt by but you know because of what i just said the sunbelt was you know outperformed the north i think for those reasons But that's just the first quarter and not something to draw an inference from over the longer term.

Patrick Baumann, Analyst — J.P. Morgan

That makes sense.

A.J. Nahmad, Analyst — Other

It's nice to be geographically diverse so that, you know, all that just, again, becomes normalized over time.

Patrick Baumann, Analyst — J.P. Morgan

Yep, of course. And then my final question is, I was wondering if you could opine on Home Depot's acquisition of Mingledorf and kind of how you see that impacting acquisition opportunities for you. Are you seeing valuation multiples go up in the industry at all after that deal, or anything else to point out on how it might impact the competitive landscape?

Albert Nahmad, Chairman

We've competed with the business they bought for a long time,

Al Nahmad, CEO

and we're not threatened by it at all. In fact, I think, I'm not going to say what I really think,

A.J. Nahmad, Analyst — Other

because it wouldn't be nice, but no, it's not something that we worry about at all. yeah i mean i'll say we've known the mingledore family for a long time we wish them well and that business well uh but you know it takes two to tango and especially in our business model and our on our formula which our chairman started 50 years ago here is the the family needs to want to join our family and be here and run their business and use our tools and our technology and our capital and so forth to do what they do and do more of it continue to grow and if that's not in their interest then it's not a good fit if it is in their interest and and there's mutual trust and respect and it's a wonderful fit so we'll keep doing what we do and we've done it successfully for a long time and i don't think we're short

Patrick Baumann, Analyst — J.P. Morgan

of opportunities in the future makes sense thanks a lot guys best blocks thank you thank you

Operator

We have the next question from the line of Jeff Hammond from KeyBank Capital Markets. Please go ahead.

Jeff Hammett, Analyst — KeyBanc Capital Markets

Just a couple of helps. Hey, just on gross margins, you held the line pretty well, and I know you got some price benefit in 1Q last year, so that was good to see. Just wondering how you think you got a particularly tough comp in 2Q, so just wondering how you think gross margins trend. And then also, just separately, can you give us what commercial HVAC equipment was in the quarter? I'm not sure if I missed that.

Albert Nahmad, Chairman

Well, that's a big question. Oh, yeah.

Rick Gomez, Analyst — Other

I can take a stab at it, Jeff. On the commercial side, really, we didn't see a whole lot of divergence between what was residential and what was commercial. The biggest divergence is what we mentioned in the press release about domestic versus international. but Resident Commercial traveled very close together. And on margins, I think, look, if you go back 10 years in time, you can see, and if you just take second quarter and third quarter as one thing, you can see that there's usually some, you know, in most years, there's a modest retreat in margins only because historically first quarters are the ones that have some OEM pricing actions. And the cooling season and R&C mix and all of that typically influences the second and third quarter margin versus an off-season margin. So that's what history would tell you. Last year did not follow that trajectory, of course, because of the price increases. And we'll see what this year brings, I think, in the absence of any new information. And we'll see, again, what the OEMs begin to talk about here in the next few days. I think that's what history tells us, is that there is a different profile to margin during season versus out of season. Offsetting that is, and we haven't really talked about this much today, is we, you know, SupplySync is now launching, for example. And so we expect that to be helpful as it scales. and AJ mentioned Hydros and DCR, its companion initiative around purchasing and non-equipment, that is gaining momentum and scaling. So there's some puts and takes to it. We'll share more when we know more. But historically, there's always a little bit of difference between seasonal and off-season margins.

Jeff Hammett, Analyst — KeyBanc Capital Markets

Okay, thanks.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference over back to Mr. Albert Nehmed for closing comments.

Al Nahmad, CEO

Well, thanks for listening and thanks for your interest in our business. We're very excited about the future. As I said, we're uniquely capable of investing in the industry through acquisitions and in post-acquisitions and that sort of thing. So we're in for the long term, and we're happy you're with us. Bye-bye.

Operator

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