Watsco, Inc.

Hello, good day, and welcome to the WESCO Incorporated Third Quarter Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a 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, 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 conference over to Albert Named, Chairman and CEO. Please go ahead.

Good morning, everyone. Welcome to our third quarter earnings call. And this is Al Namit, Chairman and CEO. And with me is AJ, President of Watsco, Paul Johnston, Barry Logan, and Rick Gomez. Before we start our normal 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 may differ materially in the forward-looking statement. I am pleased to report that Watson generated healthy earnings and record cash flow despite a very challenging market environment. As we all know, 2025, a year of significant transition to next-generation equipment containing A2L refrigerants. The transition affected roughly 55% of products sold and influence most every aspect of our business. Regulatory changes have historically been good for our business and good for our customers. In the long term, we expect this transition to be no different. The transition is substantially complete, and we look forward to operating a far simpler business in 2026. Throughout all of the volatility, we are satisfied that our earnings are largely intact Our balance sheet remains strong and our technology advantages remain immense. We certainly expect the volatility to be as temporary and will ease as the transition concludes. We operate in a great industry with strong long-term fundamentals and have the industry's most accomplished leadership team, all with long-term focus to keep building on our success. Turning now to our third quarter results. Sales declined 4% in total and 3% in the U.S. While unit volumes remain subdued, we achieved double-digit pricing gains on the new products with growth in sales for both non-equipment and commercial refrigeration products. We again improved gross margins, which expanded 130 basis points to 27.5%. As we have expressed before, we have several ongoing initiatives to enhance gross margins with long-term goals of exceeding 30%. Operating expenses increased 5%, reflecting a measure of ongoing inefficiency tied to the product transition, as well as new and acquired locations. With the product transition largely behind us, we expect SG&A performance to improve from here. We continue to fortify our balance sheet, reducing inventories and overall working capital. We generated record third quarter cash flow of $355 million, an incremental opportunity in the fourth quarter as we close out the year. We remain fundamentally positive and optimistic about our position in the industry and our ability to generate growth. Our balance sheet has a healthy cash position and no debt, providing us with opportunity to invest in most any size growth opportunity. This includes the capacity to co-invest with our OEM partners as well as heading to 2020 as we head into 2026. We also continue to invest in innovation and technology that separates us from our competitors. We have made long-term progress in driving adoption. I should say we have made terrific progress in driving adoption. For example, e-commerce penetration continues to grow and accounts for 34% of our sales and up to 60% to 70% in certain U.S. markets. Let me say it again. e-commerce penetration continues to grow, and it counts for 30%, 34%, I should say, of our sales at up to 60% to 70% in certain U.S. markets. The number of contractors and technicians engaged with our mobile apps now stands at 72,000 users and grew an impressive 18%. That means that 72% – I should say 72,000 of our customers are using our technology. The annual run rate of sales through OnCallAir, our digital selling platform for contractors, saw a 19% increase in the gross merchandise value of products sold through the platform and reaching $1.7 billion over the last 12 months. We are also making next generation investments to enhance our competitive position. For example, we are developing new technology aimed at capturing more sales from the institutional customer. We are accelerating the use of pricing optimization tools to make progress toward 30% plus gross margin target. We have launched a new initiative to compete and grow sales in the highly fragmented equipment non-equipment, I should say, non-equipment market, which today is roughly 30% of our sales. And we have begun to harness the power of artificial intelligence, both internally and externally, offering potential to further transition our customer experience, improve operating efficiency, and create new data-driven growth strategies. Our technology investments are making a big difference, and we believe The impact will only grow with time. We look forward to sharing more during our upcoming investor meeting in Miami in December. I can't wait to see and meet you all this December. These investments, along with our scale, entrepreneurship, culture, and capacity to invest are unmatched in our industry.

With that, let's turn to Q&A.