Watsco, Inc.

Good day and welcome to the Watsco fourth quarter 2025 earnings 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 one on a touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Albert Namid. Please go ahead.

Good morning, everyone. Welcome to our fourth quarter earnings call. This is Al Namid, Chairman and CEO, and with me is AJ Namid, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start, a cautionary statement as always. This conference call is 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 statements. As we all know, 2025 marked a year of significant regulatory change to next-generation equipment containing A2L refrigerants. This transition follows several busy, volatile years beginning after 2019. We navigated through the COVID, supply chain disruptions, steer and energy rated transitions, refrigerant changes, and now the conversion to new ATL equipment. It has certainly been an adventure, and we look forward to a simpler operating environment this year. Through it all, Wattsco achieved terrific results and created immense value for our shareholder. We grew our scale and market share, and we added 12 business acquisitions representing over $1.6 billion in sales. As announced today, we boosted our annual dividends by 10% to $13.20. This marks Wasco's 52nd 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 of 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 raised gross margins by 40 basis points to 27.1%. We have several ongoing initiatives to enhance growth 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 at a 20% growth rate. Operating efficiency improved as SG&A dropped 2%, and this included newly acquired and open 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 entirety of 2025. We also met our $500 million inventory reduction goal established at the end of the second quarter and generated record fourth quarter cash flow of $400 million. Looking forward, we are focused on improving inventory turns and generating incremental cash flow. We expect markets to gradually improve as the transition matures the balance of this year. We continue to invest in innovation and technology that separate us from competitors. We have made terrific progress in driving adoption. E-commerce continues to grow and accounts for 35% of sales. and exceeds 60% in certain U.S. markets. This year, contractors' engagement with our mobile app expanded 15% to 73,000 users. The annual run rate of sales through OnCall Air, 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 $1.8 billion for the year. We've also made incremental investments to enhance our competing 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 the 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 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 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 touchtone phone. 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 the question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from David Manthe with Baird. Please go ahead.

Good morning, David. Thank you. Good morning, Al. The first question on the pricing dynamic, obviously with the mixed 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. Beyond that, I think last year there was also some commentary around some of the contractors maybe not feeling comfortable with the new product, et cetera. 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 going to let several people here answer that. Do you want to start, Barry?

Morning, David. Yeah, well, first, it is a, you know, 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 a 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%. 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 it's a critical question. We think, you know, my best guess, I should say, is the aftermarket add-on replacement market was down 6% in 2025 in parsing out the actual unit of client and third pieces. And so 6%, is that disruption of 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, but we're not ready to call it a season yet because it's not the season. But I would say the beginning line is in a much better place.

Yeah, the contractor's been well-trained. He understands the A2L product. He knows how to do the installation now. He knows he's got to replace the indoor and the outdoor unit. So I think the training part of it is behind us. I think 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.

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 regulatory changes, et cetera, et cetera. 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. Refrigerant canisters, I mean, that kind of thing is behind us. So we don't have a crystal ball, but we certainly like this starting point more than we do others or last year's. And no matter what, though, our job is to grow and to make inroads with our customers and in this industry and control what we can control and that we should be investing. And that's what we're focused on is finding ways to win given this environment or any environment. be able to balance sheet as clean as ours, we feel very limited.

And Dave, you mentioned pricing in 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 just a general theme, and, of course, it's the mix of the new products that's accounting for most of that, that's been a very stable part of our business. And the margin opportunity that 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 full maturity of the new products, you know, Algebraically 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.

All right, thanks for all that context. I'll pass it on.

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

Morning, Tom. Morning, Al. Thanks for taking my questions. Sure. I want to start on the dividend increase you announced today, another 10% increase. This has been a key part of the Watts Go story for a long, long time now, over 50 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, so 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 going to go to my number one advisor 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, you know, relax people on that theory. Because the dividend was $7.10 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 a consistency that means we should own Wattsco forever. So, that's the pretense of what a 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 a share today. and that's the pool of capital that we look at to say can and how much and when, and we're satisfied with that concept. And I like that Wattsco was not just debt-free at December 31st. 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. We're comfortable with cash flow and keep the track record and that, you know, that important part of the Watska story going.

Thank you, Barry. You mentioned OEMs, and for my follow-up question, I wanted to hit that theme. If we look back at what 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 what's go, 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 seasonality versus distributor and contractor seasonality. and that's even been more amplified or magnified by the Fortune 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 an 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 look at our math, it's somewhere down in the 20s, mid-20s. 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 is – 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 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 14A kind of conversion and activity and pull in the first quarter. But I think that begins to clear on our side of the ledger, if 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 few years. But I think the curvature and the spectrum will narrow and be a little simpler for everyone as the year goes on.

And Tommy, I'll add some color too, 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 over the last 10, 15 years, I think it's safe to say we've done a good job of modernizing its people, its teams, its systems, its processes, its 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 told now. So here we are in these days where we're hopefully reaching some level of normalization and And so what is our priority? It's sales. 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 where our priority is sales. Thank you both.

Yeah, just to put up even 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, you know, tactical discussion in our markets about product, about, you know, how does this market grow? How do we grow the market? That's refreshing. I can assure you a year ago, it wasn't about that. It was about getting the product and having the panic attack of having over half our business changing the new products. That's done. And so now it's about growth.

I hope that was helpful.

Our next question comes from Ryan Merkle with William Blair. Please go ahead.

Hi, guys. This is Mike Francis for Ryan. How are you doing? Great. I wanted to start just asking how January and February are going to date. 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.

All right. 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, you know, if I want to 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 there's very clearly some severe weather that closed some stores that, you know, For now, I'll believe it could have been a bit better than that, but it's still not indicative or an inference into the season. And Alasko becomes a 40% larger business in about 90 days when the summer season hits. So that's the data, but I wouldn't try to draw an important inference out of it.

And then SG&A, nice job on that. 4Q, is down 2% for the next couple quarters a good assumption, or are there any sort of puts and takes that would swing that higher or lower?

Barry?

Yeah, I think it's progress, right? So a lot of the reduction activities and and really taking action happening during the fourth quarter. It didn't start 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 should have and serve customers the proper way and calibrate our SMA then. But I do think some of our growth investments, new branches, new technology, 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 SGA 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.

All right. I appreciate it. I'll just add a little color there, too. I mean, our business unit leaders did a good job right-sizing 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. But like Barry says, we're not going to be shy to invest where we see growth opportunities.

All right. Pass it on. Thanks, guys.

Our next question comes from Brett Lindsey with Mizzou. Please go ahead.

Hey, good morning, all. Wanted to come back to gross profit margins, so at 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 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 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. 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 initiative is early days, but good progress so far. So I think the controllables of margin that are within our portfolio, let's say, we feel relatively good about. And if this is a year where you could have 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 grind at this over the next several years to get to our ambition of 30%. We don't want to swing for the fences on this. We want to do it responsibly, and we want to do it in a measured – I'd love to be able to say we grew X to Y every year for the next 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 maybe just follow up on inventory and more Watsco 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 right-sizing that needs to take place, or do you think you're in pretty good shape?

Yeah, there's always going to be right-sizing taking place in our inventories. You 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, if you just take residential units, residential units, you know, ended the year down. Dollars ended up, you 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 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 inventory is in a great position right now to face the market.

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

Yeah. Can you guys hear me?

Yeah.

Why don't you tell them what our dream plan goal is in terms of inventory terms? And where we are now, where we'd like to be.

Our dream plan, which is very well proclinated 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 going to climb up that ladder. And when we do that, you guys can do the math. for every turn of inventory, what that means in terms of free cash flow, which 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, you know, 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 12-month sales. Just use that as an index. And if you looked at 10 years, that's the average. So I think that the beginning, you know, point is a good beginning point. Where the turns come is trying to not spike 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, and then you have a much, you know, again, simpler curve you're managing throughout the year for inventory. 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 can 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.

Thank you.

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

Hey, good morning, guys. Just back on gross margin. So I understand that the 30% target and continue to drive for that, but You know, it seemed like the second half you were kind of getting back down to kind of low 27s, 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 maybe pricing arbitrage in 1Q, 2Q, 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 in the product mix that goes along with that seasonality. Anybody else want to add something to that?

Yeah, Rick, why don't you fill in. You and I had a good chat earlier.

Yeah, I think that what Al just said is correct. 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. You know, 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, because 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 customers, 130,000 of them out in the field in 700 locations. That will be, over a longer period of time, the more important ingredient to whether we can sustain and grow gross margins. And as I said earlier, I think there's optimism and upward bias to that because that technology is still proliferating and still scaling as we go. The other, again, just component that I think is underappreciated in margin is the importance of the mix between your equipment and your non-equipment. So obviously we saw just a relative difference there in sales trends, and that is good for margin. What we want to do, forget about 25, whatever the market grows on equipment, great, let's do better than that, but The whole point of VCR is not just to get smarter about purchasing and redistribution. It's about growing the non-equipment base. It's a $2 billion segment of our business and $1.5 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 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.

I also think whenever we have this conversation, it's important to reiterate that The mission to expand gross margins does not necessarily mean raise prices across the board and suffer the consequences of higher prices meaning lower sales. That is 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 customer's purchasing behavior with us. And because we have such scale across so many different geographers' 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 drive price and stuff with the consequences of elasticity. That's not it.

Okay, great. And then, Barry, maybe you can give 4Q what international and commercial was and then just speak to what trends you're seeing or what the outlook is. I think international was particularly challenging last year and maybe commercial started the year better and then softened, but maybe just update us.

I mean, commercial was for the quarters, Jack, is that what you asked?

Yeah.

Yeah, commercial for the product was down single digits, high single digits, and obviously no giant influence there the way that residential was influenced by the 410A change. So a little better result in the fourth quarter with light commercials. 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 our Latin American business, which has kind of been weak all year, was kind of the same kind of quarter. The planning, the The programming for next year is better in both markets. But, again, we said the word geopolitical earlier in the call. Those are 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 JP Morgan. Please go ahead.

Good morning, Steve.

Good morning. How are you?

Good.

Good. 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?

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

And for the year as well?

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

Yeah. And, and, and as far as the, the, like the parts and the repairs and things like that, um, was there any, any sort of like trade down in that channel that you're seeing at all? I mean, I'm, we're just trying to kind of gauge what the, what the appetite is, um, from an inflationary perspective from your customers really across a range of products, not just the boxes. Um, Was there any sign of, like, a trade down on that front at all? 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, you know, compressors and motors 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 a double digit. But for the quarter, they were actually flat to down. The fourth quarter only represents about 18% of the annual sales of 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, I think trains down zero to five, Lenox down zero to five, and then, I mean, Carrier put out like a down 15 or something like that, or down to 10, 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?

That's like the most difficult crystal ball question of all, Steve. I've never answered it in normal years in February. Steve, do you have the answer?

We know the answer. We're just not going to tell you.

Yeah. All right, well, I guess I had to ask.

Thanks a lot for all the email. We'll be very – you know, I have better information in 90 days. Like, I want to take one of those, like, eight balls. Remember the eight balls when you're a kid and you shake it and it gives you an answer? It's too early to tell. If I shake the eight ball, it's going to say too early to tell.

Well, 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. All right.

Thanks, guys. But, 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, not OEM data, not HRI data, our data. So I went back to 2018. So 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 20, 30-year long-term average unit growth rate in this industry. I used 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 if I, you 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's normal. So you're at kind of a normal, you're at a normal level is the point.

Yeah, and normal meaning that if there was an oversold market in our markets coming into 25, this year's correction helps that equation for sure. There are other variables than just the ones 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.

And so you're making it – Yeah, go ahead. Sorry. I was going to say, Steve, yeah, which is it feels more normal. I'm not sure it actually is normal yet, but it does feel more normal. And, again, 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 are you, looking back, what do you now think the pre-buy was last year?

Yeah, well, no one pre-bought them. We sold them and they installed them.

Right, for you guys, right.

Right. So 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 that happened a year ago. And if we do the algebra on saying what would have been normal a year ago and project that into this year, It was a 7% change in actual unit. The actual unit change was 17%.

Got it. Okay. All right.

Thank you very much. Sorry, I can't help myself here. I have to make a point, which I think we do every quarter, which is that these are the right questions and good conversations, 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 sack the long-term for some short-term benefit. So just know that that's at the core of Wasco's culture.

Loud and clear. Amen.

Well said, Mr. President. All right, are we done?

Our 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, 410, I guess, fully in the rear view at this point, and I think that that comment was tied to the 454 transition. 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. And any way you can help me think through that, thank you.

Yeah, when we say two units, we mean you're going to have your outdoor unit, and then you're going to have to install a separate coil on the inside. The 454 and the 32A product that we sell that'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 not 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 important definitionally. The AHI 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 410A 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 must replace both indoor and outdoor systems. And I can tell you even more certainty next year, 27, distributors will not be really carrying any product that can sustain the old system if it's chronically failed. So it's a progression, but that gives you some color on it.

Thank you. That's really, really helpful. And 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 know, that maybe a year ago it only just replaced one of the two.

But you've got to remember, a unit has a warranty to it. And that warranty on the compressor and the motor goes for five years. And in most cases, it moves to 10 years. So if the average lifespan of a product, let's say, in the entire U.S. is 14 to 15 to 16 years, you've only got a window of five to six years where the consumer is going to be paying for the replacement product. of the compressor or the motor.

Thank you.

So, yeah, it really, you know, a lot of it and 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 the system? I don't think we have that data. 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 system, It's his warranty issue. And so, you know, you're right. The affordability and consumer, you know, 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, Kyle. That was really helpful.

Our next question comes from Patrick Bauman with J.P. Morgan. Please go ahead.

Good morning. 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 Dykin Goodman with the transition, I think, in 24, and then as well with Rheem. I'm just curious if those OEM volumes have fully recovered now or if there's more room to go to kind of normalize their share.

Yeah, the opportunity for Rheem and Dykin, they're performing very, very well for us right now.

Were they able to? Did they grow their volumes last year? Not going to get into that, no. 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 duct work and refrigerants and things like that as being more commodity-sensitive and I'm just curious what you're seeing in terms of inflation-driven price there currently.

Copper goes up and goes down daily. Copper is a hard one to track. Today it's down 2.5%. It's down to 572. 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.

Hey, Pat, in the aggregate, just to dimensionalize it, in the aggregate it's about 5% of total volume, so it's really not material, not significant. And we very deliberately keep or 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 margins. So it's very conservatively managed, and it's only 5% of the business.

Understood. Thanks for the call.

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

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 and Ahmed for any closing remarks.

I appreciate your interest in Woxco. 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 in the next quarter. Bye-bye now.

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