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.