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Watsco is the largest distributor of air-conditioning, heating, and refrigeration equipment for both commercial and residential use in the U.S. Founded more than 60 years ago in Miami, Watsco in 2023 acquired Gateway Supply Co., a South Carolina plumbing and HVAC distributor. Albert H. Nahmad has served as the company’s CEO since 1972.

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Q4 2024

Watsco (WSO): Company Profile, Stock Price, News, Rankings

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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 Nahmad. Please go ahead.

Good morning, everyone. Welcome to our fourth quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start, a cautionary statement as always. This conference call 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 from 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, SEER and energy-rated transitions, refrigerant changes, and now the conversion to new A2L equipment. It has certainly been an adventure, and we look forward to a simpler operating environment this year.

Through it all, Watsco achieved terrific results and created immense value for our shareholders. We grew our scale and market share, and we added 12 business acquisitions, representing over $1.6 billion in sales. As announced today, we boosted our annual dividends by 10% to $13.20. This marks Watsco'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's most accomplished leadership team, all with focus of building our long-term success - 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 growth 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 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 margins 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 platforms 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 competitive position and add to our long-term growth and margin profile. For example, we are developing new technology aimed at capturing more sales to institutional customers.... We are accelerating the use of our pricing optimization tools to make further progress toward our 30%+ gross margin target. We have launched a new initiative to compete and grow 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 one on your touch-tone phone. If you are 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 two. At this time, we will pause momentarily to assemble our roster. Our first question comes from David Manthey with Baird. Please go ahead.

Thank you. Good morning, Al. The first question on the pricing dynamic. Obviously, with the mix shift that happened materially last year, we had a big increase in the price of units. I think there's been some hesitancy on the part of OEMs when they're talking about 2026 and price increases and maybe not getting the typical increase. But beyond that, I think last year there was also some commentary around some of the contractors maybe not feeling comfortable with the new product, et cetera.

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?

Sure. Morning, David. 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, 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%+, 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 decline into 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 the season yet because it's not the season. But I would say that the beginning line is in a much better place.

The contractor has been well trained. He understands the, 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, you know, regulatory changes, et cetera, et cetera. And you used 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.

... heat up to the extent certainly that it did over the last five years. I mean, the regulatory changes are behind us. Hopefully, there won't be another shortage of refrigerant canisters. I mean, that kind of thing is behind us. So we don't have a crystal ball, but we certainly like this starting point more than we do others or the last years. And no, 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 we should be investing. And that's what we're focused on, is finding ways to win, given this environment or any environment. With a balance sheet as clean as ours, we feel very limited.

Dave, Dave, you mentioned pricing in the face of all this. A year ago, when we commented on pricing, we thought that the new product would end up being 8%-10% higher in price. Our price benefit in 2025 for the year was 9%. For the fourth quarter, 11%. So pricing as a just a general theme, and it's, 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. It and the margin opportunity that flows from that has been yielded in a good result this year. That maturity didn't stop January one 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 Moll with Stephens. Please go ahead.

Morning, Al. Thanks for taking my questions.

I want to start on the dividend increase you announced today, another 10% increase. This has been a key part of the Watsco 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%. I would like for what happened after 2020 to occur again to 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 you should own Watsco forever. So that's the premise of what a board discusses in sustaining that.

You're right, cash flow is actually how the dividend is paid, and cash flow is probably closer to $16-$18 a share today. You know, that's, you know, that's the pool of capital that we look at to say: Can we, you know, can and how much and when? And we're satisfied with that concept. And I like that Watsco was not just debt free at December 31. In fact, we didn't borrow a penny every day of 2025, and we're looking for acquisitions, we're looking for investment, we're looking for what our imagination can do with OEMs to grow our business. At the same time, the dividend is a critical theme, and we're going to raise it if we feel comfortable, and we do.

So let's hope earnings, you know, is a reset following this past year. Time will tell. We're comfortable with cash flow and, and keep the track record and that, you know, that important part of the Watsco 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%-15%. They're calling for their own residential sales down 20% in the first half of the year. What are we to make of how to translate those kind of comments to what you might expect? Are these reasonable proxies for Watsco, or are there some differences that you want to call out today? Thank you.

Yeah, I think, well, first, there's always and forever a disparity in the timing of OEM, you know, seasonality versus distributor and contractor seasonality. And that's even been more amplified or magnified by the R-410A conversion, which started this time last year for us, but had already begun three months before for the OEM. So that the channel has not been an easy thing to analyze at any time. I think, if my memory is right, Carrier's unit volumes were down in the 40% range this past quarter. If you look at our math, it's somewhere down in the 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, 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, 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 more stability, 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 one.

We're still working through some of the 410A, kind of conversion and activity and pull in the fourth in the first quarter, but I think that begins to clear on our, our, 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, a leading indicator or a lagging indicator, and, and it's been impossible for anyone to analyze this in the last, you know, few years. But I think the, the curvature and the, and the spectrum will narrow and, 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, a good job of modernizing its people, its teams, its systems, its processes, 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 sold now. So here we are in today's world, we're hopefully reaching some level of normalization. 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. In this new environment, whatever it may bring, that's what we're, that's where our priority is sales.

Yeah, just to put up even, to completely exhaust that, you know, we have about 15 primary equipment OEMs, and it, 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? You know, 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 change in the new products.

That's done. And so now it's about growth.

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

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

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

I can answer that, but I'd rather you answer it.

Yeah, it's down in the mid-single digit range, so it's better than... If I want to feel better, I don't feel good, but I feel better. It's down 5% or so in the-

Very clearly, you know, 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 Watsco 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 important inference out of it.

Okay. And then, SG&A, nice job on that in 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?

Yeah, I think it's progress, right? So a lot of the reduction activities and really taking action happened during the fourth quarter. It didn't start January, October one, 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 SG&A then. But I do think some of our growth investments, new branches, new technology, you know, investments we are making can largely be offset by some of the reductions that are in place. So time will tell. What can make it go up would be variable expenses like commissions, bonuses that would be driven by volume.

I want SG&A to be higher as a result of that discussion.

Because earnings would be a multiplier against that type of growth. But in terms of calibrating and starting the year, I think we're in a lower place than a year ago. And again, we'll recalibrate that as we get closer to the season and see.

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.

Our next question comes from Brett Linzey with Mizuho. Please go ahead.

Hey, good morning, all. Wanted to come back to gross profit margin, so up 40 basis points 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?

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, 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, you know, conventional OEM pricing, I think that also is favorable to margin.

So no, no, no flashing red. I think there's you know, good optimism and also just a well-thought-out strategy to you know, grind at this over the next several years to get to our ambition of 30%. 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 and just... I'd love to be able to say, we grew X to Y every year for the next you know, Y number of years, and we'll get to 30%. So it's not that linear, but that's what we're aiming for, is progress along the way and someday we'll tell you we got to 30%.

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 you think you're in pretty good shape?

Well, there's, yeah, there's always going to be right sizing taking place in our inventory. You know, there are, there are things that we need to do to, 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, in great shape.

... compared to where it was a year ago. A year ago, we were, we were in the transition period, and now we're out of the transition period. We're pretty much through with the R-410A. We've got some left that needs to be moved, but I, I think overall, our inventory is in a great position right now to face the market.

And Paul, wouldn'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 times?

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.

Why don't you tell everyone 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 populated among 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 3s, given all the noise, and we're gonna 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.

Yeah. Just to add, yeah, just to add one analytical thought to it. You know, units, 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 ending, ending inventory now is, 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, 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 KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys. Just back on gross margins. 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 of the business and the product mix that goes along with that seasonality. Anybody else want to add something to that?

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

Watsco (WSO) Q4 2025 Earnings Call Transcript

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