Q1 2026 Watsco Inc Earnings Call

April 28, 2026

Operator 3: Good day, and welcome to the Watsco Q1 2026 Earnings Conference Call. After today's presentation, there'll be an opportunity to ask questions. I would now like to turn the conference over to Mr. Albert Nahmad. Thank you, and over to you.

Operator: Good day, and welcome to the Watsco Q1 2026 Earnings Conference Call. After today's presentation, there'll be an opportunity to ask questions. I would now like to turn the conference over to Mr. Albert Nahmad. Thank you, and over to you.

Speaker #2: After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star and then 1 on your touchdown phone.

Speaker #2: To withdraw your question, you may press star and then 2. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Albert Nahmad, thank you and over to you.

Speaker #2: Welcome to our first quarter earnings call. This is Al Nahmad, chairman and CEO, and with me is AJ Nahmad, the president, Paul Johnston, Barry Logan, and Rick Gomez.

Al Nahmad: Welcome to our first quarter earnings call. This is Al Nahmad, chairman and CEO. With me is A.J. Nahmad, the president, Paul Johnston, 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 may differ materially from the forward-looking statements. First quarter results point to improving stability now that the transition to A2L 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.

Speaker #2: 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.

Speaker #2: Ultimate results may differ materially from the forward-looking statements. First quarter results going to improving stability now that the transition to ATOL products has matured.

Speaker #2: We expect a more simplified business environment this year, but it is still early and our summer season, but so far so good. We're also excited to announce our agreement to acquire Jackson Supply.

Speaker #2: A legendary market-leading Sunbelt distributor with 230 million dollars in annual sales. We are fortunate to know many great entrepreneurs in our industry. Jim Duret, Jacksonville owner and his talented group of leaders, all of whom will be remain with the company certainly meet the definition of great entrepreneur.

Al Nahmad: Jim Durett, Jackson Supply owner, and his talented group of leaders, all of whom will remain with the company, certainly meet the definition of great entrepreneurial. Our relationship with Jackson dates back more than 20 years, we are grateful to Jim for entrusting us with his company's next chapter. Jackson will expand their Sunbelt 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. We expect to close the transaction sometime in Q2.

Speaker #2: 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 Sunbelt presence by 25 locations and provide diversification of brands and products, giving their strong presence in parts and supplies.

Speaker #2: As I mentioned, and as is our culture, the 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.

Speaker #2: We expect to close the transaction sometime in the second quarter. Within our existing business, we continue to build and expand our technology platforms, which provide us an immense long-term competitive advantage.

Al Nahmad: 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 Q1, while outpacing overall growth rates. OnCall 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 efficiency systems. We expect the gross merchandise value for OnCall Air to exceed $2 billion this year. Let me say that again. We expect sales of OnCall 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 Q1 results.

Speaker #2: 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-efficiency systems.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: Sales increased 2% in US markets, reflecting a mature mix of A2L products as well as an improved mix of high-efficiency systems. Offset by lower unit sales.

Al Nahmad: Sales increased 2% in US 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 Q1 progressed. Gross margins remained largely intact, reflecting good execution by our leadership team to sustain price and competitiveness. We continue to execute on several ongoing initiatives to enhance gross margins with a long-term goal of achieving 30%. SG&A remained 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 we remain debt-free. Let me repeat that. We remain debt-free.

Al Nahmad: 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 Q1 progressed. Gross margins remained largely intact, reflecting good execution by our leadership team to sustain price and competitiveness. We continue to execute on several ongoing initiatives to enhance gross margins with a long-term goal of achieving 30%. SG&A remained 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 we remain debt-free. Let me repeat that. We remain debt-free.

Speaker #2: Unit volume stabilized as the first quarter progressed. Gross margins remained largely intact, reflecting good execution for our leadership team to sustain price and competitiveness.

Speaker #2: We continue to execute on several ongoing initiatives to enhance gross margins, with the long-term goal of achieving 30%. STNA remained flat as improved operation efficiency offset incremental technology investments and new locations.

Speaker #2: We expect overall operating efficiency to further improve in our technology can now show its mettle in a simpler operating environment. Our balance sheet continues to be strong and remain debt-free.

Speaker #2: 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.

Al Nahmad: As I mentioned, we continue to invest in innovation and technology to separate us from our competitors. 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 Q2. We are accelerating the use of our pricing optimization tools to make further progress towards our long-term target. We have launched a new initiative to compete and grow sales in a highly fragmented parts and supply segment, which comprise almost 50% of the entire market share. 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.

Speaker #2: 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.

Speaker #2: We are excelling in the use of our pricing optimization tools to make further progress toward our long-term target. We have launched a new initiative to compete in gross sales in the highly fragmented parts and supplies segment, which comprises almost 50% of the interest market share.

Speaker #2: And we have begun to harness the power of artificial intelligence, offering the potential to further transform our customer experience and improve our operating efficiency and create new data-driven growth strategies.

Speaker #2: 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.

Al Nahmad: These investments, along with our scale and entrepreneurial culture and a capacity to invest, are unmatched in our industry. With that, let's turn to Q&A.

Speaker #3: Thank you. We will now begin the question and answer session. To ask a question, we press star and then one on your touchstone telephone.

Operator 3: Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your touch tone 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.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your touch tone 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: Please go ahead.

Speaker #4: Good morning, Ryan.

Al Nahmad: Morning, Ryan.

Speaker #3: Mr. Ryan, can you hear us?

Operator 3: Ryan, can you hear us?

Operator: Ryan, can you hear us?

Speaker #4: Yeah. Can you hear me?

Ryan Merkel: Yeah. Can you hear me?

Speaker #3: Yes, sir.

Al Nahmad: Yes, sir. Now I can. Yes.

Speaker #4: Now I can. Yes. 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 what's changing and are you seeing April positive in terms of year-over-year growth at this point?

Al Nahmad: Okay. Hey, everyone. Congrats on the deal and a good start to the year. I wanted to start-

Ryan Merkel: Okay. Hey, everyone. Congrats on the deal and a good start to the year. I wanted to start-

Ryan Merkel: Thank you.

Al Nahmad: Thank you.

Ryan Merkel: 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?

Speaker #2: Well, let me turn to our expert and that sort of thing, the Barry Logan.

Al Nahmad: Well, let me turn to our expert in that sort of thing, Barry Logan.

Speaker #5: Oh, he just turned to me saying he dropped off the call. Please let the operator know.

A.J. Nahmad: Oh.

A.J. Nahmad: Barry?

A.J. Nahmad: said he's saying he dropped off the call. Please let the operator know.

Speaker #3: Yeah. We are trying to reconnect with him, but yes.

Operator 3: Yes. We are trying to reconnect him.

Operator: Yes. We are trying to reconnect him.

A.J. Nahmad: Operator, can you please connect? Okay.

Speaker #5: Okay. Rip, do you want to jump in there?

Paul Johnston: Rick, do you want to jump in there?

Speaker #6: Sure. I'll take a stab and then Barry can backfill and enhance it. Ryan, 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, we saw what was the full maturity really of the A2L product transition.

Rick Gomez: Sure. I'll take a stab, and then Barry can backfill and enhance it, Ryan. Good morning. Yeah, look, I think what we. First, if we just look at Q1, 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 and which means that the market is not yet, you know, fully healed. There's no, there's no inflection point here. Things did get incrementally better as the quarter progressed. We exited the quarter nicely with March up high single digits on a same-day basis.

Speaker #6: Units still weighing a little bit and 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.

Speaker #6: 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 incrementally more stability in April than we did to start the year and so April has begun nicely.

Rick Gomez: You know, so far, 3 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. 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. This is certainly, I think, incrementally more stable, more positive, less complex. We'll take that in a Q1.

Speaker #6: All of that said, we're still not yet in what is the thick of the selling season. And so we'll be a little bit cautious in our tone and our optimism, but this is certainly, I think, incrementally more stable, more positive.

Speaker #6: Less complex. And we'll take that in the first quarter.

Speaker #4: Okay.

Paul Johnston: Okay.

Speaker #6: Yeah. I'll take out that too if that's all right, which is if you zoom out even further, look at the history of this industry for 30, 40, 50 years, it's been pretty mature, slow growth, steady as you go.

A.J. Nahmad: Yeah. I'll take that too, if that's all right. Which is, 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. COVID hit, and it seems like all chaos broke loose over the last 5 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 products 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, we've had constraints on or limitations on refrigerant canisters. It's just been kind of one thing after the other for the next 5 years.

Speaker #6: Industry and then COVID hit. And it seems like all chaos broke loose over the last five years. We had extreme demand as people were investing their homes.

Speaker #6: We had extreme supply chain challenges, which constrained the products that we could sell. We had multiple regulatory changes that changed the products that we sold.

Speaker #6: 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 we've had constraints or limitations on refrigerant canisters.

Speaker #6: It's just been kind of one thing after the other for the next five years. And it seems like most coming into 2026, most of that stuff was behind us.

A.J. Nahmad: 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. We looked forward to a more normalized 2026 as we started the year. I think we've got at least most of the way there. Obviously, there's still some things changing with tariffs and some dynamics, but we're looking forward to a more normalized environment and getting back to business and hitting the streets and taking care of our customers and growing the business. I think that's, that's materializing.

Speaker #6: Certainly, the stuff being driven by the industry in terms of regulatory changes and so forth. So we looked forward to a more normalized 2026 as we started the year.

Speaker #6: And I think we've got at least most of the way there, obviously, there's still some things changing with tariffs and some dynamics, but we're looking forward to a quote-unquote "more normalized" environment and getting back to business and hitting the streets and taking care of our customers and growing the business.

Speaker #6: And I think that's materializing.

Speaker #4: I think go ahead, Barry.

Ryan Merkel: Thanks. Go ahead, Barry.

Speaker #2: No, I was just 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.

Al Nahmad: No, I was gonna say, I think it's interesting too that we see e-commerce sales kind of bloom this quarter. That tells us the contractors' daily life is kind of re-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. Also, now that the product line is the product line, we saw an increase in higher efficiency systems being sold. Again, I, as Rick said, it's early, but those are good indicators, and it's kind of what we have been looking for as some indicators.

Barry Logan: No, I was gonna say, I think it's interesting too that we see e-commerce sales kind of bloom this quarter. That tells us the contractors' daily life is kind of re-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. Also, now that the product line is the product line, we saw an increase in higher efficiency systems being sold. Again, I, as Rick said, it's early, but those are good indicators, and it's kind of what we have been looking for as some indicators.

Speaker #2: That tells us the contractors’ 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.

Speaker #2: 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.

Speaker #2: And it's kind of what we have been looking for as some indicators.

Speaker #4: All right. Very helpful. I'll pass it to others and leave it there. Thanks.

Ryan Merkel: All right. Very helpful. I'll pass it to others and leave it there. Thanks.

Speaker #3: Thank you. We have the next question from the line of David Mante from. Bed, please go ahead.

Operator 3: Thank you. We have our next question from the line of David Manthey from Baird. Please go ahead.

Operator: Thank you. We have our next question from the line of David Manthey from Baird. Please go ahead.

Speaker #7: Good morning, David.

Al Nahmad: Morning, David.

Speaker #2: Good 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 GMAR and Baker footprint that you currently have.

David Manthey: Morning, Al. Thanks for taking my question. My question's primarily on the Jackson Supply acquisition. Correct me if I'm wrong, this looks like a Goodman distributor primarily. As far as I can tell, it looks like a great fit within the CE, Gemaire, 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?

Speaker #2: Is there anything else you can share with us about mix, margins, growth, what made this an attractive acquisition for WATSCO?

Speaker #7: Well, this is a relationship we've had for a very long time, and we have seen them succeed in our markets over years. So we know that they have the right leadership.

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

Speaker #7: We know they have the right strategy. And all we want to do is support it so that they can continue to expand and if they need more capital, we'll provide that.

Speaker #7: And if they need more technology, we'll provide that. If they need more equity, for their leadership, we'll provide that. So it's just a wonderful business to become part of WATSCO.

Speaker #7: And 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 Manthey: Mm-hmm. Yeah. Sounds good. As it relates to this, the stabilization or normalization theme that we're all kind of looking at right now, when we, 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 too thin, 'cause I know you guys aren't gonna do that, 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 gonna 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?

Speaker #2: 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.

David Manthey: Yeah. Sounds good. As it relates to this, the stabilization or normalization theme that we're all kind of looking at right now, when we, 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 too thin, 'cause I know you guys aren't gonna do that, 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 gonna 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?

Speaker #2: I don't want to slice this two things because 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 be go the other way, would grow, whereas price would sort of tail off toward the end of the year?

Speaker #2: Is that how you're thinking about it?

Speaker #7: Well, we certainly are hopeful that we're going to growth. 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 market conditions that we have experienced for so many years.

Al Nahmad: Well, we certainly are hopeful that we're gonna grow, and it seems like we will. It's too difficult, too early, I should say, is a better way to say it, that we're gonna have the gone up market conditions that we have had experienced for so many years. All I can say is what we've already said, is that we, like we're seeing improvements, but we're not. We're pretty assured that we're on the right path. Let's wait and see. Regardless of what the markets do, we're gonna do well, and we have a competitive edge over other distributors that we tell you about over and over again.

Speaker #7: And so all I can say is what we've already said is that we're seeing improvements but we're not and we're pretty assured that we're on the right path.

Speaker #7: But let's wait and see. Regardless of what the markets do, we're going to do well. And we haven't competitive edge over other distributors that we've told you about over and over again.

Speaker #2: Yeah. Sounds good. Thanks a lot, Al.

David Manthey: Yeah, sounds good. Thanks a lot, Al.

Speaker #7: You bet.

Al Nahmad: You bet.

Speaker #3: Thank you. We have the next question from the line of Tommy Mall from Stephens. Please go ahead. Good morning. Good morning, Al. And thanks for taking my questions.

Operator 3: Thank you. We have the next question from the line of Tommy Moll from Stephens. Please go ahead.

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

Al Nahmad: Morning, Tommy.

Tommy Moll: Good morning, good morning, Alan. Thanks for taking my questions.

Speaker #2: Sure.

Al Nahmad: Sure.

Speaker #3: To start, I wanted to expand a bit on the year-to-date comments that Rick made if March exited the quarter in high single-digit growth range.

Tommy Moll: 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? How long has it been since that was the case?

Speaker #3: 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?

Speaker #3: And how long has it been since that was the case?

Al Nahmad: All yours, Rick.

Speaker #7: All yours, Rick.

Speaker #4: Yeah, Tommy. We're not going to slice it that thinly for three weeks in April here. Again, we're not yet in the full selling season.

Rick Gomez: Yeah, Tommy, we're not gonna slice it that thinly for 3 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 we, you know, this time last year is when we saw volumes begin to degrade a little bit. Just on paper, mathematically, it stands to reason that, you know, that looks better. You know, price, obviously we have pricing actions that took effect last year. I'll remind everyone that our mix of A2L products in Q1 of last year was about 25%. Like for like, the new equipment is at a double-digit price point above where it was last year.

Rick Gomez: Yeah, Tommy, we're not gonna slice 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 we, you know, this time last year is when we saw volumes begin to degrade a little bit. Just on paper, mathematically, it stands to reason that, you know, that looks better. You know, price, obviously we have pricing actions that took effect last year. I'll remind everyone that our mix of A2L products in Q1 of last year was about 25%. Like for like, the new equipment is at a double-digit price point above where it was last year.

Speaker #4: I think the prior question got at it a little bit, which is that this time last year, there were soft volumes beginning to degrade a little bit.

Speaker #4: And so just on paper, mathematically, it stands to reason that that looks better. And price, obviously, we have pricing actions that took effect last year.

Speaker #4: 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.

Speaker #4: 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.

Rick Gomez: We had some of that in our Q4 of last year, and it was about 60% of our mix in the Q2 of last year. You know, the ultimate comparison here is what did it look like versus 2 years ago, versus 3 years ago? We'll be in a smarter position to answer that question after the Q2. So far so good is how I would describe the start in April.

Rick Gomez: We had some of that in our Q4 of last year, and it was about 60% of our mix in the Q2 of last year. You know, the ultimate comparison here is what did it look like versus two years ago, versus three years ago? We'll be in a smarter position to answer that question after the Q2. So far so good is how I would describe the start in April.

Speaker #4: So 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.

Speaker #4: So far, so good is how I would describe the start in April.

Speaker #3: 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?

Tommy Moll: 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?

Speaker #2: 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.

Al Nahmad: 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 can only get better. It's not gonna get worse. So we expect our inventory turns to increase and contribute to cash flow for the rest of the year.

Speaker #2: So many changes were occurring recently that it can only get better. It's actually get worse. So we expect our inventory turns to increase. And contribute to cash flow.

Speaker #2: For the rest of the year.

Speaker #7: Yeah. Plus we've got our supply chain is a lot more solid than it was in the past. AJ mentioned that we had COVID and we've had all these changes in models and products.

Paul Johnston: Yeah. Plus, we've got. Our supply chain is a lot more solid than it was in the past. You know, A.J. mentioned that we had COVID, and we've had all these changes in models and products. 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.

Speaker #7: 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.

Speaker #3: Thank you both. I'll turn it back. Thank you. We have the next question from the line of Jeff Hammond from KeyBank Capital Markets. Please go ahead.

Tommy Moll: Thank you both. I'll turn it back.

Operator 3: Thank you. We have the next question from the line of Jeff Hammond from KeyBanc Capital Markets. Please go ahead.

Operator: Thank you. We have the next question from the line of Jeff Hammond from KeyBanc Capital Markets. Please go ahead.

Speaker #2: Hey, good morning, everyone. Maybe just to start, the Section 232 update seemed to bring about questions about follow-on pricing. And I'm just wondering if you've seen any pricing from your OEMs near-term outside of normal course.

Al Nahmad: Morning, Jeff.

Jeff Hammond: Hey, good morning, everyone. Maybe just to start, you know, the Section 232 update seemed to, you know, bring about questions about, you know, follow-on pricing. I'm just wondering if you've seen any pricing from your OEMs in near term outside of like normal course, that would suggest, you know, more pricing, upward move in pricing.

Speaker #2: That would suggest more pricing upward-moving pricing.

Speaker #4: Well, I do expect it because of the duties that are being paid now by some of the manufacturers. And I can't quantify it yet.

Al Nahmad: Well, I do expect it because of the duties that are being paid now by some of the manufacturers. I can't quantify it yet, but yes, the pressure is on the manufacturer, and I believe they will raise their prices.

Speaker #4: But yes, the pressure is on the manufacturer, and I believe they will raise their prices.

Speaker #7: Yeah. We've had a number of a number of price increases to date from several of the manufacturers. Which have already become public. So they're well known.

Paul Johnston: Yeah, we've had a number of price increases to date, you know, from several of the manufacturers, which have already become public, so they're well known. We are going to have a price increase pretty much across the board, I believe. We'll just have to wait until, you know, probably in Q2, we'll know for sure exactly what those price increases look like.

Speaker #7: 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.

Speaker #2: Okay. Great. And then just on that, there's been kind of increasing questions about price elasticity and the unit costs are getting up. And there was this debate last year about repair replace.

Jeff Hammond: Okay, great. Just on that, you know, there's been kind of increasing questions about price elasticity and, you know, the unit costs are getting up. There was this debate last year about, you know, repair or replace. Was that, you know, this A2L transition, or was that the consumer kind of being tight? You know, and I noticed your non-equipment or other products was up. Just wondering what you're seeing and how you're thinking about repair versus replace as we go through into the selling season.

Speaker #2: Was that this A2L transition? Or was that the consumer kind of being tight? So and I noticed you're not equipment or other products was up.

Speaker #2: Just wondering what you're seeing and how you're thinking about repair versus replace. As we go through into the selling season.

Speaker #7: I think we're happy with yeah, we're happy with both. We're seeing a definite uptick in our compressor sales. Which aren't going to offset any by any material stretch of the imagination, the equipment sales.

Paul Johnston: I think we're happy.

Rick Gomez: Go ahead.

Paul Johnston: Yeah, we're happy with both, you know. We're seeing a definite uptick in our compressor sales, which aren't gonna offset any, you know, by any material stretch of the imagination, the equipment sales. We're also seeing a rebound in equipment sales. I think it's gonna be kind of a dual market out there for a while, where we're gonna have an increase in parts, and at the same time, we're gonna have an increase, I'm hoping, in equipment. I don't think it's either/or anymore.

Speaker #7: 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.

Speaker #7: 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. I don't think it's either/or anymore.

Speaker #4: 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.

Rick Gomez: 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. The 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. There's broad-based growth there, and it's not necessarily a read on repair versus replace all the time.

Speaker #4: The parts is actually the minority of what's in non-equipment. Yes, a group, but so did virtually everything else in non-equipment, including supplies, including our small and growing plumbing business.

Speaker #4: 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.

Speaker #7: Okay.

Jeff Hammond: Okay. Thanks, guys.

Speaker #2: To say it analytically, I mean, parts replacement parts, parts sales are less than 10% of what's gone. So when we say 30% is non-equipment, that means 20% is everything else, just from analytical point of view.

Barry Logan: To say it analytically, I mean, parts, replacement parts sales are less than 10% of Watsco. When we say 30% is non-equipment, that means 20% is everything else, just from an analytical point of view.

Speaker #7: Thank you.

Jeff Hammond: Thank you.

Speaker #3: Thank you. Again, if you have a question, please press star and then one. We have the next question from the line of Nigel Koh from Wolf Research.

Operator 3: Thank you. Again, if you have a question, please press star and then one. We have the next question from line of Nigel Coe from Wolfe Research. Please go ahead.

Operator: Thank you. Again, if you have a question, please press star and then one. We have the next question from line of Nigel Coe from Wolfe Research. Please go ahead.

Speaker #3: Please go ahead. Oh, thanks. Good morning. Hi, Al. I wanted to go back to your comments on inventory turns continuing to increase. The 1Q inventory build was a little bit higher than what we expected.

Al Nahmad: Morning.

Nigel Coe: Oh, thanks. Good morning. Hi. Hi, Al. I wanted to go back to your comments on, you know, inventory turns continuing to increase. The Q1 inventory build was a little bit higher than what we expected. Actually looked quite normal. My initial reaction was that the destocking is behind us. It doesn't sound like that's the case. Just wanted to clarify that comment. I'm wondering if you know, the inventory build is, you know, getting ahead of price increases, slightly better demand. Just wondering anything more there.

Speaker #3: It looked actually quite normal. So my initial reaction was that the destocking is behind us. It doesn't sound like that's the case. So I just wanted to clarify that comment.

Speaker #3: And I'm wondering if the inventory builds is getting ahead of price increases. Slightly better demand. Just wondering anything more there.

Speaker #7: Well, there's been a shift in the product innovation. So, when a product innovates, we have to carry the existing inventory to support what's been out there.

Al Nahmad: Well, there's been a shift in the product innovation. When product innovates, we have to carry the existing in-inventory to support what's been out there, and then we have to take inventory in for the new changes in the product. That does inflate inventory. That doesn't bother us. It's just part of the normal thing. 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.

Speaker #7: 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.

Speaker #7: It's just part of the 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.

Nigel Coe: Okay.

Speaker #7: Nigel, I'll take a stab at that too. I mean, I would not call our expected inventory turns enhancement and burn through of our inventory more structural destocking.

Rick Gomez: Nigel Coe, 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 Johnston mentioned, the supply chain and our OEMs and the whole process is more stable, more reliable than it has been. Now we've 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. We expect to turn inventory better than we have been able to because there's less noise in the system.

Speaker #7: 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.

Speaker #7: So now we bought inventory for the summer selling season to make sure that we had the right amount of products in the right places.

Speaker #7: 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.

Speaker #3: Yes. Another way to ask it, 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.

Nigel Coe: Yes. Another way to ask it, would be do you expect sell-in and sell-through to equalize now, going forward? Just obviously we've seen a big divergence in the past. 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 Q2 versus Q1 on the price increases. I'm wondering if you expect that, still, you know, that to happen this year with the price increases coming through.

Speaker #3: 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.

Speaker #3: I'm wondering if you expect that still to happen this year with the price increases coming through.

Speaker #7: I think that'll probably be a second. Yeah. Go ahead.

Al Nahmad: I think that'll probably be a second-

Rick Gomez: Yeah, go ahead.

Speaker #2: Yeah. Let me refresh the conversation about that. We have a target of 30% gross profit margin. And a lot of things go into that.

Al Nahmad: Let me re-refresh the conversation about that. We have a target of 30% gross profit margin, a lot of things go into that. We're not gonna get there overnight, but we have a plan to get there. 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'll help gross profit margins and our ability to consolidate purchases across the whole company from vendors, manufacturers will also help improve gross profit margin, if that helps, that explanation.

Speaker #2: 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.

Speaker #2: I'm sure that the sophistication pricing system that we have is superior. Anything else on the market, that'll help gross profit margins. And our ability to consolidate purchases across the whole company from vendors, manufacturers, will also help improve gross profit margin.

Speaker #2: If that helps. That explanation.

Speaker #1: Okay. Thanks, Al.

Nigel Coe: Okay. Thanks, Al.

Speaker #3: Thank you.

Operator 3: Thank you.

Operator: Thank you.

Speaker #7: You're welcome.

Barry Logan: I want-

Speaker #2: I want to go back to the I want to go back. I'm sorry. To the inventory discussion. Just to be, again, try to be educational about it.

Operator 3: We have the next-

Operator: We have the next-

Barry Logan: I want to go back to the.

Operator 3: Sorry.

Operator: Sorry.

Barry Logan: I want to sort of go back, I'm sorry, to the inventory discussion, just to be again, try to be educational about it, 'cause 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 sales divided by average inventory. Just to 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. As some of the metrics with the manufacturers improve in terms of lead times and on time, you know, on-time delivery, things like that. As that improves, it lets us moderate the amount of inventory we carry.

Speaker #2: 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.

Speaker #2: The goal is to own less inventory on average throughout a given year. That's the equation of inventory turns, right? It's cost of sales divided by average inventory.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: So it's much more subtle than the big stick we took the 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.

Barry Logan: 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.

Speaker #3: All right. 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.

A.J. Nahmad: Right. I'll add one more note to that, which is that with our new Hydros 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.

Speaker #3: We can also increase product assortment at each branch while still carrying less inventory, because we can turn that inventory faster. Do we move on to the next question?

Operator 3: Do we move on to the next question?

Operator: Do we move on to the next question?

Speaker #7: Seems like we're disconnected. Are we disconnected?

Paul Johnston: Seems like we disconnected. Are we disconnected?

Speaker #3: No, sir. You're connected. Do we move on to the next question?

Operator 3: No, sir, you're connected. Do we move on to the next question?

Operator: No, sir, you're connected. Do we move on to the next question?

Speaker #7: Yes. Go ahead.

A.J. Nahmad: Yes, go ahead.

Speaker #3: Sure, thank you. We have the next question from the line of Stephen Folkman from Jefferies. Please go ahead.

Operator 3: Sure. Thank you. We have the next question from the line of Stephen Volkmann from Jefferies. Please go ahead.

Operator: Sure. Thank you. We have the next question from the line of Stephen Volkmann from Jefferies. Please go ahead.

Speaker #7: Morning, Stephen.

Paul Johnston: Morning, Stephen.

Al Nahmad: Morning, Stephen.

Speaker #3: Good morning. I guess he wanted you to think about it before you took my question. So.

Stephen Volkmann: Good morning. I guess he wanted you to think about it before you took my question.

Speaker #7: Yeah. We reserve the right to change our mind, Stephen.

A.J. Nahmad: Yeah, we reserve the right to change our minds, Stephen, you know.

Speaker #3: Yeah. Feel free. Understood. 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.

Stephen Volkmann: Yeah, feel free.

A.J. Nahmad: Yeah.

Stephen Volkmann: Understood. Most of mine have been answered, but I have a kind of a bigger picture one. 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. I'm just curious how you're viewing that these days, 'cause 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. I'm just curious how you think that plays out as the year progresses.

Speaker #3: 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.

Speaker #3: And yet, 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: 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. 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. 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.

Speaker #7: If I can make a stab at that, 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.

Speaker #7: So obviously, the announced price increase does not always apply completely to certain segments of the market. To some of the people that have longer-term contracts with pricing.

Speaker #7: 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.

Speaker #7: And it's generally less than what the announced price increase is.

Speaker #3: Yeah. I would add to that, though, Paul, which is that the software that we've brought online to help our businesses not only would analytics and pricing and making sure we have the right price for the right customer, it's also about administrating those price increases.

A.J. Nahmad: 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 an OEM, it's touching thousands of SKUs, and 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. 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.

Speaker #3: I mean, if you think about every time there's a price increase from OEM, it's such thousands of SKUs. And 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.

Speaker #3: 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—it's not actually instantaneously, but I'll say instantaneously—so that we don't have the risk of a lag of price increase.

A.J. Nahmad: 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.

Speaker #3: Where we otherwise did have that risk and sometimes missed making changes that needed to be made. If that made sense.

Speaker #7: Yeah. It's a good point.

Paul Johnston: Yes. Good point.

Speaker #3: All right. That'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.

A.J. Nahmad: Interesting.

A.J. Nahmad: It's interesting. I appreciate that. Maybe almost a segue there, A.J., 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 growth in that platform is accelerating, does that have an impact on your gross margin target? Is that, is that a tailwind or is it just more sales?

Stephen Volkmann: It's interesting. I appreciate that. Maybe almost a segue there, A.J., 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 growth in that platform is accelerating, does that have an impact on your gross margin target? Is that, is that a tailwind or is it just more sales?

Speaker #3: 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?

Speaker #3: Is that a tailwind, or is it just more sales?

Speaker #7: Yeah. Well, all the above. We do realize a higher gross margin with our online sales and our offline sales. And e-commerce sales are increasing.

A.J. Nahmad: Well, all the above. We do realize a higher gross margin with our online sales than our offline sales. E-commerce sales are increasing. We expect that trend to continue. Also our cost to serve is lower with our online sales. 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 product. It's really, it's a win for all of us, including and especially the customers. 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.

Speaker #7: We expect that trend to continue. And also, our cost of service is lower with our online sales. And customers are using that tooling because it helps them, too.

Speaker #7: It helps them organize their businesses and how they go to market and how they procure products. So it's really a win for all of us, including and especially the customers.

Speaker #7: 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.

A.J. Nahmad: 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 for 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. That's the possible. Steve.

Speaker #7: And just to give you a sense of what's possible, we have markets and when I say markets, I mean the state of Florida for 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.

Speaker #7: So that's the possible.

Paul Johnston: Steve.

Paul Johnston: 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.

Speaker #3: And Steve, if we look even more long-term, this is one of the most underappreciated aspects that we write about at 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.

Barry Logan: That is an incredible moat and an incredible stickiness to future revenues, and those customer relationships that really matters when you look out three, five, seven years.

Paul Johnston: That is an incredible moat and an incredible stickiness to future revenues, and those customer relationships that really matters when you look out three, five, seven years.

A.J. Nahmad: Yeah. While we're on the subject, we also sell more line items for invoice when we sell online versus offline. It's a winning formula to sell more products online, and we're focused on it.

Stephen Volkmann: Yeah. While we're on the subject, we also sell more line items for invoice when we sell online versus offline. It's a winning formula to sell more products online, and we're focused on it.

Speaker #7: 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 good it's a winning formula to sell more products online.

Speaker #7: And we're focused on it.

Paul Johnston: Thank you all.

Stephen Volkmann: Thank you all.

Speaker #3: Thank you all.

Operator 3: Thank you. We have the next question on the line of Chris Snyder from Morgan Stanley. Please go ahead.

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

Speaker #1: Thank you. We have the next question from the line of Chris Snyder from Morgan Stanley. Please go ahead.

A.J. Nahmad: Okay.

A.J. Nahmad: Thank you. Hey, I wanted to ask about Q1 inventory. It was up about 25% quarter-on-quarter, which matches what we saw the last, you know, 5, 6 years. The last 5, 6 years, you know, OEM inventory or was tight, lead times were long. This year it feels like the opposite. I was surprised at how much your guys' inventory came up in that construct. I guess, is this because you guys feel that demand is turning, or there's, you know, well-appreciated April price increases coming even before the 232, and there was some building, to get ahead of that? Thank you.

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

Speaker #8: 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 five, six years.

Speaker #8: But the last five, six years, 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.

Speaker #8: 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.

Speaker #8: Thank you. Yeah. 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.

Barry Logan: Yeah. 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. 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. That element, that sales mix of A2L is still being compared a year ago to a heavy mix of 14 A products. That gets simpler and easier to identify as we get into Q2. To keep it simple in my statement, we do own less units at the end of March than we did a year ago.

Speaker #8: So if you take the inventory increase for equipment, it's all in the mix of price. It's not units. Actually, we own fewer units at the end of March than we did a year ago.

Speaker #8: So that element, that sales mix of A2L is still being compared a year ago to a heavy mix of 14A products. So that gets simpler and easier to identify as we get into the second quarter.

Speaker #8: But to keep it simple in my statement, we do own fewer units at the end of March than we did a year ago. Yeah.

Chris Snyder: Yeah. I guess on that, like sequentially, it's kinda the same. Sequentially, like the 25% up, you know, Q1 versus Q4 presumably is almost all volume or units. 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 5 years. You know, the lead times are a lot shorter, I would've just thought that you guys would build a little bit more cautiously. I guess just the question was like, is that a function of demand turning and you're more optimistic there, or they're just very well anticipated price increases? Thank you.

Chris Snyder: Yeah. I guess on that, like sequentially, it's kinda the same. Sequentially, like the 25% up, you know, Q1 versus Q4 presumably is almost all volume or units. 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. You know, the lead times are a lot shorter, I would've just thought that you guys would build a little bit more cautiously. I guess just the question was like, is that a function of demand turning and you're more optimistic there, or they're just very well anticipated price increases? Thank you.

Speaker #8: But I guess on that sequentially, it's kind of the same. Sequentially, the 25% up Q1 versus Q4 presumably is almost all volume or units.

Speaker #8: So I guess, just like that, kind of more, it felt like you guys were building in Q1 the same way you built the last five years.

Speaker #8: But 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.

Speaker #8: So I guess just the question was, is that a function of demand turning and you're more optimistic there, or are there just very well anticipated price increases?

A.J. Nahmad: I think if you look at our March inventory versus our March inventory the year before, you see that the dollars are down. When you sell an A2L product, excuse me, today, you've got to sell an indoor unit and an outdoor unit. We've had to increase our inventory of indoor units to accommodate the new A2L refrigerant. That could be part of what you're looking at there also.

Speaker #8: Thank you.

Speaker #7: 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, excuse me, today, you've got to sell an indoor unit and an outdoor unit.

Speaker #7: 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: Interesting. I appreciate that. Just, you know, maybe following up on the inventory point, you know, over the last year, it seems 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. I guess just now, you know, it feels like there's another round of OEM price increases coming. You know, 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? Is there any, you know, thing 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.

Speaker #8: Interesting. I appreciate that. And then, just maybe following up on the inventory point—over the last year, it seemed like it was very difficult for the industry, both the distributors and the OEMs, to have a sense of how much product their customers are holding.

Speaker #8: 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.

Speaker #8: I guess just 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?

Speaker #8: Thank you.

Barry Logan: Hmm.

A.J. Nahmad: I mean, I'll take a stab at that and you guys keep me honest, which is that we, Watsco, did not buy ahead of the expected price increases coming from the 232 tariffs. That's point 1. 2 is that, yes, some of our customers hold some inventory, and no, we don't have visibility into what that numbers are. But maybe Paul or somebody can hold me honest. I don't think it's particularly material. No. There were some customers that bought ahead of the price increases coming now, the 232 tariff price increases.

Speaker #3: I mean, I'll take a stab at that and you guys keep me honest, which is that we WATSCO did not buy ahead of the expected price increases coming from the 232 tariffs.

Speaker #3: That's point one. Two is that, yes, some of our customers hold some inventory. And no, we don't have visibility into what that numbers are.

Speaker #3: But maybe Paul or somebody can hold me honest. I don't think it's particularly material. 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.

A.J. Nahmad: 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.

Speaker #3: But that, in the end, and what 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.

Barry Logan: Yeah, most of the contractors.

A.J. Nahmad: It's not substantial enough. It's not substantial enough to really jolt the picture.

Speaker #7: Yeah. Most of the contractors.

Speaker #3: It's not substantial enough. It's not substantial enough to really jolt the picture.

Barry Logan: I don't think most of.

Speaker #7: 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.

Chris Snyder: Thank you.

Barry Logan: ... most of our contractors are not carrying a lot of inventory. They don't have mega warehouses.

A.J. Nahmad: Yeah

Barry Logan: where they put inventory in, so.

A.J. Nahmad: That's why we do.

Barry Logan: Yes, I agree with AJ completely. Yeah.

Speaker #7: Yeah.

A.J. Nahmad: Yeah. 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 gonna 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.

Speaker #8: Yeah.

Speaker #3: The reason we have inventory, the reason we have all the convenient locations with 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.

Speaker #3: 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.

Barry Logan: Yeah.

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

Speaker #7: Yeah.

Speaker #8: And I would say.

Speaker #7: Thank you. I appreciate that. And I know it's hard to I know it's hard to pinpoint, but it did feel like last year there were some unexpected downstream inventory.

Speaker #7: So that's why I wanted to ask.

A.J. Nahmad: Yeah.

Speaker #3: Thank you. Yeah.

Barry Logan: If I say it this way, it's not one size fits all for any brand that's out there. I mean, our business model with our brands and our customers is to carry it for them in Florida, have 100 locations to take the pressure off of them having to stock anything, ever. That's our value in Florida. There are other business models, other OEM models, factory-operated models that have under 30 branches in Florida. 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.

Speaker #8: Yeah. If I say it this way, it's not one-size-fits-all for any brand that's out there. I mean, our business model with our brands and our customers is to carry it for them in Florida, have 100 locations to take the pressure off of them, having to stock anything ever.

Speaker #8: That's our value in Florida. 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.

Speaker #8: 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 kind of evaluating your answer and listening to your question, there is a different answer if we go across brands and OEMs as well in that equation.

Barry Logan: Just, and kind of evaluating your, you know, the answer and listening to your question, there is a different answer if we go across brands and OEMs as well in that equation.

A.J. Nahmad: That's a good point. Good point, Barry.

Speaker #3: That's a good point. Good point, Barry.

Chris Snyder: Thank you. I appreciate that distinction. Thank you, Barry.

Speaker #8: Thank you. I appreciate it. I appreciate that distinction. Thank you, Barry.

Operator 3: Thank you. We have the next question from the line of Patrick Baumann from J.P. Morgan. Please go ahead.

Operator: Thank you. We have the next question from the line of Patrick Baumann from JPMorgan. Please go ahead.

Speaker #3: Thank you. We have the next question from the line of Patrick Bowman from JPMorgan. Please go ahead.

Patrick Baumann: Good morning.

Speaker #9: Good morning.

Barry Logan: Morning.

A.J. Nahmad: Morning.

Speaker #7: Good morning.

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

Speaker #9: 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: It's better than last year.

Speaker #3: Better than last year.

Barry Logan: I have no idea.

Speaker #7: I have no idea.

A.J. Nahmad: Yeah.

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

Speaker #3: Yeah.

Speaker #9: There wasn’t anyone that was jumping to answer that question.

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

Speaker #3: Yeah, no. I mean, we're obviously shy to answer that question. Sorry. Go ahead.

Barry Logan: Yeah, I mean, Pat, I've said this for my career in April, I think. 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 that answer, existing home sales, new home sales, consumer spending.

Speaker #8: Yeah. I mean, Pat, I've said this for my career in April, I think. The question is, if I ask it back to you, is, do I feel better or worse today?

Speaker #8: I feel better today, for sure. The other equations of the answer: existing home sales, new home sales, consumer spending—yeah, consumer confidence. And contractor confidence, ultimately, is who actually sells the product in someone's home.

A.J. Nahmad: Mm-hmm

Barry Logan: you know.

A.J. Nahmad: It's consumer confidence.

Barry Logan: Yeah, consumer confidence and contractor confidence ultimately is who actually sells the product in someone's home. You know, I would say again, it seems like a better situation, but time will tell.

Speaker #8: I would say, again, it seems like a better situation, but time will tell.

A.J. Nahmad: Mm-hmm.

Patrick Baumann: 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.

Speaker #9: Did you see any regional disparity in performance in March and April? Just asking in context of what seems to have been a really hot start to the year from a weather perspective.

Speaker #9: In certain areas.

Barry Logan: 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, the northern markets had a bit of disruption in the quarter that resolves itself as time goes on too. The Sun Belt by, you know, because of what I just said, the Sun Belt was, you know, outperformed the North, I think, for those reasons. That's just the Q1 and not something to draw an inference from over the longer term.

Speaker #8: Yeah. I would say in the northern market, you had severe some severe winter. You had a bunch of closed locations. A bunch of lost business.

Speaker #8: We really either blame or compliment the weather in our discussion. But the northern markets had a bit of disruption in the quarter. That resolves itself as time goes on, too.

Speaker #8: So the Sunbelt by because of what I just said, the Sunbelt was outperformed the north, I think, for those reasons. But that's just the first quarter.

Speaker #8: And not something to draw an inference from over the longer term.

Patrick Baumann: That makes sense.

A.J. Nahmad: It's nice, it's nice to be geographically diverse so that, you know, all that just again, is becomes normalized over time.

Speaker #9: That makes sense. And then my.

Speaker #3: It's nice to be geographically diverse. So that all that just, again, has become normalized over time.

Patrick Baumann: Yep, of course. My final question is I was wondering if you could opine on The Home Depot's acquisition of Mingledorff's 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?

Speaker #9: Yep. Of course. And then my final question is, I was wondering if you could opine on Home Depot's acquisition of Mingledorse and kind of how you see that impacting acquisition opportunities for you.

Speaker #9: 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?

Barry Logan: We've competed with the business they bought for a long time, and we're not threatened by it at all. In fact, I think I'm not gonna say what I really think because it wouldn't be nice, but, no, it's not something that we worry about at all.

A.J. Nahmad: We've competed with the business they bought for a long time, and we're not threatened by it at all. In fact, I think I'm not gonna say what I really think because it wouldn't be nice, but, no, it's not something that we worry about at all.

Speaker #3: We've always competed with the business they bought for a long time, and we're not threatened by it at all. In fact, I think I'm not going to say what I really think because it wouldn't be nice.

Speaker #3: 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.

A.J. Nahmad: I mean, I'll say we've known the Mingledorff family for a long time and wish them well and that business well. You know, it takes two to tango, and especially in our business model on our formula, which our Chairman started 50 years ago here is, 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 and continue to grow. If that's not in their interest, then it's not a good fit. If it is in their interest and there's mutual trust and respect, then it's a wonderful fit.

Speaker #3: I wish them well, and that business well. But it takes two to tango, and especially in our business model and our formula—which our Chairman started 50 years ago here—the family needs to want to join our family.

Speaker #3: 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.

Speaker #3: 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 there's mutual trust and respect, then it's a wonderful fit.

Speaker #3: 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 of opportunities in the future.

A.J. Nahmad: 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 of opportunities in the future.

Patrick Baumann: Makes sense. Thanks a lot, guys. Best luck.

Speaker #9: Makes sense. Thanks a lot, guys. Best of luck.

Barry Logan: Thank you.

Speaker #7: Thank you.

Operator 3: Thank you. We have the next question from the line of Jeff Hammond from KeyBanc Capital Markets. Please go ahead.

Operator: Thank you. We have the next question from the line of Jeff Hammond from KeyBanc Capital Markets. Please go ahead.

Speaker #3: Thank you. We have the next question from the line of Jeff Hammond from KeyBank Capital Markets. Please go ahead.

Jeff Hammond: Hey, guys.

Barry Logan: Hey, Jeff.

Speaker #10: Hey, guys.

Jeff Hammond: Just a couple follow-ups. Hey, just on gross margins. You know, you held the line pretty well, and I know you got some price benefit in Q1 last year, so that was good to see. Just wondering how you think. You had a particularly tough comp in Q2s. Just wondering how you think, you know, gross margins trend. Also just separately, can you give us what commercial HVAC equipment was in the quarter? I'm not sure if I missed that.

Speaker #7: Hey, Jeff.

Speaker #10: Just a couple of follow-ups. Hey, just on gross margins—you held the line pretty well. And I know you got some price benefit in Q1 last year.

Speaker #10: So that was good to see. Just wondering how you think you got a particularly tough comp in two Qs. So just wondering how you think gross margins trend.

Speaker #10: 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.

A.J. Nahmad: Well, that's a big question.

Barry Logan: Oh, yeah.

Speaker #7: Oh, that's a big question.

Speaker #3: Oh.

A.J. Nahmad: 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 resi and commercial traveled very close together.

Rick Gomez: 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 resi and commercial traveled very close together.

Speaker #7: Yeah.

Speaker #3: 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.

Speaker #3: The biggest divergence is what we mentioned in the press release about domestic versus international. But residential and 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 could see that there's usually some in most years, there's a modest retreat in margins, only because historically, first quarters are the ones that have some price OEM pricing actions.

Rick Gomez: On margins, look, if you go back 10 years in time, you can see that. If you just take Q2 and Q3 as one thing, you could see that there's usually some, you know, in most years there's a modest retreat in margins only because historically Q1s are the ones that have some OEM pricing actions, and the cooling season and RMC mix and all of that, you know, typically influences the Q2 and Q3 margin versus an off-season margin. 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.

Speaker #3: 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.

Speaker #3: 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, we'll see what, again, what the OEMs begin to talk about here in the next few days.

Rick Gomez: I think in the absence of any, of any new information and we'll see what, 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's 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, Supply Sync is now launching, for example. We expect that to be helpful as it scales. A.J. mentioned Hydros and DCR, its companion initiative around purchasing and non-equipment. That is gaining momentum and scaling. There's some puts and takes to it. We'll share more when we know more.

Speaker #3: I think that's what history tells us, is that there's a different profile of the margin during season versus out of season. Offsetting that is, and we haven't really talked about this much today, is we supply sync for is now launching, for example.

Speaker #3: And so we expect that to be helpful as it scales. And AJ mentioned Hydros and VCR. It's companion initiative around purchasing and non-equipment. That is gaining momentum and scaling.

Speaker #3: So there's some puts and takes to it. We'll share more when we know more. But historically, that's the there's always a little bit of difference between seasonal and off-season margins.

Rick Gomez: Historically, there's always a little bit of difference between seasonal and off-season margins.

Jeff Hammond: Okay, thanks.

Speaker #7: Okay. Thanks.

Operator 3: Thank you. This concludes the question and answer session. I would like to turn the conference over back to Mr. Albert Nahmad for closing comments.

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

Speaker #3: Thank you. This concludes our question and answer session. I would like to end the conference over back to Mr. Albert Nahmad for closing comments.

Al Nahmad: 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. We're in for the long term, and we're happy you're with us. Bye-bye.

Speaker #7: 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 post-acquisitions.

Speaker #7: And that sort of thing. So win for the long term. And we're happy you're with us. Bye-bye.

Operator 3: Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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

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