Watsco (WSO) Q3 2025 Earnings Call Transcript

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Date

Wednesday, Oct. 29, 2025, at 10 a.m. ET

Call participants

• Chairman and Chief Executive Officer — Albert Nahmad
• President — Aaron J. Nahmad
• Chief Operating Officer — Paul Johnston
• Executive Vice President — Barry Logan
• Chief Financial Officer — Rick Gomez

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Takeaways

• Total sales decline -- Sales fell 4% in the third quarter of 2025, with U.S. sales down 3%.
• Unit volumes -- Unit volumes remained subdued, attributed to both market conditions and the A2L refrigerant transition.
• Gross margin expansion -- Gross margins increased by 130 basis points to 27.5%.
• Operating expenses -- Operating expenses rose 5%, attributed to transition-related inefficiencies and additional locations.
• Record cash flow -- Watsco generated record cash flow of $355 million.
• Inventory reduction -- Inventory decreased by $350 million, progressing toward a $500 million year-end reduction target.
• Balance sheet health -- Watsco maintains a strong balance sheet with no debt and a high cash position.
• E-commerce penetration -- E-commerce accounts for 34% of total sales, and reaches up to 60%-70% in some U.S. markets.
• OnCall Air adoption -- The digital platform achieved a 19% increase in gross merchandise value, reaching $1.7 billion in annualized sales over the last twelve months, with over 70% of sales above the minimum standard efficiency.
• Mobile technology engagement -- The mobile app’s user base grew 18% to 72,000 active contractor and technician users.
• Non-equipment sales -- Non-equipment, comprised of parts (8% of revenue) and supplies (over 20%), now forms roughly 30% of sales.
• Pricing gains -- Achieved double-digit pricing gains for new products, supported by the A2L transition.
• Current quarter sales trend -- Management reported “mid-single-digit” revenue declines to date.
• Gross margin initiatives -- Ongoing initiatives, including pricing optimization and AI, target gross margins in excess of 30% over the long term.
• Inventory turns -- Current inventory turns are 3.6-3.7, with management targeting improvement.
• Accounts receivable quality -- Past-due receivables over 90 days remain at 1.2%, a decade low.
• Acquisition capacity -- Leadership highlighted readiness to deploy capital toward acquisitions if industry softness creates opportunity.
• Institutional customer focus -- New technology initiatives address the under-10% and growing institutional/large contractor segment.
• A2L transition impact -- Approximately 55% of products sold were affected by the A2L refrigerant transition, which is now “substantially complete,” according to Albert Nahmad.
• SG&A outlook -- SG&A performance is expected to improve with the product transition largely behind Watsco.

Summary

Watsco (NYSE:WSO) delivered record operating cash flow despite a 4% sales decline and persistent unit softness attributed to a challenging environment and the A2L refrigerant transition. Management underscored a substantial completion of the regulatory transition, stating the business will be structurally simpler next year. Higher gross margins, propelled by a favorable mix, robust pricing execution, and technology-driven initiatives, created incremental profitability even as operating costs reflected transition inefficiencies and network growth.

• Management noted “mid-single-digit” revenue declines so far in the fourth quarter of 2025.
• Balance sheet strength, including high cash and no debt, positions Watsco for potential strategic acquisitions as market conditions evolve.
• Technology adoption accelerated, with e-commerce reaching 34% of total sales and OnCall Air facilitating up to $1.7 billion in annualized digital sales over the past 12 months.
• Watsco reaffirmed long-term gross margin ambitions above 30%, driven by pricing optimization tools and artificial intelligence initiatives.
• Current inventory turns of 3.6-3.7 are being addressed as part of a broader effort to raise cash productivity and operational efficiency.

Industry glossary

• A2L refrigerant: A next-generation, mildly flammable refrigerant introduced due to regulatory changes, requiring modifications in HVAC product design and installation.
• SEER: Seasonal Energy Efficiency Ratio; a measure of air conditioning cooling efficiency.
• OnCall Air: Watsco’s proprietary digital sales platform for contractors, supporting proposal creation, inventory integration, and online transaction capabilities.

Full Conference Call Transcript

Albert Nahmad: Good morning, everyone. Welcome to our third quarter earnings call. And this is Albert Nahmad, Chairman and CEO. And with me is Aaron J. Nahmad, President of Watsco, Paul Johnston, Barry Logan, and Rick Gomez. Before we start, our normal cautionary statement: This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. I am pleased to report that Watsco, Inc. generated healthy earnings and record cash flow despite a very challenging market environment. As we all know, 2025 is a year of significant transition to next-generation equipment containing A2L refrigerant.

The transition affected roughly 55% of products sold and influenced most every aspect of our business. Regulatory changes have historically been good for our business and good for our customers. In the long term, we expect this transition to be no different. The transition is substantially complete, and we look forward to operating a far simpler business in 2026. Throughout all of the volatility, we are satisfied that our earnings are largely intact, our balance sheet remains strong, and our technology advantages remain immense. We certainly expect the volatility is temporary and will ease as the transition concludes.

We operate in a great industry with strong long-term fundamentals and have the industry's most accomplished leadership team, all with a long-term focus to keep building on our success. Turning now to our third quarter results, sales declined 4% in total and 3% in the U.S. While unit volumes remain subdued, we achieved double-digit pricing gains on the new products with growth in sales for both non-equipment and commercial refrigeration products. We again improved gross margins, which expanded 130 basis points to 27.5%. As we have expressed before, we have several ongoing initiatives to enhance gross margins for long-term goals of exceeding 30%.

Operating expenses increased 5%, reflecting a measure of ongoing inefficiency tied to the product transition as well as new and acquired locations. With the product transition largely behind us, we expect SG&A performance to improve from here. We continue to fortify our balance sheet, reducing inventories and overall working capital. We generated record third-quarter cash flow of $355 million, an incremental opportunity in the fourth quarter as we close out the year. We remain fundamentally positive and optimistic about our position in the industry and our ability to generate growth. Our balance sheet has a healthy cash position and no debt, providing us with the opportunity to invest in most any size growth opportunity.

This includes the capacity to co-invest with our OEM partners as we head into 2026. We also continue to invest in innovation and technology that separates us from our competitors. We have made long-term progress in driving adoption. I should say, we have made terrific progress in driving adoption. For example, e-commerce penetration continues to grow and accounts for 34% of our sales and up to 60% to 70% in certain U.S. markets. Let me say it again. E-commerce penetration continues to grow and accounts for 34%, I should say, of our sales, and up to 60% to 70% in certain U.S. markets.

The number of contractors and technicians engaged with our mobile app now stands at 72,000 users and grew an impressive 18%. That means that 72,000 of our customers are using our technology. The annual run rate of sales through OnCall Air, our digital selling platform for contractors, saw a 19% increase in the gross merchandise value of products sold, reaching $1.7 billion over the last twelve months. We are also making next-generation investments to enhance our competitive position. For example, we are developing new technology aimed at capturing more sales from the institutional customer. We are accelerating the use of pricing optimization tools to make progress toward a 30% plus gross margin target.

We have launched a new initiative to compete and grow sales in the highly fragmented non-equipment market, which today is roughly 30% of our sales. And we have begun to harness the power of artificial intelligence, both internally and externally, offering potential to further transition our customer experience, improve operating efficiency, and create new data-driven growth strategies. Our technology investments are making a big difference, and we believe the impact will only grow with time. We look forward to sharing more during our upcoming investor meeting in Miami in December. I cannot wait to see and meet you all this December. These investments, along with our scale, entrepreneurship, culture, and capacity to invest, are unmatched in our industry.

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

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 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 your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Tommy Moll of Stephens. Go ahead, please.

Tommy Moll: Morning, Albert. Thanks for taking my questions.

Albert Nahmad: Of course.

Tommy Moll: I want to start with a question on the repair versus replace dynamic. It has been a couple of quarters in a row now where your non-equipment business trends have been well ahead of the equipment trends. You have obviously been very disciplined on pricing for the new equipment, and so I am curious. Is the simplest explanation here just that we are seeing some price elasticity among homeowners, or is there something else you might call out?

Albert Nahmad: I am going to let Paul Johnston respond to that.

Paul Johnston: Yeah. You know, it is not a repair versus replace. It is repair and replace. I think we said that on the last call. What we have seen is the larger dealers that have salespeople generally do not sell compressors and motors. They generally sell the equipment side. And what we see with the people that do not have an in-home salesperson is they will repair the unit. So we see a dichotomy there amongst our customers. Also, there is a geographic spread where, you know, if you are in Illinois or, excuse me, Pennsylvania, and you have got an eleven-year-old unit in your house, you are generally going to repair it and not replace it.

It has got a twenty-year life. In Florida, Texas, you have got a shorter life. I think generally, you are going to replace it with a piece of equipment. So it is really difficult to put your finger exactly on, you know, where and who is creating a repair versus replace market. And just some data behind that. When we say non-equipment, there are really two things that are not equipment: parts and supplies. That is maybe a more direct way of calling that category something parts and supplies. So parts basically is 8% of Watsco's revenues. Parts. And the supplies, everything else is over 20% of Watsco's revenues.

So just in the scope of that discussion, you know, parts will never substitute what is happening in the replacement market in that discussion. The data just is not there to support that. So at the end of the day, it is the consumer that is spending $8,000, $10,000, $12,000 on a pair of new machines for their home. As Paul is suggesting and where we see in the Sunbelt, that is a more frequent purchase and a more ordinary purchase and a more necessity purchase. And we do see some differences as we go north of the Sunbelt. So we do like it that Watsco is, you know, 75% in the Sunbelt in that respect.

But it is really, I think, more of the crux of the answer is built on what are consumers spending on their homes right now. And that is probably the bigger orientation to this than whether we are selling more compressors or not versus the replacement market.

Tommy Moll: Yep. As a follow-up, maybe we will address the elephant in the room here. Maybe just take it on directly. Yesterday, Carrier mentioned that their October distributor movement was down 30% and that they expect something like down mid-twenties for November and December. Does all that sound reasonable enough in terms of what you have seen or expect to see for your equipment business this quarter? And should we think of that in terms of volumes or sales?

Albert Nahmad: Well, that is a very good question. And I do not think we are out of the woods yet. So there is some merit to that. Who wants to add more to that? Is it you, Paul? AJ or Barry? We, you know, I think it is pretty much in line. And you have got to remember that the shipment data that you are seeing was up last year as a lot of the OEMs were shipping all that 410A in. So the shipment data coming out of HRI really is not going to be indicative of what is going on in the market.

But when you look at the actual unit sales, you know, without the price increase, I think they are pretty much in line with what the market is showing. Now that is going to vary from region to region. Once again, we are seeing some real strength in certain parts of the country, and we are seeing definite weaknesses in others. You know? And so it is not across the board. But in aggregate, we are not seeing an increase in demand. No. It is the fourth quarter. In aggregate, it is still below this time last year. Now this time last year, it was an extraordinary quarter. But, nevertheless, we are seeing that and we are dealing with it.

We are getting more productive in our operations and more efficient given the lower volumes that temporarily are lower. And we are adjusting to the circumstances. Just to add that to clarify one Tommy, just to clarify, one aspect of that is that the 20% to 30% is unit volumes, not sales dollars. I want to be clear about that.

Tommy Moll: Read my mind. Yeah. And I mean, let me just do a little bit of therapy about it just to be, again, very direct about it. So we are clear. A year ago, fourth quarter unit volumes for Watsco were up almost 20%. Right? Between 15% to 20%. And a year later, the variance is going to be, you know, exposed to that comparable. Right? And then after the fourth quarter is when things started to become, I would say, less extreme in that regard. So I think the fourth quarter a year ago is still in the context of the transition started. The 410A availability was at its peak.

Be it contractors, builders, national accounts, whoever it was, was drawing on distribution for 410A because they could get it. And it is really the last of the cyclical things in this discussion, I think, about the transition is the fourth quarter. Now it is the smallest quarter of the year. It is off-season. And it will be either there obviously is noise in the fourth quarter this year. But that it really does not bear resemblance as we go forward into next year as a consequential trend, I would say. It is more about the comp a year ago than whether the market has changed any at all in the last, you know, twenty days. Sure.

I think that last sentence summarizes the barriers of pacing. Our pacing and the industry pacing is roughly the same. The comp changes in Q4.

Tommy Moll: Thank you all for the insight. I will turn it back. Rick, is there something you want to add with the work you have done?

Rick Gomez: I think, I mean, it is obviously, it has been a fluid market, and one of the noisiest years in recent memory. And by the way, with all that noise, our earnings are largely intact, and I think that says a lot about the resiliency of our business model and of distribution in general. But if we step back, you know, let us examine kind of the big macro factors. We do not have influence over interest rates. We cannot influence consumer sentiment. Or new housing completions or existing home sales. These are all things that impact, you know, the unit movement numbers that everyone is focused on. But we have control, and we have influence over many other things.

We have control over how many customers we serve. And that has been growing steadily over time. We have influence over our margins. And that too has steadily improved with more upside to go, we think. We have control over our expenses. And we are taking steps to improve efficiencies with the product now largely behind us. We control our inventory. And as you can see, we made great progress to improve working capital and cash flow in the quarter. We have influence on how we partner with OEMs, and we are right now developing aggressive growth strategies with our key partners for next year. We control our balance sheet. And, of course, it has never been stronger.

And we control our technology, which is, I think, the most important competitive advantage we have and with more innovation being introduced right now in real-time to help future growth even as we navigate this admittedly fluid industry dynamic, I think we have done a great job of acting on the things within our control, and we will continue to do so.

Tommy Moll: Thank you. I will turn it back.

Operator: The next question comes from Ryan Merkel of William Blair. Go ahead, please.

Ryan Merkel: Morning, Albert. Yeah. Hey. Hey. Morning all. I want to follow-up on the fourth quarter. Could you just comment on what you have seen quarter to date in terms of total sales?

Albert Nahmad: It is soft.

Ryan Merkel: Okay. Gotcha. So, yeah, it sounds like your biggest supplier is talking about units down 30%. It sounds like you do not totally disagree with that.

Albert Nahmad: No. No. We are not. We are not in that arena of softness now. Not even close.

Rick Gomez: It is single-digit. You know, it is probably mid-single-digit so far in revenue.

Ryan Merkel: Okay. That is helpful. Okay. So mid-single-digit decline. And then I am curious if you talk about the third quarter, the shape of the quarter, it sounded like July started off kind of flat. Right, year over year. And then from what I heard, August was really rough. September was also tough. So two-part question. Is that what you saw? And then what do you think the reason is that, you know, the unit volume just fell off so much in August and September?

Albert Nahmad: Barry, Paul, you want to deal with that? I do not know. Barry, do you want to grab that one?

Paul Johnston: Because contractors installed fewer systems.

Albert Nahmad: Yeah. I mean, again, if we consider the number of units that did decline, put it in, you know, unit number, and then ask the question, what makes up the comp, what are the components of the unit decline? New construction is the largest component of that discussion. We can see it in our customers. We can see the special pricing we give. We can count the number of units we sell into new construction. And it was down as a percentage down the most in that overall discussion. And I do not know offhand if that got worse in August and September. That is a little granular for my brain this morning. Right.

But that is the largest component of the discussion. So if interest rates or homebuilding activity or existing home sales get generated in the forward period over the next twelve months, that is an opportunity because that is the largest component of both the quarter and the year-to-date decline in units. And in terms of the replacement market and everything else, there is always a measure of consumer discretion, always, when a contractor walks in and says, this thing will cost you $8,000, $10,000, $12,000. And to the extent the consumer is either tighter or worried or credit crunched, or more paralyzed in some way about spending $8,000, $10,000, or more on something, it is going to affect.

Did that get worse in August and September? It looks like it. Is it permanent or temporary? Is it long-term or short-term? We will see. At least in our industry's history, it is never long-term. It is always a short-term dynamic. But, anyways, that is some big picture thoughts on that.

Ryan Merkel: Okay. I appreciate it. I know that is kind of a hard question to answer, so appreciate you entertaining it. I will pass it on. Thanks.

Operator: The next question comes from David Manthey of Baird. Go ahead, please.

David Manthey: Morning, Albert.

Albert Nahmad: Morning, David.

David Manthey: Thank you. I feel like I am in a parallel universe here. In twenty-five years covering Watsco, this is the closest I have come to hearing guidance. It is pretty amazing. But as long as we are talking about it, the minus five to 10% revenue declines in the fourth quarter, we are talking about equipment only there, correct?

Albert Nahmad: No. We did not give guidance. We did not give guidance. We gave a percentage of what we see thus far in the quarter. In October. But in equipment, Barry. Right?

Barry Logan: No. That is overall. No. That is overall. Yeah. Overall.

David Manthey: Okay. Fair. Fair. Okay. Alright. And then, you know, if you believe in this, the normalization seen here, you have a lot of cash, no debt, you have a healthy dividend, you have always invested organically as needed. The stock seems to be on sale here. Is there a thought about allocating some of your cash forward to more aggressive share repurchase at these levels?

Albert Nahmad: That is an excellent question. And I thought about it. We thought about it. But on the other hand, the softness in the industry creates perhaps opportunities for us to do more acquisitions. Because I would say when we compare our financial strength to others, we are at the top of the heap. And there may be some distributors that finally want to venture with us either in a joint venture or sell to us altogether. We do not know, but we have to remain open to the possibility that we may be able to step up our acquisition activity. I do not know that it is going to happen, but we have to be ready to do that.

And we will use our capital to acquire more distributors if we have that opportunity.

David Manthey: Yep. I appreciate that, Albert. Okay. Thank you.

Operator: The next question comes from Jeffrey Sprague of Vertical Research Partners. Go ahead, please.

Jeffrey Sprague: Morning, Albert.

Albert Nahmad: Hey. Good morning, Jeffrey.

Jeffrey Sprague: Good morning, everyone. I just want to come back to inventories. It was nice to see that sequential step down in Q3. Just want to think about where we end the year. Obviously, a lot of that depends on things you said you cannot control, like end demand and the consumer and all those sorts of things. But what is your view at this point in time of sort of how you end the year, how close to normal you might be, you know, as you obviously then start to pivot the focus into 2026.

Albert Nahmad: Well, I would say that maybe a general reply as a state criminal. A specific fourth quarter. Reply. We want to increase our inventory turns. And that effort will continue into the fourth quarter and in the future. So we are going to get better at inventory turns. And that is our goal. So I think I have answered your question. That is a focus. And we certainly have the capability with our technology to do something about it. And we are doing it, as you can tell, the inventory is coming down, and it is coming down again in the fourth quarter. And the turns are slightly increasing. Now I am trying to create more cash for us.

And we like that.

Jeffrey Sprague: Yeah. I like more cash too.

Barry Logan: Yeah. There are really two curiosities and the one you are asking about is will our distribution channel, Watsco, be in a more conventional position. Right? That is your that is really almost an OEM orientation that did not ask the question, you know, does the has the inventory been reset in line with some kind of, you know, so that understand what I am saying. Yes. That is absolutely. And so, yeah, there is a lot of progress in this in the third quarter. More progress in the fourth. Yeah. You could look analytically where are we today versus history and answer the question, and I can help you with that.

But what I was saying is how does inventory affect us looking forward? You know, what if we add five inventory turns instead of four? What would that do to our return on invested capital? What would that do to our real estate? What would that do to our cash flow? What would it do to the overall handling and load that we carry in our stores if we had less, you know, less inventory and better turns. What if we had better technology with our OEMs to replenish our stock every day? Those are the bigger those are the things we are focused on while trying to reduce inventory by the end of the year.

And you can understand that it is a longer-term perspective from our point of view. And while we are just trying to get the year-end inventory in line to have a frankly, a strong hand, a strong capital base to flow into next year. And so I think we said last quarter, we were targeting $500 million of reductions by year-end. And second quarter or third quarter was $350 million of that. I think we can improve on the $500 million target. It is a slower time of year to say that, but, you know, by the end of the year, I think inventories will be near historical levels versus the size of our company.

Albert Nahmad: But let me say again. Yeah. When we say inventory turns, we are presently at about 3.6. 3.7. We want to be a lot better than that. Barry used some numbers, but he was just throwing numbers out there. I am giving you more specific numbers. So we have an opportunity to significantly improve inventory turns, which also significantly increases our cash flow. And becomes a more productive part of our business, with high inventory trends. And we have the ability to get our manufacturers to participate in that. Because, generally, we are the largest customer, and we have the largest impact on the unmet market.

And that is what we are doing with them and with our own technology to do better with what we have. To achieve the higher turns. But I like it. I like higher turns, and I like higher cash flow. I mean, we are at $600 million in cash flow right now. In the bank. I would like to see that number get larger because I would like to have the ability to do almost any transaction that comes our way. And I do not like going into debt for it. I would like to have it with the capacity to do what we need to do. With the cash we have.

Jeffrey Sprague: Great. Well, thank you for that very thorough answer. I will pass the and give somebody else an opportunity. Appreciate it. See you in December.

Albert Nahmad: Good. I am glad you are coming.

Operator: Our next question comes from Chris Snyder of Morgan Stanley. Go ahead, please.

Chris Snyder: Hey. Good morning. Thank you, guys. I wanted to follow-up on some of that inventory conversation. It seems like, you know, you guys believe you will be at, like, a roughly more normalized level to exit the year. But I guess, you know, my question is, should we expect the normal kind of typical ramp in inventories from year-end into Q2? That we have seen you guys do historically. Or could that be more muted, you know, just kind of given the inventory backdrop? Thank you.

Albert Nahmad: Oh, that is an interesting question. And I can only say that we are trying to get better in the management of our inventory. So history is not dependable, what we are going to do as we go forward this year. I think whatever we have done in the past, we will do that. We will do better. Go ahead,

Paul Johnston: Yeah. Think about the last, you know, five, six years in our industry. We have had we had the change in industry standards on efficiency, then we had change in refrigerant come at us, then we had, you know, we had the pandemic. It has not been normal on a lead time basis with our OEMs for the last four, five, six years. So for us to get back to normal again, as Barry was talking about, means we order something and we get it within four to six weeks. And we do not have lead times that extend out beyond that and that the manufacturers can go ahead and supply us in a timely manner.

And that is how you adapt your inventory to get to a five turn.

Albert Nahmad: And we are trying to get cooperation from the manufacturer to do better in deliveries.

Paul Johnston: Right. And to do whatever they have to do to deliver much quicker with less lead time. And that is part of the effort. And because of who we are and our size, they listen to us. I hope. I am hoping. But I think they will.

Chris Snyder: Thank you. I appreciate that. Maybe to follow-up on price, you know, the OEMs that have reported so far talked about an expectation of incremental price in 2026. Maybe a bit of a surprise given what seems like affordability challenges and just overall headwinds facing the consumer. I guess, is your thoughts on that? And do you feel like just given the balance sheet and maybe the absorption headwinds that they are facing, do you feel like that gives you guys better ability to push back or negotiate than years past? Thank you.

Albert Nahmad: Well, I could not know how to begin to answer that question. A tough question. We are a good customer about manufacturers, and I like to think that they will listen, and we will listen to them. And, you know, we like to get along with our manufacturer. I do not know how to answer that any better than that.

Paul Johnston: Yeah. If I bottom line, though, when you look at the average transaction out there, you know, our value content to the contractor is generally about 30% to 40%. So if it is a $12,000 installation, you know, the amount of product that we are selling is going to be in the, let us say, $3,000 to $4,000 range. So a price increase at that point is going to increase, let us say they go up, you know, pick a number. If they go up $100, you know, it is not going to be a major, you know, transaction halt to the consumer. So I really do not know what we are facing from the OEMs yet.

And until we do, you know, we cannot react to it.

Chris Snyder: Thank you. I appreciate that perspective.

Operator: The next question comes from Mitch Moore of KeyBanc Capital Markets. Go ahead, please.

Mitch Moore: Hey, everyone. Good morning. Good morning. I know most of the industry is already in those entry-level baseline SEER products, but just wondering if you could talk about mix in the quarter. Just maybe if you could flesh out if you are seeing consumers trade down to lower-tier products?

Paul Johnston: Yeah. That has been occurring. Yeah. Yeah. All year long. You know, anytime you have a change in product, you know, everything always has migrated to the base model. The base model today is 15.3 SEER. In the South, that is a very efficient piece of equipment that I would not call base anymore. I would call it almost high efficiency. So, you know, it has been pretty steady. The data we have only covers two quarters on the industry. You know? So first and second quarter, we are fairly flat. You know, as far as the SEER ratings. It is always higher on heat pumps than it is on straight cool.

And the exception and the exciting thing going on in our business is that we can help our customers sell up, particularly through OnCall Air. I think we are approaching not I think. We are approaching close to $2 billion of our customer sales going through that tool. And the most amazing statistic is that over 70% of the sales that occur are more are higher than the minimum efficiency standard. So where the rest of the industry is selling 80%, 85% minimum standard on OnCall Air, it is over 70% above minimum standard. The more of that we can do, the better for everybody in the channel.

Albert Nahmad: Well said, Isaac, can you explain OnCall Air? Yes. OnCall Air is there may be some new people on this call. Yeah. Sure. OnCall Air is a technology initiative. It is actually a business we created in our Watsco Ventures subsidiary and has created a piece of software that is really a sales engine for our contractors or our customers. So a customer like AJA, Heating and Cooling would be an OnCall Air customer and use our software to sell in the kitchen house.

And then loaded up with all of our data about all the products we sell, our customers' pricing, our inventory, everything you could ever want in terms of creating a world-class professional sophisticated proposal or proposals for homeowners as a contractor or building owners as contractors attempt to sell their wares. Our customers that use it are winning more jobs. They are higher ticket jobs. They are higher margin jobs. And like I just said, they are more often than not selling higher efficiency systems than the base tier as well. So it is growing. It is growing fast, and it is just a win-win-win for everybody in the channel.

Mitch Moore: Great. That is super helpful. And then, obviously, record gross margins here in the third quarter. Just wondering if you could unpack the moving pieces within that, maybe just how much was mixed benefits from the other HVAC products, versus some carryover OEM pricing? Thanks.

Rick Gomez: This is Rick. I can help you with that answer a little bit. There are two or three contributors there that help and that feel, you know, good and sustainable. The first is we had growth in non-equipment. And as a category, as a basket, that non-equipment business has higher gross margins. So that is a mixed benefit in our gross margin. There was some carryover benefit from, you know, springtime OEM pricing actions. And then the third most structural, interesting aspect of it is that we have talked about the pricing optimization tools that are maturing and getting better every day in the field. AI is making that even better today.

And transactional margins were very resilient in a down market and actually slightly up. So we take some comfort in that, and it feels somewhat permanent and structural, whatever word you want to use. And those are the large contributors to the margin expansion.

Albert Nahmad: And then I just I just gotta Oh, let me just say this. We do not want to provide information to our competitors that can use force. So be careful with how much detail we answer these things. Go ahead, AJ.

Aaron J. Nahmad: I was just gonna say, you know, the way you said that, Rick, and what you said earlier about controlling what we can control, it is important to reiterate that we are a long-term company. I mean, I know this is a third-quarter call, but our job is to invest and to steer the business for the long-term health and continuous improvement of this business. You heard us talk about that in our inventory, right, where we talked a little bit about what it means in this quarter and next quarter, but, really, we are talking about how do we get to five turns. What does that mean for our business in the medium and long term?

The pricing, there is noise. There are OEM changes and so forth. But what are we doing to improve our paradigm as a selling organization to structurally increase our margins over the long term? It is true of our technology initiatives, helping our customers digitize their businesses so they can be more efficient as well as we can be more efficient, and we can all move the efficient frontier out into the right. So, you know, I understand these questions are very much focused on this quarter and next quarter, but our business is focused on the long term as well as the short term.

Mitch Moore: Right. Great. Thanks, guys.

Operator: Our next question comes from Steve Tusa of JPMorgan. Go ahead, Steven.

Steve Tusa: Good morning.

Albert Nahmad: As I say, Miami common staff.

Steve Tusa: Moto Bene?

Albert Nahmad: That is very good.

Steve Tusa: I do not know. I was in Italy this summer, so, just I could tell. I could tell. Yeah. And then never real, like, language guy, unfortunately.

Albert Nahmad: You did good. You did good.

Steve Tusa: But I do talk HVAC. I talk the HVAC language. So I am just curious, when you survey your contractors, what are they saying about like what their volumes are down? Or are they I mean, would assume they are down if this is what kind of like what you guys are seeing, but like what is the actual like I do not know what you call it, act like of activity? For the contractors, like, at the ground level.

Albert Nahmad: I am not sure. I understand your question.

Steve Tusa: Well, you know what? Are your contractor customer sales down, or are they, like, you know, is it because Lennox mentioned something about contractors having inventory I think Carrier kind of reinforced that yesterday. There is this kind of narrative that there was some inventory sitting at contractors or should we assume that your sales are kind of in line with what they are seeing on the ground level?

Paul Johnston: I think some contractors may have inventory, but I, you know, it is that is going to be a very large contractor's got a warehouse. You know, we sell to almost 100,000 different contractors across the country. So it is, you know, if you are talking to the large contractor, yeah, they could have inventory, but it I do not think it is ever going to be a meaningful amount of inventory. I mean, see as Asia, I have talked to contractors in the Northeast that are of size, and they are doing great. I have talked to small ones in Texas that are closing up shop.

I mean, it is all over the map, which as you imagine, since, like Paul said, we are at such scale with 100,000 customers across the company.

Steve Tusa: Right. It is not there is not one story. There are thousands.

Steve Tusa: Okay. But, obviously, the industry overall is down. Right? As far as this institutional channel, which is, I think, the large contractors, how big is that now as a of the market if housing and homebuilders are like 20%? Like is that institute channel? How big is that now, the consolidators? On the contractor side?

Albert Nahmad: It would be a guess on our part.

Paul Johnston: Yeah.

Albert Nahmad: No. But we have guessed on our part. Yeah. Barry, what do you have there? I think you estimated that for me once.

Barry Logan: Yeah. I mean billion dollars. It is just two separate conversations, Steve. There are the contractors that do work for the builder community. And that is not necessarily a consolidator or some kind of what we are targeting as institutional. And if housing is 10%, 15% of the market, I will believe those contractors are 10%, 15% of the market. But the focus of what we are talking about is mega contractors that are primarily replacement-driven that have a multitude of locations throughout the U.S. And their fragmentation of who they buy from is extreme. So we are trying to develop the thought of how to bring productivity and scale to that relationship.

And I certainly think that segment is under 10% of the market, but it is growing. And this is not just cooked up in a lab. It is customers coming to us and asking if we can help them with this.

Albert Nahmad: Right. I think you said that right, Barry. It is under 10%, but it is an important growing segment. They are buying their buying is fragmented. Including amongst the Watsco companies fragmented. So what we are developing is a single solution for them to buy all their needs from all of our businesses. That is under development now and will come to market early next year. But the conversations we have with those institutional type contractors and the consolidators of what the prospect of this thing is very exciting to them and, therefore, very exciting to us.

Steve Tusa: Got it. And then just one last one for you on pricing. Anything in the environment that you are seeing where maybe there is an OEM that is trying to get rid of some inventory or something? Any kind of late-season rebate activity that or discounting activity you are seeing on a like-for-like basis? Price wise?

Albert Nahmad: I never whatever we are seeing is not material.

Steve Tusa: No. It is not. Okay. Okay. Thanks a lot.

Operator: The next question comes from Nigel Coe of Wolfe Research. Go ahead, please.

Nigel Coe: Please do not test my language skills. I find my Spanish make it. By the way, I think this is the first time you guys have done a formal investor event. So this is one we cannot miss. So looking forward to that, guys. Where are you coming from, Nigel? New York. Yeah. So do not be fooled by the accent. It is a you had me fooled. You did have me fooled.

Albert Nahmad: I was gonna guess.

Nigel Coe: I was gonna guess Ireland.

Albert Nahmad: Ireland. Well, yeah. Yeah. No. I am actually washed, but close enough.

Nigel Coe: Okay. So I want to go back to I would really love to get your perspective on, you know, the customer behavior and why it changed so dramatically. And, you know, it seems to me a coincidence or maybe not a coincidence that it is happening at the time where we have seen this A2L transition. And I am just wondering if the kind of the cost of a full replacement system versus a partial is a factor that contractors are highlighting to you. And within that question, I am just wondering if you are seeing the same sorts of trends for the R32 products, ductless or Goodman.

Are those kind of sell-through dynamics better than what we are seeing for 454B?

Paul Johnston: Yeah. It is this is Paul. Yes. You are seeing a difference, you know, as far as performance. The A2L product you have got to replace the coil inside as well as the outdoor unit. You cannot just replace the outdoor unit. Because you have to have the sniffing device to be able to tell if there is a leak, and then you have to have the switch to turn on the blower fan. So that brought the price up, but it also increased the cost to the consumer to, you know, replace an entire system. When you look at ductless products, ductless products continue to grow. You know?

There are some new products out there that are side discharge, and, you know, they have a tendency to get into the higher efficiency levels with a coil inside, and they are ducted. So, yeah, we have seen some changes in the duct-free market, which have enhanced our sales there.

Nigel Coe: But, Nigel, yes. But the price of the A2L machines or equipment or solutions are higher, but I do not believe that is the full reason for a slowdown in the industry. I think that is much more about the record or, I believe, close to record lows in consumer confidence. Record lows in the trading of homes and building new homes, the tariffs creating, I would say, uncertainty for many homeowners of what their cost of living is going to be. So I just think there is less activity in terms of people investing in their homes, HVAC included. Especially coming off a period where they invested a lot in their homes.

When they were living at home all day long during this COVID times. So while yes, it is true that there is more price in the machines, I just do not believe it is that clear of a less elasticity conversation. I think much more macro influences are having an impact.

Nigel Coe: Okay. Okay. That is great color. Thanks, guys.

Barry Logan: Just I just want to add something for everyone's sake in this because I think part of this part of this discussion is, you know, where is the contractor in this? And, are their businesses doing? Someone asked, you know, is there a correlation between what the contractor would feel and what we are feeling and so on. And I said this many quarters through my career. No one ever asks about credit. You know, we give contractors $800 million in accounts receivable, and we know the credit quality, you know, every second of the day. In the recession, for example, we had 10% of that portfolio over ninety days past due. Today, it is 1.2%.

Last year, at this time, it was 1.2%. Credit quality has not changed at all. It is not, you know, that 1.2% is as low as any year in the last ten years. So if I look at, you know, the pure credit quality of our customer as maybe a leading indicator of some kind, the quality is very high.

Nigel Coe: Okay. That is great color. And then my follow-up, and I know we are running out of time here, but my follow-up is, everyone tracks the HARDI data intra-quarter. And it just seems very disconnected from well, it is not does not seem it is very disconnected from what we are seeing. From you and, obviously, your OEM partners. Any perspective on that would be helpful.

Paul Johnston: Yeah. I think there is a great deal of difference there. You know, one, if you take a look at the OEMs themselves who do not report to HARDI, you have got, what, 50% of train sales goes through their company-owned stores, 70% of Lennox, 70% of Goodman. Carrier pushes, what, over 40%, 45% of their sales through Watsco. Do not report to that. So, you know, it is a different reporting group. I think it is going to be a little bit more commercial refrigeration. I think it is going to be a little bit more on the repair side perhaps. Excuse me. And it tends to be generally more of a Northern Based Report Than The South.

So geographically, I do not know how it is I do not know if they have a consistency every month or quarter. As far as who is reporting to it. So, you know, the only index that we really can use is the HRI data.

Albert Nahmad: Paul, why do not you comment also which we generally do not comment, that the weather this season.

Paul Johnston: Yeah. The weather was yeah. It was hot in Florida like it always is, and it was hot in Texas like it generally is. But, you know, we had the recooling days that were not really on target, you know, for the entire year. Especially the peak part of the year, which is, you know, May and June, you know, when people are thinking about putting in a new air conditioner. But if the weather does not get hot, they do not. So it has been just an odd year. I just I wish I could put both arms around it and explain it better, but it is a very difficult situation to explain.

Barry Logan: Barry said it on last quarter's call. We look forward to getting back to some harmony. Hopefully, in 2022.

Nigel Coe: Amen. Alright, guys. Appreciate the color. Thanks a lot.

Barry Logan: And the word was the word was serenity, by the way. Serenity. Yeah. Thank you.

Albert Nahmad: Better word. Serenity now.

Barry Logan: But in the meantime, we are getting stronger. Our balance sheet is getting stronger. Our technology capabilities are getting better. We are not feeling sorry for ourselves. The industry slowed down. We are doing something about it. We are getting stronger.

Nigel Coe: You are fine.

Operator: Our next question comes from Steve Tusa of JPMorgan. Go ahead,

Steve Tusa: Hey, guys. Sorry. What is

Albert Nahmad: Can I say that? We are very we are very proud. I believe the term is, serenity now and sanity later. I believe that is what they say. Sorry, on that point about this year being an unusual year. So as you kind of stand today, know the crystal ball is pretty clouded, but like do you view this as kind of like abnormally low and then next year you bounce from a sell-through perspective? Or there is just not enough visibility to kind of call that as you move into next year?

Do we think this year has been unusual? Yes. Demand is unusual. Do we think we will get normal next year? I would like to think so, but who am I to predict the weather is going to do with the other circumstances? That create demand. So that is an unknown. Are we stronger now, and will we be stronger next year? Yes. All I can do is control what we do. We are going to get stronger and better no matter what is going on with demand. Because that is who we are.

We are going to get we are going to build up our capabilities to do much more things that our competitors can do innovating in technology and building our cash position to perhaps do more M&A. I would like to do more M&A. So whatever comes, we will be ready for it.

Steve Tusa: Yep. Control the controllables. Thank you.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks.

Albert Nahmad: Well, this was fun today. I enjoyed it. Have a great team here in Watsco and Miami, and I certainly hope as many of you can come to Miami in December, please do. We will welcome you with open arms. In any event, thanks for your interest in Watsco. Bye-bye now.

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

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