Watsco, Inc. Stock

Good day, and welcome to the Watsco Third Quarter of 2026 Earnings Call. [Operator Instructions] Please be aware that today's call is being recorded.

I would now like to turn the call over to Albert Nahmad. Please go ahead.

Good morning, everyone. Welcome to our third quarter earnings call. And this is Al Nahmad, Chairman and CEO. With me is A.J. Nahmad, President; Paul Johnston, Barry Logan and Rick Gomez.

Before we start, a 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 on the report.

I'm happy to report that Watsco's third quarter results reflect improving demand and simpler operating conditions in our industry and in our business. The last 6 years brought a pandemic, supply chain disruption, regulatory transitions and tariff volatility. Through it all, we stayed the course and invested in our business. Demand trends are now normalizing. Organic growth is improving and our digital system ecosystem is producing measurable results and driving growth. Our largest and most impactful product group, which is residential HVAC equipment, grew 7% during the quarter with gains on both unit volume and pricing. We expect the impact from the A2L transition will be largely over by the end of this year.

Third quarter reflects Jackson Supply, which was acquired on June 1 of this year. Jackson has $230 million in annual sales and operates from 25 Sunbelt locations. Jackson is performing well and grew 16% during the quarter. We're also pleased to have completed the acquisition of the Granite Group. Granite has annual sales of approximately $500 million and serves over 11,000 customers from 82 locations in the Northeast. Granite marks the fourth business acquired by Watsco that serves both HVAC and plumbing contractors. Today, Watsco has 112 locations that offer both HVAC and plumbing products.

Our M&A pipeline has always included companies that have historically distributed both HVAC and plumbing products, and we hope to have other similar businesses to join us. As is our culture, Granite will continue to independently operate and grow their business with our full support. They have big ambitions, and we will support their leadership in any way we can. Watsco is a more efficient company this year. We have made investments in technology, supply sync, BCR, hydros and other initiatives that will benefit growth in the years ahead. Excluding these investments, fixed costs have increased 1% so far in 2026.

In terms of our balance sheet, we ended the quarter with $649 million cash and no debt. Even after using a portion of our cash to fund the Granite transaction in October, we remain a positive net cash flow position and are committed to maintaining a pristine balance sheet, enabling investments in growth opportunities as they arise. Turning to the third quarter results. Sales increased 7% to a record $2.22 billion and 4% on a same-store basis. Gross profit was a record $586 million. Gross margins were 26.4%. SG&A increased 5%, excluding Jackson, primarily due to variable expenses. Operating income was $225 million with an operating margin of 10.1% and earnings per share came in at $3.77. Gross margins over the last 12 months has been in a narrow range and more in line with historical seasonality and current business conditions.

Having said that, we remain focused on reaching our long-term goal of 30% and believe we have the right tools in place to get us there. Year-to-date, operating cash flow has improved 79% to $304 million, reflecting our continued vigilance towards managing our assets. Finally, I'm going to hand this call over to A.J. Nahmad, who is our President, to provide an update on Watsco's technology initiatives, and he will be joined by other leaders of Watsco. A.J.?

Thank you, and good morning to everyone. With the complexity of the last few years largely behind us, we believe our technology investments have made us a stronger company with higher growth prospects and a widening competitive moat. Our goals are ambitious and straightforward. First, leverage our industry-leading repository of data, product, market, customer, competitor pricing, you name it. This underpins and empowers the industry's most advanced technology platforms.

Second, revolutionize our customer experience so that contractors, installers and technicians love doing business and only want to do business with the Watsco companies. Next, transform our supply chain and distribution operations to better serve customers and gain operating efficiencies along the way. And finally, develop and launch technologies that help our customers grow their businesses. Importantly, we see contractor behavior evolving in ways that benefit the technology-enabled distributor long term. Our core technology platforms continue to scale and add value. E-commerce sales have grown 12% year-to-date while outpacing overall growth and broader industry metrics. E-commerce reached 37% of sales over the last 12 months with certain markets at 60% to 70% penetration.

Digital engagement with our mobile apps is strong at more than 73,000 active monthly users. And [Indiscernible] continues its growth trajectory. Over the last year, approximately 351,000 proposals represented a homeowners generating $2 billion of gross merchandise value, a 14% increase over the comparable period. .

Simply put, the contractors we serve digitally are growing faster, have greater loyalty, and we believe we can lower our cost to serve at scale over time. Just as exciting, the new initiatives announced late last year are making progress. [Indiscernible] our newest platform to serve the growing segment of large institutional customers launched earlier this year to great [Indiscernible]. We have launched the pilot program and are transacting the customers with a plan to scale it to more and more customers in the coming months. This is a growing channel with unique customer needs that provides incremental growth opportunity for Watsco. -- while leveraging our existing scale and infrastructure.

VCR, which stands for vendor consolidation and rationalization continues to expand across many of our non-equipment product categories. Relationships with our strategic vendor partners have strengthened, and in many cases, are at all-time highs. Hydro, which is our investment in share logistics and distribution has further matured and will continue to scale in 2027 and to more locations and more vendors. And the transformational use of AI continues to evolve throughout Watsco. I could spend the next few hours just on that subject. These investments, along with our scale, entrepreneurial culture and capacity to invest are unmatched in our industry. We view these technology investments as critical to growing our leadership position in the HVAC industry and attracted [Indiscernible] of companies like Jackson and Granite and many others before them to aid our M&A strategy of acquiring great businesses in our space. We invite you to visit us and learn more about what we consider to be our long-term competitive advantage.

In closing, a reminder of our fundamentals. Watsco is the market leader and the technology leader in what remains a highly fragmented HVAC distribution market. The products we sell are necessity and the installed base continues to expand. We have deep and collaborative relationships with industry-leading manufacturers and industry partners. We offer the broadest variety of products and operate a large and growing network to serve more and more customers, and our unique ownership culture shared by more than 8,200 employees rewards and incentivizes long-term performance.

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

[Operator Instructions] At this time, we will take our first question, which will come from Tommy Moll with Stephens.

Of course. So I want to start on gross margin, which I suspect will dominate this call. I'm going to go out on a limb here and try to summarize what we're seeing and then I would invite anyone to correct me where I'm wrong. But you threw out a lot of factors that drove the results this quarter, customer mix and market equipment versus non-equipment. But is it an oversimplification to say that you've taken some share in the new home construction market and that inherently you're dealing with larger customers and lower margin equipment products primarily it's kind of all one and the same factor here.

I'm going to let Barry Logan and Rick Goldman deal with that compare on top of the data better than I.

Thank you, Thomas, for the question. Yes, it's -- I would have worried there was the second question by the way. So [Indiscernible] the first question. There's a measure of still kind of comparison reality going on that this should be accounted for. It's not as simple. I want it to be as simple as what you said, but not quite. But it is becoming more simple. A year ago, new construction-related equipment sales were down double digits. This year, they're up double digits. And so that's a mix reality to margin as well. It's also a comparison discussion to last year. And it's also our participation in this year through some of the inference in your question is gaining some share, but there's still a bit of a comparison discussion in that.

When we talk about larger customers, that doesn't necessarily mean new construction, not at all. In fact, even in new construction, the builders themselves hire contractors to do the work. They're not necessarily all large contractors. In the case of we comment about large customers, it's really that more seasoned call it, multi-truck multi-market customers that I think have done well that are using our technology, our penetration of technology in that group is in excess of 50% e-commerce into that channel.

You can see our e-commerce revenues are up double digits this year. That tells you something about traction and the affinity of technology and those customers. And as you might suspect, the larger the customer, there is a more moderate margin but there's also more moderate cost with our manufacturers who support that activity. It's not just up to us to set the price. We jointly work with our manufacturers and our customers on total margin in that segment, and the cost to serve is not as great in that community as it is in, let's say, the small contractor community. So that's a component of it.

Rick, anything -- anything else in there that that's important to discuss?

I would just add a couple of things, Tommy. First, First is that there's -- we had some -- this is part of the comparison reality that Barry described this time last year, there was a shortage of refrigerant in the market that helped last year's margin. And this year, we have Jackson Supply in our Q3 revenue mix. They're not quite yet at Watsco is 27% range. And so therefore, that weighed a little bit. So that will abate, obviously, and that's part of the comparison that Barry is describing.

I think the other thing that's worth pointing out, though, is that this -- if we look at margins sequentially, Q2 to Q3, this is the type of sequential margin change that we've seen in the last several years, as a result of tariff pricing and product transition and other realities of the marketplace. And so I would point -- I would -- you could go back and look at '25, '24, '23, '22, and you'll see I think, similar types of changes from Q2 to Q3 margin and not wholly unexpected.

Yes. This is A.J. I'll add. I zoom out to the big picture, which is, I guess, where I like to live most of the time is there's a lot of -- you have a lot of noise you have to look for the signal, especially since we're such a long-term focused company, right? Watsco and our [Indiscernible], we used to operate at 24%, 25% gross margins. that ran up to 29% gross margin with all the noise and Barry and Rick just described some of that. But we're a 27-plus now year-to-date, and our goal is 30% and we see a path there. And it will not be a straight line, there will be choppiness certainly quarter-to-quarter. But our job, what our focus is, is the long-term, the ARC maturity and getting from where we were 24%, 25% to where we are, 27-ish to 30-ish where we're heading.

And as a follow-up, I wanted to ask about SG&A. If we just look at the same store, it ran a little hot versus the sales growth this quarter, maybe about 1 point more growth in SG&A than sales. Although Al, you pointed out a lot of the increased expense was around some of these big initiatives that you highlighted as early as your Investor Day last year. But just help us parse the trends here. When -- how do we measure success on operating leverage? And with these investments, when is it reasonable to expect to see it on an all-in or a same-store basis?

Barry, you can jump in.

Yes, I'll take a shot at that. It's a good -- I'd like to phrase, Tommy, where you said, how do you measure success. And as a distributor, the most simple way to measure success is our fixed cost remaining efficient while growth is going on because then the incremental margin, every dollar that you sell drops to the bottom line. We wanted to make a lot of progress this year on fixed cost because we couldn't make a lot of progress in the prior years. And so year-to-date, if I isolate fixed costs, they're up 1% this year. Year-to-date, I'll address the quarter in a second.

And year-to-date variable costs are up 6%, and which is some measure of business units that are doing well, that are growing, that are growing earnings. They're paying commissions [Indiscernible] recruiting bonuses. And little bit of freight and fuel and delivery cost inflation in that number, which is to be expected. But overall, on a same-store basis, SG&A is up 2%. And technology spending, by the way, year-to-date is up about 13% or $6 million. And those are some of the new initiatives that are in those numbers.

[Indiscernible] ease the word investments, but that's the right word for those dollars.

That's correct. And so that's the big picture for the year-to-date is to become more efficient, fixed costs and make them as neutral as possible, battle inflation through other initiatives to save. And again, year-to-date, fixed expenses are up 1%. For the quarter, it's 3%. And again, there is some inflation in that for rent and facilities and things like that. But in relative terms, it's kind of in line with inflation. And during the quarter, variable expenses were up around 10%. Again, as we see some acceleration, certainly in some business units that are outgrowing what we report there are accruals and variable type expenses that go with that and some outsized inflation and delivery costs for the quarter, which is I consider that a short-term thing. But it's a good question about how do you measure success? And I would say this year's progress, not optimized, but good progress.

Our next question will come from David Manthey with Baird.

I'll go back to gross margin, of course, here. And if we're looking at normal seasonality, into the fourth quarter, I guess the implication is probably something in the 27% range, which I think would put you somewhere in the low 27% for the full year. I believe that you said in the past that excluding the abnormal second quarter in 2025, you would have been somewhere in the 27.5% range. So 27.5% to 27 low 27s, I'm not asking for any guidance here, but I'm just trying to think through -- as you think about from where we are in '26, looking ahead to '27, what are the key levers we should be thinking about moving here in terms of whether that's customer mix or equipment, non-equipment, pricing, price optimization that you're doing internally? What are the factors we should be thinking about to move the needle one way or the other?

Anyone want to pick it up in there?

That's a pretty good [Indiscernible]. It is a lot of those things. It's -- we are certainly still early days in our pricing optimization efforts. I think there is a huge runway there. There is certainly the influence and the impact of the mix of equipment versus non-equipment, what equipment is sold when it is sold of the customers that are showing up and buying every day. So it's all those things, and we can't predict or control all of those things. But back to where we're investing, we feel very good about what's in flight, right? We feel good about the technology. We know that the -- more that customers use more of our technology, the better customers they are, not only in gross margin, but also in sales and stickiness or lack of attrition.

We love the VCR initiative where we're finding ways to buy smarter and help our vendor partners at the same time. So it's a win-win to them. We love Hydros, which is helping our business units carry more products on the parts and supply side and expand our offering, and we love [Indiscernible] has got so much opportunity underneath it, and we keep learning about or thinking about new ideas with new partners. But what that should ultimately mean is a lot more sales and a lot more sales of parts and supplies as it matures. So your list is good. I like what -- we like what's in flight, when does it all show up in every quarter's financials, I can't tell you.

Yes. And just it would be helpful, Dave. I think just doing the math, just being objective and just using data in simple math, you're right, the fourth quarter generally is a better margin than the seasonality that preceded it. And if I look at the math over a 10-year average, it's about 20, 30 basis points of improvement. So that's just something to consider. I'm not -- again, as you said, I'm not giving guidance, but that's the math over at least a 10-year period.

I think it's important to remind everyone for the sake of looking forward that the OEM pricing actions that are taken either the amount of those actions or the timing of those actions certainly plays a role in the equation over, let's say, the next 12 months. And the expectation is that they will come early and more conventional and kind of more ordinary, if you will, than what we've seen in the last 4 or 5 years, which is different amounts, different by vendor, different timing with and without tariffs, with and without mega inflation -- and that volatility is part of what we've had -- what we've had to explain in the last 4 or 5 years. And I can't predict the future, but the expectation is that going into the next 12 months, that will be a more ordinary and conventional feeling than some of the volatility we've seen.

Yes, sorry. it's Rick, sorry.

Yes. I was just going to add 1 item to that, which is I think what underappreciated in all of this right now is the fact that we are being a rebound and stabilization of industry volumes. That's important to any distributor. At the end of the day, if you're going to have incremental -- and this goes back to Tommy's question a little bit, if you're going to have incrementals that are good and healthy.

And so if I step back in time, if we go to this call a year ago, same-store sales were down. Now they're up. Add-on replacement was down. Now it's up. R&D was down more than 10%. Now it's up more than 10%. Equipment sales were down 7% last Q3, now they're up 5%. I know, by the way, we're a 10% bigger company having made 2 great acquisitions in the last 120 days. So I do think that the -- my point in saying that is that there has to be some base level of industry health and stability in volumes, and we're starting to see that now, that hasn't been the case over the last 3 or 4 quarters.

Yes, that's helpful. So then all of the things we just went through, those all sound like positive needle movers with the one exception being the large customer mix that you cited this quarter, is that a cyclical or a secular thing in terms of larger customers? And certainly, with all of the things we talked about it's not enough customer mix being towards larger customers. That would not be enough to overwhelm all of the other goodness that you're working on. Is that correct?

[Indiscernible] No, I'll just take a shot at it. I think the word affordability is in lexicon now a great deal of the fact that the products are $10,000, $15,000 or whatever to install. And I've always said from my career, we've said for our careers and people know [Indiscernible] these things. So you have immense product change, you have a higher price tag. You have a trickier economy. You have a more tricky consumer, therefore, and yet e-commerce sales grew 10%, 12% this year. And I would say, higher efficiency systems grew 10%, 15% this year-to-date. So does that make sense?

And I think, again, the larger customer, the one that is using technology that's appliable and going to the home and selling that wants to move on from the [Indiscernible] product that wants to get their business, marketing and financing and so on directed toward the opportunity and helping us helping empower them to do that is where we see the benefit from it, Dave. And again, the cost to serve in those customers is lower than, let's say, 50 smaller customers that may do as much volume as 5 that are considered large customers.

So I think it's really part of the transition, part of the maturation in [Indiscernible] products is those customers have done a good job of it. And then our job is how do we help our customers plug along and move along the transition and maturity as well. That would be some observations, I think without data, but some good observations, I think.

Yes, I'll double down on that, Barry, which is just to be clear, large customers is not a bad thing, right? We have tools and technology and systems and processes and programs, and we welcome that customer base. Our mission and our goal is to make sure that we are the supply house of choice for all those customers and that we can do so at a profitable level and sell them the full suite of products that we have and with the services that we provide. But we don't exclusively cater to that segment of customers either. I mean the small guys with 1 truck or 3 trucks, we've got wonderful pricing and programs in technology and systems and processes for those guys as well, including helping them go from small to big because when they do, when they drag us long in their growth and they're very loyal.

So like Barry said, our job is to cater to all the customers and these investments that we keep talking about, certainly focus not just on one group but all groups.

If you look at the market that we've got out there right now, the market is up. but it hasn't recovered yet back to what it was. And I think at that point, you're going to see the smaller customer becomes -- he's going to become a better customer than what he was this year. This year, the small customers probably suffered more than the large customers. They don't advertise. They don't promote and they have an issue where everything has to go by word of mouth. So I think as the market recovers, I think you're going to see the smaller customer recover with them. .

Our next question will come from Ryan Merkel with William Blair.

Can you comment on October trends quarter-to-date? I think you mentioned further momentum, and then I'm curious on the complexion, are you seeing the new construction recover further comment on commercial, if that's getting better and then aftermarket replace if you're seeing a pickup there?

That's good news. [Indiscernible] do you want to share that?

Yes. I don't have the data in front of me though. So if Rick or Barry, you want to be more explicit.

October [Indiscernible] is looking healthy to date, and continuing the momentum that you've been alluding to, and we hope and expect to carry through the end of the year, but hard to say on the R&C details, I don't know, Barry or Rick, if you have that or if you want to share it?

Well, in revenues, we're up double digits so far in this quarter in revenues.

Got it. Is that total company revenues? Or is that organic?

[Indiscernible] I mean it includes the acquisitions that we've made.

Got it. Yes, I was just -- yes, okay. So [Indiscernible] would you say is recovery?

Just to say it this way, Ryan. I think less to say it this way, so it's careful. So -- we said in the press release that since May, we've seen improvement every month, month over month in terms of progression and momentum in October is no different. October was better than September. And if you add acquisitions on top of that, that's where you get into the 10% plus on acquired revenue on top of what we're seeing organically. .

Okay. Got it. That's helpful. And then I wanted to ask on the side discharge, which is becoming a big topic. I'm curious for you, are you seeing progress on that product? How big is it? And if you know, can you comment on the ASPs versus their traditional condensers?

Yes. [Indiscernible] has been a good growth market for us over the last 2 years. And what we're seeing is it's probably in the 8% to 10% range of the total market today. It's going to continue to grow. It's got a lot of benefits that you don't have with the top discharge. It's variable speed. So it's -- it's got a lot of efficiency and the cost of the product is relative to the top discharge. So we're -- we feel like we're outperforming. We want to continue to outperform in the side discharge. Side discharges, we think is going to be the future of our markets. So it's important to us.

Yes, we are leaning in besides this charge. We are excited about innovation on the products.

And obviously, the manufacturing community that supports us, it's very -- it's as diverse as our typical ducted units. I mean they are branded products. There are more affordable products. There are private label products. In our case, as Watsco, our job is to have the broadest diversity and spectrum of good, better, best across all the products we sell on side discharge would be the same. So it's really, to me, not a discounted cheaper product strategy. It's not. It's an ultra-high efficiency play with a new product that has a lot of diversity in brands and price across the spectrum and all of our partners that are supporting that we're growing with, and it's -- it's kind of -- it's fun to sell a new product.

And as Paul said, it's not necessarily new, but I would say contractor acceptance is where we're seeing traction. And as their supplier, we're supporting it.

And I think you said [Indiscernible] but just I would say that the -- that segment of the market is maturing, where now it has evolved into a good, better, best offering where it's not just the best anymore and it's not just the value line anymore. There is room and the market size for that stratification.

And it's a proven product. Basically, what you've done is you've taken the ductless product and you put [Indiscernible] as opposed to just having a high wall or a cassette on the inside. So it's a proven product, and it's going to be a great product for us in the future.

Our next question will come from Steve Volkmann with Jefferies.

It's funny timing. I have 2 side discharge units in there also. [Indiscernible] end of the call...

Special price...

So can we talk a little bit about pricing. I think pricing was up about 2%. I think you said in the quarter. Sorry, I have a lot of calls going on today. But just curious if you've heard any sort of directionally what we should be thinking going forward, how the OEs are thinking about price for '27?

We're seeing a lot of metal prices are going up. A lot of steel prices are going up right now. And so we're seeing price increases on those. We've only had -- we really don't have a lot of indication yet from the OEMs, what direction they're going to be going -- but obviously, with the cost of freight, with the cost of metal, which is what these products are made of, we expect to have some price increases this fall going into next year.

Okay. All right. Fair enough. And then maybe just switching, I'm curious how you're thinking about inventory. I think last quarter, you said you thought it had sort of peaked, but I see it's up a little bit. I assume that includes the acquisitions. Just how are inventory levels? How should we be thinking about that going into '27 as well?

Barry, we were just talking about it so you go ahead.

Yes. Well, first, you're right. Our balance sheet in September this year includes Jackson $60 million, $70 million inventory that was not in the prior year comparison. And last year, at this time, we were as [Indiscernible] said, a giant [Indiscernible] sound was going on in terms of unit declines. And this year, we're seeing unit increases. So a year later, I think inventory [Indiscernible] in sales, yes.

So as we entered -- as we close this quarter, inventory is reflective of that is reflective of an increasing demand environment. And as we -- but as we close the year, this is usually and historically, our season of reaping cash flow and reducing inventory. And there's an opportunity. I'm not saying it will happen, but an opportunity to get inventory more or less equal to last year at the year-end, excluding the 2 acquisitions we've made. So historically, I think sequentially, we have very little reduction in inventory sequentially, second to third quarter, much of it comes in the fourth quarter. And I would say that's how it looks this year.

Our next question will come from Mitch Moore with KeyBanc.

Maybe just to build on some of the questions around customer mix. I guess my question is how much, if any, of the customer mix headwinds reflects existing contractors kind of consolidating into larger accounts? Or is it just because larger customers are outgrowing their smaller peers?

I think the answer is yes. We're seeing a lot of consolidation. I mean it's just natural. There's a consolidation going industry and it's probably 7% to 8% of the market right now. That's going to continue. So it's not the big guys. We're already there. It's the growth of the [Indiscernible] start growing with private equity.

And can I just maybe attempt to, I think, reframe the narrative around this a little bit as others have tried. We does it have an implication in margin? Yes. Is it a headwind to the business? No, not necessarily. I mean when this happens, Mitch, when you have customer A buying customer C, usually there's a market share pickup opportunity also, right? So it's not just axiomatic risk. It's both risk and opportunity when this happens. And I also -- I think we should ground ourselves in the fact that this is a $75 billion industry. 2,000 distributors comprise the landscape. We are, by far, the best positioned to capitalize on this trend relative to that fragmented distribution network that exists.

And so I -- is it an irritation in margin? Yes. Can we count it in basis points? Yes -- even nowhere near full percentage points, basis points. I think what's -- and by the way, we're doing this as [Indiscernible] is launching right? So we're not even yet to market with the product and the platform that we think is going to be game-changing in this space. So we're not in any way thinking about this defensively or [Indiscernible] what's it going to do to margin next quarter? We're thinking about this more as an opportunity for growing with customers, growing volumes and growing share at the end of the day. Yes. The industry is dynamic, and we're dynamic.

Mr. Operator, our Chairman fell off the call. Could you please get him back on the line.

I mean I just want to add at a data point to the question because I like to -- I want it to be abstract. We said this in our Investor Day when we're developing the technology for supply sync. The consolidated community today is about a $400 million or $500 million business for us. if that grows -- there's outgrowth, let's say, 10% in that community, either because they're giving us more business or there's more of them, that's a growth opportunity, obviously, becomes at a lower margin. I don't think that's particularly material to the big picture analysis of Watsco's gross margin.

It's a headwind, okay. It's also a growth opportunity to Rick's point. And overall, I think where we kind of segment out margin impacts in our press release and in this conversation today, we're talking 10, 20 basis points in each one of the discussion items. This is not like a revolution or an evolution that I think has a lot of volatility to it. It's really explaining some of the nuance that we're managing. And as I said very carefully, cost to serve is different, meaning SG&A is different in those products -- in those customer segments also, which means EBIT margin is not necessarily proportionately affected by it.

So I just think it's -- we're giving a lot of color today on these nuances, but I don't think anyone should run with it too far when it's 10, 15, 20 basis point discussion items.

Great. That was a lot of color. And I guess just my next question, I think residential units were up 5%. Could you just help us parse out how much of that growth was replacement versus new construction?

We have don't disclose that. We've seen the AOR trends get better as the year has progressed, Mitch, and it was flat around flat in the second quarter. It was up low single digits in the third quarter, what we consider to be the add-on replacement universe. And where your volatility good or bad can come is in that residential new construction multifamily side of the market, that was up low double digits for us in the third quarter, and that's how you get to a 5%.

Our next question will come from Jeffrey Sprague with Vertical Research Partners.

We covered a lot of ground. I did want to just touch on replacement a little bit more. Thanks for the comment a moment ago. So obviously, with the replacement comps are a little bit easier, but you just kind of stand back here and look at things at an absolute level. Have we gotten to what you would call some semblance of just normality between repair and replacement?

Good question. I think there's still a lot of room to grow in replacement. I mean you had a pull forward that occurred during the pandemic. And I think -- as those units mature, I think you're going to see the replacement market return to what we call normal.

Regionally, it's unique. You have a different replacement market in the north than you do in the South and in the West. And we've seen the replacement market change based upon where in the marketplace, the change is occurring.

Yes, I agree just all in -- just quick data points there, Jeff, to maybe help you. One is we're -- I look at just units, we're still about -- I would characterize it as we're closer to a trend line, but we're not quite at the trend line. units are still, call it, 10% to 15% below where they were 2 years ago. AHRI, which you should never anchor on in any given month, but you can look at longer picture trends with AHRI. Those volumes today are where they were around mid-2018. That was a while ago. And so -- and I think more importantly, we're still dealing with the consumer that's uncertain and I'm sure about the state of things and all of that points to -- we're closer to trend line, not fully to Paul's point, at some level of normality yet with replacement.

And then just I want to make sure I've dialed correctly on this inventory for year-end. I think Barry gave us the Jackson inventory. How much comes in for Granite?

It's coming in, in October. And yes, Rick, maybe handle that.

There was about Jeff, I'll say about $140 million, $150 million of inventory. Now there's going to be some seasonality to that for granted, but that's what it was, let's say, the end September, which was not on our balance sheet.

And then maybe just one other quick one. Just plumbing is becoming a little bit more of a strategic focus imperative. Does that fundamentally have a different margin profile than your kind of core legacy HVAC business?

I was going to say not necessarily. I think what's true in the plumbing space is if you saw a lot of equipment there, you're going to have 1 margin profile if you sell a lot of non-equipment, you're going to have a different margin profile. The same is true there in HVAC, by the way. We see that within our portfolio of businesses too. I wouldn't call it structurally different or radically different.

What is, I think, different is that their customer curve, if you will, is probably at a different state of maturity than the HVAC contractor, which is to say there's likely less consolidation going on there. Those customers are slightly less technology-enabled today than as compared to the HVAC contractor. And so we think that there's the same kind of maturity and sophistication curve that we've seen with our HVAC contractor base over the last 5 or 10 years and how they've adopted technology in their business, we think that it's in the very early innings as it relates to the plumbing contractor which is all opportunity in the long term.

I wanted to say this too, Jeff. I think we get a lot of questions about entering plumbing. And what we've actually entered is acquiring businesses that have done both HVAC and plumbing well for decades. [Indiscernible] been around for over 50 years doing both HVAC and plumbing well for that period of time, gateway a few years ago, same thing. In fact, if you look at the top 50 plumbing distributors in the country, of them, 20 of the 50 also sell HVAC and are on the top 50 list of HVAC companies in the industry.

So it's not a new thing or a novel thing. It's an ordinary thing. And we've known these families for a long time. It's taken us this long to do 4 of them. But that's the approach. And to answer your question again, we don't see a big profile difference in terms of margins because, again, they do both well and have the better companies have a higher margin. And have figured out how to coexist in those markets with those products.

And I also just want to say, I got to say publicly, Bill and Chris and Amir and the whole Granite team are just world-class and as good as it gets. So we can't be more excited to have them finally part of this family. Like Barry said, we've known the family for a long time. but it took us this long as we talked about it with them to get to the starting line. But now they're part of the family, and it's all upside from here and let the fund begin.

And I would add to that, on a big picture that Watsco is now taking out and committed. Can you hear me?

Yes. Yes.

I would say that the big picture for Watsco that we should explain is that we're now committed to growing in the plumbing market, which means that we have enormous opportunity in that distribution business of planning as well as the HVAC market. So we've got 2 industries that we can play and play hard and get size. The plumbing on we're just beginning, and it's pretty healthy stuff. We have 2 other business units before this one that showed us, plumbing can add profitability to the business as they already have over the last several years. So that's a huge ability now for us to take share in the plumbing market where we just have a few hundred million dollars worth of sales in a much larger market. Big opportunity is what I'm trying to say, in.

Our next question will come from [Indiscernible] Singh with UBS.

Yes. So we continue to hear about customers trading down more towards lower efficiency levels -- but it feels like the scope for further mix down could be limited. So can you give your views on what you are seeing and like some sense of portfolio impact for you?

Yes, we are seeing -- when you say low efficiency today, it means that the efficiency is high efficiency compared to what it was 5 or 10 years ago. So as they trade down to the baseline efficiency that we have in the marketplace, that is occurring. And that's why we get very excited about the opportunity to be able to sell the side discharge. So I think the side discharge will be a breakthrough where customers will start going back to high efficiency once they see the opportunity.

Right. And just one perspective. I mean this is the entry-level as the industry has been in quite a long time, Paul, you've got some great data around that. But if it's 80% to 85% entry level today, I think the thrust of your question is right, which is it's there's more likely a mix-up opportunity over time, particularly now that you have a side discharge product that competes very well from a price perspective and get you all the efficiency on the high end -- so it does allow a contractor to deliver more value to that homeowner versus just entry-level and traditional top discharge high efficiency, there's now something that can help broaden the industry beyond where it is today.

Every time there's been an efficiency change, we've seen a compression to the low end and then it spreads back up. So it's not something new that we haven't experienced before.

That's very helpful. And just on the margin side, like you are integrating a couple of big recent acquisitions. Now should we expect that to be a headwind to margin in the near term, but with the potential for improvement in the medium term as you scale margins within those businesses? And can you also help size those impact.

Again, I'd just be careful with this. So when we acquire a company like Granite or Jackson, we're keeping the people, we're keeping the culture we're keeping the infrastructure. We're keeping the what's made them successful for 50 years. And the question is, how do we help them build on that success and build on their networks? And adding capital or products or technology, whatever it might be. So the word synergy does not exist in our mindset. How do we take cost out, how do we tweak margins. That's not a concept for Watsco. We built a very successful company supporting great companies that became part of our family. And that the intent is identical to that theory for Jackson and Granite.

So in terms of your question, I don't think there's anything any risk or short-term kind of trigger or anything that needs to be kind of worried about. The question is, will they be successful as part of the Watsco family? And the only scorecard I can show you and Jackson is up 16% in its first quarter as part of Watsco. So I want to impute that in the future, of course. But just know that there's no like sudden move or sudden synergy or sudden anything relative to these kind of opportunities. It's really how do we build on the great success of these good companies that have been around forever.

How do we provide them the technology, the financial resources so they can grow faster. That's the opportunity, and that's the only synergy we have.

Another important aspect we create an equity culture, we provide equity throughout the organizations that we acquire, which means that they have a stake in the whole company, win or lose. And I think that's very important in terms of our culture, providing equity to people that sell us their business. They're leaders so that they act as owners and be great conscious of that.

This concludes our question-and-answer session. I'd like to [Indiscernible].

[Indiscernible] we'll talk again in 3 months or sooner. Bye-bye.

Thanks for joining us, everyone. Good afternoon. Before we get going, let me read the following disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

My name is Christian Yao, I am a member of the multi-industry team here. And on the stage, we are very pleased to have Barry Logan, Executive VP; and Rick Gomez, VP of Corporate Development from Watsco with us today.

So let's start with something high level maybe. Watco has become a much larger business today. Where do you guys see the biggest benefit of Watsco's scale? And what can Watsco do that other players cannot simply replicate?

Sure. Well, thank you, Christine. Thank you for being here, everybody. It's the last session of the day, which also means, I guess, we can run a couple of hours if you wanted, right? So just kidding.

We are Southern storytellers, so we'll try to contain it to scale is the question. So scale historically for us has been very acquisitive in the markets to have the capital to have the relationships with OEMs to know who the big players are to have the credibility to discuss acquiring their company. And most of the time, when we say acquiring a company, it's a family business that has been around 50, 60, 70 years. The personal chemistry, the credibility to talk to them, manufacturers who have to permit who can buy 1 of their distributors. Just the idea of having the scale to to get things done at scale has been successful for us over almost 40 years now. That's old school. But still going on, it's still important to us.

Scale also meant being a mega partner to the manufacturers that we represent. Manufacturers are not at your kitchen table when you buy these systems. We're not at the kitchen table. We are maybe through technology today. But the contractor who actually does the work, who gets paid, who pays us, who produces the unit volume, who get things to happen at the homeowner and business level, our scale helps that. It helps with the number of brands we sell. It helps with number of stores we operate. It helps with the complexion of all the goods we might sell in those stores. It helps with the number of employees we have serving the end market, a bit old school again, but that's part of what scale does.

More recently, the word technology, which every company wants to describe as a moat around their business. Again, we're dealing with 100,000 contractors, 30,000 SKUs, 700 stores is in a number of price points, an infinite number of customer interactions and all of which converges on the idea that everything everybody wants in our industry, they want an hour for now. Very much almost a retail trade business selling to contractors who order in real time who want the product in real time and tomorrow it becomes a different day. So the last 10 years, how do we bring an ecosystem of technology that does that and operates in that fashion and provides that value, it provides that speed and convenience, accuracy, completeness, all the things that technology can do versus just relying on historically old school, kind of the grampy old men and our stores answering the phone. How do we make it a 24-hour business, not an 8-hour business.

The scale has let us spend about $60 million, $65 million a year on building out the technologies that help the contractor every day but help the homeowners, how they source and buy products from our customers, how we can improve the operations of our daily life. I have 30 more minutes to answer the question. But you get the drift. But at the end of the day, it boils down to strong OEM relationships that are critical and material to them as part of the scale, the ability to innovate and deliver technology and the credibility to acquire some great businesses that have been around for decades that are interested in doing that with us.

For sure. Maybe let's stay with contractor for a minute. As contractors become larger and more sophisticated, how does that change what they need from Watsco. Does customer scale change economics of the relationship? Or does it ultimately make Watsco's platform more valuable?

Well, I think it's -- the first reaction to something like that is you worry, you assess, you have to like try to figure things out. That's the near-term reaction. And about a year or so ago, we said wait a minute. On paper, we are tailor-made for this trend. We have the scale that we just talked about. We have the industry's most advanced technology platform to go help these growing contractors win. We have the industry's best digital selling platform to help them execute better in the home and close more and higher priced and higher margin orders in the home. And so we decided to embrace the trend as they say, don't fight the tape. So we're not fighting the tape on this one. We decided to embrace the trend. And we announced at our Investor Day in December the launch of something called Supply Sync, and Supply Sync is that single pane of glass that a large consolidating customer has to go procure and have the entirety of our pen catalog at their disposal. The entirety of our business units, resources at their disposal, again, our scale and our technology. And so we think it's a win-win, and we think it's a trend that we can do well with irrespective of what the near-term irritation of it might be.

I think it's something that we can absolutely capitalize on. So it's core to what we're doing now, and the update is Supply Sync is with its pilot customers, and we intend to scale that later this year and entering into 2027. There's both a volume and a margin opportunity that comes with that. The volume opportunity is that today, those existing customers, we feel like we have less than our fair share of share of wallet. And so that's where the incremental volume can come from. And it's a margin opportunity at the same time in the sense that what we sell to those customers today is largely equipment and again, by exposing the full totality of Watsco's inventory and pin catalog, we think we do well with nonequipment with that customer segment over long periods of time. So it's a trend. We're prepared for it to persist. And I think we have, again, the scale of the technology and now the platform in Supply Sync to make that successful.

That's very helpful. I appreciate it. We covered some topics about value prop to the contractors, but maybe let's switch to talk about the OEM side. What is Watsco's value proposition to the OEMs?

Again, it's -- first and foremost, it's the contract relationships that we have. Again, that who is actually defining the product to be sold in the home, who specify the product. It's who the contractor is the 1 they're at the point of sale. And access to that contractor relationship is the critical element of how we compete more contractors, more brands, more locations, more everything. And we think that that's -- that's the first access point of an OEM when you make stuff in a factory is how do you get access to that local market, and that's through our relationships, first and foremost.

Secondly is, I think the last 10 years of when we use the word technology is to drag our OEMs into that environment when none of those distributors necessarily were asking for it. We had to get Honeywell to give us their product information. We had to get carrier to give us their bill of materials for everything they've made over the last 10 or 15 years. So now a carrier dealer can sit in someone's backyard and know the right motor because we have the billing materials sitting there in a mobile app that he can draw and to find the right motor.

So again, I think there's been a lot of value and continued value and more innovation to occur of how do we bring and a manufacturer wanting to bring itself into the point of sale into the contractor relationship at a point, again, using the technologies that we've developed.

And the other is capital. Working capital in this industry as a distributor is roughly 90 days worth. So if we were to grow a business from $200 million to $400 million, that requires that proportionate amount of working capital to put into the market. If Carrier Ream, Vicon, 1 of our OEMs says, how do we grow? They need to invent it at the factory that we need to invest the working capital it takes to deploy that into a market support it with credit, support with the inventory, support the know-how. And so in our joint venture with Carrier, for example, this is certainly on our books, more than $1 billion of capital is sitting in our balance sheet, trying to sell more carrier products each year, and several hundred million dollars of Ren working capital is at on behalf of Rene.

And again, if their factory grows 10%, 15% a year, they've invested 0 in that working capital. We've made that investment. And so it's a collaboration that is obviously very important. But we can -- we're the investor of working capital in this industry to grow an OEM's business. And to the extent our wealth and our capability and our -- we're here to help you learn more about a growing public company. That is our charter and OEMs know that. We're not trying to protect the family's interest. We're trying to grow our business. And a few billion dollars of capital is in place to go do that. And so that's a few of the ideas that gets in partnering with us.

And I would just add very quickly to that, that there's -- we -- for those of you that are newer to the story, we operate in a $75 billion industry. We're the leader in that industry. The top 5 or 10 command, what they command, but there's 2,000 other distributors that comprise the chunk of that, the majority of that $75 billion in TAM. So what I'm trying to convey is that the median distributor in our industry is not Watsco at $7 billion. It's $100 million, $200 million, $300 million distributor -- and that fabric and lack of distribution, some are investing, some are not.

And I think what we offer very strategically to our OEM partners is -- there's a balance sheet with no debt, and there's every ambition to grow this business and invest in technology to do that. I'm not sure that's true everywhere in the distribution landscape. And so that's what I think we offer to more qualitatively and strategically is a -- we're thinking decades ahead in terms of how we invest. And I think that's rare when you go look at the average distributor in our space.

Thank you for that. Maybe to further understand the dynamics and relationships with OEMs, if we see meaningful OEM share shifts or potentially new entrants game traction, in the market over time. Does Watsco economically care, which manufacture ultimately wins or could greater competition among the OEMs actually increase your strategic value? What's your take?

First, it's important to understand how we go to market as Watsco and 700 stores of Watsco, there's not 1 named Watsco, by the way. And so why is that? Well, we acquire business units that have been great at building a brand before Watsco. So we have -- for example, we have a large business called Jamere that sells Reem throughout the Sunbelt. We have our joint venture with Carrier where we're selling carrier dedicated brand locations selling billions of dollars of carrier brand. We have a relationship with Daiken, where we have 1 of their historical year-old distributors that we acquired 25 years ago, helping build the Goodman and Daikin brands in its markets.

So my point is that we have very defined business units whose charter is to grow market share of the brands they sell. They're distinct some measure of independence. We want to grow those customer relationships, and we want to build our company with that array of brands and opportunities. And the OEMs understand that. They respect that. That's how we've operated for, again, almost 40 years. And -- so very dedicated networks that are there to grow brands. And the question is how do we add more to it. So we've acquired a couple of carrier distributors in the last 6, 7 years to build on our joint venture.

We recently also acquired a Daikin distributor in Texas that is now dedicated under the Watsco philosophy to build its brand network within that. So the only ones to understand that and we don't grow if we ever substitute 1 product for the other. Our job is to be supportive of our business units, trying to do that. And that's where the relationships are really at the grassroots level is in the field with -- in local markets. And again, I think our job at the Watsco level is to build great relationships to enable that. And then we're still not in 10 states. We're still not representative of all brands in the market. And we'd like to diversify over time because that reflects what the market is. But the horsepower and intent and conviction of a brand is for all the brands we sell, and our partners know that and know how it operates.

Appreciate that. I think that's a good segue into capital deployment. As Watsco have become larger, how has the acquisition opportunity evolved? And when you guys are acquiring, I wonder what can you guys offer that other people -- other companies cannot for example, like a larger strategic buyers or like a PE owners.

Yes. I think -- look, we've -- we are a collection of businesses that operate as 1 umbrella under Watsco. And it varies right, there's nothing in the market that says, Watsco, you'll never see a branch called Watsco -- that's very intentional. That's very much by design. Part of that is because our M&A strategy has been to go by market leaders that have built terrific businesses -- and our job is to go help them build on what they have built. Our job is to help them. We go to work for them. It's not the other way around. So I'll get to what we offer them in a second.

But I think the aperture for M&A and the opportunity for partnering with more terrific businesses, it's as great today as it was 10 years ago, 20 years ago. And I'll give you 2 proof points of that or just 2 data points to validate that.

If we're, call it, $7.2 billion of sales prior to the 2 acquisitions that we've just announced, that add about $750 million of volume to the business, by the way. And I just mentioned that the industry is about $75 billion in TAM, then that's 1 way of computing market share, let's round that to 10%. So lots of opportunity to go nowhere near anything that would be considered mature.

And then the other way to measure market share is if you just look at traditional residential unitary shipments, we are 18% to 20% of the market. So in either scenario, are we so capped out that M&A isn't an ingredient for growth. what we offer and what we attract these -- and what we, I think, is a point of attraction for many of these businesses is we are a forever home. That's what we are. We get calls all the time from bankers asking if we want to dispose of anything, and we don't answer those calls because we've never disposed of anything.

And so for the entrepreneurs that have built great businesses that have taken something that in many cases is multigenerational, second, third, fourth generation in certain cases. And it's time for them to rethink ownership -- we are that perfect home where we offer the stability of, again, our balance sheet, our capital, our OEM relationships, our technology orientation and the fact that they can continue as who they are as what they've built their legacy, their people, their name, their partnerships in the market, their customer relationships, et cetera. I think that's been hugely attractive to, again, these very entrepreneurial-minded owners in our industry, and that is the strategy going forward. And there are many, many more of those opportunities in the market that we can go after.

I think our timing was good or fortunate most of these businesses were built after World War II, where -- and especially in the Sun Belt, if I said Houston and Dallas and Miami and Orlando and Charlotte and Phoenix. These are all post-World were to boom places where air conditioners made it possible to live there. And so now 50, 6, 7 years later, the second, third generation owners that say now what? And so a similar good example of that is actually in Philadelphia.

Our business unit in Philadelphia is about a $300 million Powerwasgo. It sold carrier Sense Carrier, I think, launched products in Philadelphia in like 190 -- it's actually a 99-year-old family business. We've owned it for 7 years. The Pierce Brothers, whose name is on the building, it's called Peerselves, run the business. And there are 6 cousins that are fourth generation in the business. And we paid roughly 9x in earnings for it. And now it's returning invested capital is 30%, and the same brothers are running it and grew it. And -- they have a lot of Watsco equity that has gone from $140 to where it is today. And that's our spokesperson for acquisition strategy to other targets.

We just announced a large deal a couple of days ago. The owner of that business spoke to for owners of -- for prior owners of other acquisition targets that are part of Watsco. And -- that's a big credibility factor as we go around other families and talk to them. And so financially, it's worked out well. Culturally, it's managed risk well -- and the idea is, again, a succession plan for the manufacturers to those distributors are in that situation. And so there's a comfort zone, I think, for them as well in this. So that's been our approach.

And Rick and I, a couple of others of us, I've known the family as well over our careers. And now we're dealing with some second generations that are now in place for third generation and a lot more to do. the funnest part of our job, it is -- that's a switch gear to talk about some of the current trends. There are obviously some moving parts in the market. And so it will be helpful to level set and see where demand stands. What have you been seeing quarter-to-date?

Sure. Well, let me start a little bit before that and work our way to the current. I think we exited last year and began this year with a little bit of humility and modesty about where the industry was. And we said exiting our first quarter that things appear to be getting better. We said exiting our second quarter that things appear to be more stable. And we can say today that, that trend has continued and that the selling season has, I think, given us more confidence, not less confidence on the trajectory of the industry and the end markets. So within our business, we have 70% of it is equipment roughly. Within that, residential is the largest component of equipment. And it was nice to see that grow mid-single digits in the second quarter, healthy balance of both price and volume. Both -- all of that has sustained itself and since we communicated in July. And we're not one to prognosticate very much. We're not one to put up fancy power points that bridge you from today to Infinity on how life looks. But I think all else equal, we feel better about the state of the industry today, the state of the end market than we did certainly to start the year. And it's been good to see that stability. It's been good to see what would be more long-term conventional averages in terms of price, volume and mix. And we'll see where it takes us. But I think it's an improved picture relative to 3, 6 and 9 months ago.

And I would just add that it's been a little bit of a liberation of spirit, I think, the last 4 or 5 years of so much that's happened. And with our partners probably having it even worse, having to spend every nickel of R&D and energy on compliance and regulations and getting the products right, getting the products out, just going through really a hornet's nest slice of transition. So this year is good to actually like take a deep breath and say, now what? -- and to have a market share discussion with a partner and say, here's how we can grow. Here's what you need to do, here's what we're going to do. Tell us what we need to do and let's work on that and build share. it's a refreshing environment right now to do that and not have to worry about what's in the rearview mirror and feel like that's kind of overhang. That feel -- overhang feels over with. Yes, the market is responding and growing. But the now what is what's important for next year, and it's a much better environment. And again, nice to have very strong technical discussions with our partners and now what can add to the equation.

And I would add just very briefly that I think part of what the stability allows besides the fact that we can all catch our breath and have more productive discussions with OEMs is we announced a slate of new things that we have going on in the business at our Investor Day not just supply sync, but we announced other things like VCR and hydros. And we gave more color on pricing optimization. We gave more color oncall air. And so this more conventional environment, the calmer waters that we are in allow for those things to now fully mature and not take a backseat or not be in some ways, clouded by regulatory transitions and supply chain disruptions. And so it's a good environment now over the next year or 2 to go win and to let those initiatives play out and mature and help our business.

Maybe let's take that demand discussion one step further and talk about what's happening upstream in the channel. From what you sit in the channel, how would you characterize industry inventory levels today? And how do you feel about like Watco inventory?

Sure. Well, firstly, inventory is what it is for one reason, not to serve a customer who needs it like an hour from now. The most critical element in the equation of inventory carry is, obviously, demand is one item. One item is the supply chain feeling that we need to have in terms of lead times and on-time delivery and kind of the equation we have with our manufacturers as to their performance and what we carry in inventory. But the overriding emotion or reality is our customer needs the product from an hour from now, and I'm going to protect that availability at all costs or compete with my balance sheet and provide that availability that maybe a competitor might struggle with. So again, imagine the level of change in the last 2 or 3 years where all those equations became very complicated and difficult. So we built inventory. That's -- we used our balance sheet the last 2 years to compete. And inventory turns went from probably 4, 4.5x to closer to 3. And we were willing to do that because it let us compete in the marketplace. And over the last 5 years, our total shareholder return is 12%. So all the volatility, all the stuff, it was a good performance period for Watsco. And yet, now that things again are in a more serene place, how do we improve inventory from here. We started last year where we cut inventory, hascheted inventory to use Rick's word that I used earlier, Avalanche inventory by 30% in a 90-day period between September and December because we felt we must start this year, 2026 at that balance point that was needed for what we sensed for this year. We're glad we did that. We were right about how much we did. And as we progress into this year, we said, let's see what demand tells us. That's an equation -- part of the equation of inventory carry. Let's watch lead times, watch the credibility of shipment data. And if we sense better performance, more reliable performance, we'll trim safety stock and improve that over time. So this year, there was not the concept of cutting hasioning inventory. It was to fines on average, lower inventories simply to improve inventory turns and to recognize that progress was available to us, still with a bias and a hedge in our minds of customer availability. So I think that this year is a year of progress where inventory turns improve. Average inventory balance is, therefore, less, but it's part of that fines. And ultimately, the demand environment will decide what inventories are going into next year. That's the same -- and if we're seeing demand growth already, then we'll play that out in our inventory balance next year. So now I would say we're in a period of finessing inventory to improve inventory turns. -- there's not the chop and slop and weirdness that we experienced. And again, working with the OEM partners and to help them plan their factory loads to help them plan their output, again, with that single greatest goal of serving the customer in a short -- a very short lead time environment for us in that equation. So I think I don't feel over inventoried or under. I feel like we started the year in the right place and are going to end up in the right place. And for next year, we would like to continue that fines of improving average inventory while competing in the marketplace at a higher level because the market share is available to us.

Thank you, Barry. We have maybe 3 minutes left. I want to make sure we have time for the audience to be able to ask a question.

I do have a couple more questions myself. So...

I can ask one...

So you guys talk about like residential. If we move outside of residential, I wonder how has the light commercial side of the business has evolved like these days? What are you hearing from your customer? What are the activity looking like?

Go ahead.

Yes. Just to define it. So we have 3 different types of commercial within our business. We have the light commercial that you're talking about. We have applied in certain markets. These are big specified contracted long lead time projects that would go into very, very large structures. And we have ERF, which is the ductless equivalent in commercial, has been a steady grower over a long period of time as ductless has evolved and gained more and more acceptance here in the U.S. So on the light commercial side, which is the thrust of your question, I would say things are pretty ho-hum there. That's a technical term, hohum. We -- there has been -- that product too went through its transition period last year. And so entering this year, it also felt like a cleaner slate. And it's also an area of focus for us. We do well with commercial in certain markets. There are opportunity in other markets to expand and grow our commercial presence. I would also say that the other opportunity within commercial is is not in the sense that you're thinking of it, but in the commercial supplies world, there -- in every large structure like the one we're sitting in, there is a ton of stuff above this ceiling that's moving air around this building. And so while everybody focuses on the equipment, it is also an opportunity to go after some of the commercial supplies that are accessories and attachments to those equipments. So state of the market there, I would say, is, again, very ho-hum and the VRF side of our business is going through now its refrigerant transition the same way that the light commercial side did last year.

It's going through that transition now?

Yes, this year, 2026. And so we'll come out of that in 2027 and so far, so good.

I would say it's about -- to put it in perspective, about equipment side, right around 10% or so of our equipment business. And if I add commercial, everything else to it, it's about another 5%, 6% of Watsco. So what would be commercial would be, call it, between 15% and 20% in total with residential being the remainder.

All right. That's very helpful. I think that's a good way to leave it. Thank you so much for coming, and thanks for this conversation. It's very helpful.

Thank you very much.

Appreciate it -- thank you for having us.

Good day, and welcome to the Watsco, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Al Nahmad, Chairman. Please go ahead.

Good morning, everyone. Welcome to our second quarter earnings call. This is Al Nahmad, Chairman and CEO; and with me is A.J. Nahmad, President; also Paul Johnston and 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. I'm happy to report that our second quarter results reflect stabilizing markets under far more conventional operating conditions. The last 5 years brought a pandemic, supply chain disruptions, regulatory transitions and tariff volatility.

Through it all, we stayed the course and invested in our business. Now the operating environment is normalizing, revenue is growing and our digital ecosystem is producing measurable results. Our largest and most impacted product segment, residential HVAC equipment grew 5% during the quarter with gains in both unit volume and pricing.

We closed on Jackson Supply on June 1, and we are thrilled to welcome their team to the Watsco family. Jackson is a legend in our industry with $230 million in annual sales, operating from 25 Sunbelt locations. As in our culture, the Jackson team will continue to operate and grow their business with our full support.

They have big ambitions, and we will gladly support their leadership team in any way we can. Turning to second quarter results. Sales increased 2% to $2.1 billion. Gross profit was $579 million with gross margin of 27.5% versus 29.3% last year.

SG&A increased 2%, excluding acquisitions. Operating income was $238 million and had an operating margin of 11.3%. Earnings per share came in at $4 per share. My earlier comment regarding volatility and disruption had the greatest short-term impact on the gross margins.

Let me say that again. My earlier comment regarding volatility and disruption had the greatest short-term impact on our gross margins in '26 versus '25. During 2025, OEMs instituted aggressive pricing action in response to inflation and tariffs, benefiting gross margin in 2025.

By comparison, 2026 OEM pricing actions were more moderate and consistent with historical levels. Looking beyond the onetime impact from a year ago, gross margins over the last month has been in a narrow range and more consistent with historical gross margins.

Now this is important. Having said that, we remain focused on reaching our long-term goal of 30% in gross profit margin. As for SG&A, we have become a more efficient company as business conditions have simplified. The modest increase in SG&A reflects continued technology investments along with the addition of Jackson Supply.

Moving on to our balance sheet. We ended the quarter with $464 million in cash and no debt. No surprise. We remain committed to maintaining a pristine balance sheet, enabling investment in growth opportunities as they come up. Operating cash flow for the 6-month period improved by $168 million, reflecting a lower ramp-up of seasonal inventory.

We expect to achieve further inventory efficiency as lead times normalize and the A2L product transition moves behind us. In April, we increased our annual dividend by 10% to $13.20 per share. Interesting, 2026 marks our 52nd consecutive year of paying dividends.

Finally, I'm going to hand the call over to A.J., the President -- our President, to provide an update on Watsco's technology initiatives. A.J?

Thank you, and good morning, everyone. With the complexity of the last few years largely behind us, we believe our technology investments have made us a stronger company with higher growth prospects and a widening competitive moat. Our goals have been ambitious and straightforward.

First, build the industry's largest repository of data, product, market, customer, competitor pricing, you name it. This underpins and empowers the industry's most advanced technology platforms.

Second, through widespread adoption and use of our technologies, revolutionize our customer experience so that contractors, installers and technicians love doing business and only want to do business with the Watsco companies.

Next, transform our supply chain and store level operations through digital platforms to better serve those customers and gain operating efficiencies along the way. And finally, develop and launch technologies that help our customers grow their own businesses so they can drag us along with their growth.

Big picture, we see contractor behavior evolving in ways that benefit the technology-enabled distributor in the long term. In terms of 2026 first half highlights, our core technology platforms continue to scale and add value. E-commerce sales have grown 13%, well outpacing overall growth.

In terms of penetration, e-commerce reached 37% of total sales over the last 12 months with certain markets at 50% to 70% penetration. Digital engagement with our mobile apps is strong as well at more than 70,000 active monthly users. And our OnCallAir platform continues its growth trajectory.

Over the last year, more than 340,000 proposals were presented to homeowners using the tool, generating $1.9 billion of gross merchandise value, a 15% increase over the comparable period. Simply put, the contractors we serve digitally are growing faster, attrit less, and we believe we can lower our cost to serve at scale over time.

At our Investor Day last year, we communicated several new initiatives that leverage our technology advantage and represent new growth opportunities that will materialize in the years ahead. SupplySync.com, our newest platform to serve the growing segment of large institutional customers launched in the second quarter to great fanfare.

Our plan is to scale it to more and more customers in the coming months and years. This is a new and growing channel with different customer needs. We see an incremental growth opportunity beyond our day-to-day business while leveraging our existing scale and infrastructure.

VCR, which stands for vendor consolidation and rationalization has expanded across many of our nonequipment product categories. Relationships with our strategic vendor partners continues to strengthen. Hydros, which is our investment in shared logistics and distribution among our business units has further matured and will become more important over time.

And the transformational use of AI continues to evolve throughout Watsco. I could spend the next few hours just on that subject. These investments, along with our scale, entrepreneurial culture and capacity to invest are unmatched in our industry. In closing, a reminder of our fundamentals. Watsco is the market leader and the technology leader in what remains a highly fragmented HVAC distribution market.

The products we sell are a necessity and the installed base continues to expand. We have deep and collaborative relationships with industry-leading manufacturers and industry partners. We offer the broadest variety of products and operate a large and growing network to serve more and more customers.

And our unique ownership culture shared by more than 7,000 employees rewards and incentivizes long-term performance. With that, let's turn to Q&A.

[Operator Instructions] Our first question comes from Steve Volkmann with Jefferies.

Al, I think you said something in your prepared remarks about how the last month, the gross margin has kind of normalized to historical levels. And I'm curious exactly what you think that means because it felt like we were sort of in a normal level in the second quarter, but maybe you have a different definition of that?

I'm going to have Barry Logan, my expert.

Can I just -- if I can jump real quick, I heard that. The prepared remarks was actually last 12 months. I think there was just a skip in the...

I'm misreading.

Yes. Normalization of the last 12 months. So go ahead, Barry.

Yes. I mean, Steve, again, this is the trend line kind of discussion we're talking about versus last year, which was not a trend line in terms of where things have been. So 3, 4 years ago, when margins achieved 27% plus, the question was, will they retreat back to something less than that over time?

And we emphatically said no, at 27% is the baseline that we expect looking forward going forward. And I think we said that prior to all the challenges of the last few years going through product change and regulatory change and everything else.

So if you look at the trend line over that 2- or 3-, 4-year period now, 27% and change has kind of been where we are. Last year is the anomaly at 29% plus in the second quarter. And so what we were conveying in Al's remarks as well as the press release, it's there in the press release as well, is let's look at things over the last 12 months, which is kind of almost the period of time where you can look back and say, when did some of these volatile items begin to recede or at least lapse and look back the last 12 months, I think the margin is 27.5%. The first quarter, second quarter is in that narrow range as well.

And it's just a way to show and identify analytically that last year is something that stands out on its own. And I can't say ignore it, but I could say discount, discount it in the analysis of looking forward over the next several quarters.

Yes. And in the medium and long term, we're super ambitious and we have our sights set on 30% gross margins in the long term. And that's not just a hope and a prayer. We are investing to do exactly that. We believe we can achieve that.

Great. Okay. And then maybe just for the follow-up. We're hearing some commentary, especially in sort of southern states about a real slowdown in new builds. Are you seeing that in your business? Is that part of what's impacting you or not so much?

Paul, do you want to take that?

Yes. We're seeing definitely a slowdown in new construction in the South, predominantly in Florida and in Texas. Those are the 2 big new construction states, and they are slower right now. So it's a very unusual scenario out there where you're seeing strength in the North and weakness in the South right now. But that's the way the market shakes out.

The next question comes from Brett Linzey with Mizuho.

It's Ryan on here for Brett today. I'm curious on pricing. You said OEM pricing in '26 has normalized to historical trends. Does that mean roughly 2% to 3% annual increases from your primary OEM partners? And kind of how does that compare to your own realized ASP growth in the quarter?

Again, there's aspirational prices that are announced and then there's real life as it plays out and the segments of customers and even market pricing is specific even by market. And then within brands, it has different attributes, right? So the composite that we reported in this quarter, in this press release that you read is a 2% price increase on units.

And when we say the word units, that's the AHRI equivalent definition of what a unit is, which is a compressor bearing unit. And that 2% is, again, I would say, a very conventional level if I look back over a 10-, 15-year average.

Got it. That's super helpful. And then one more on gross margins here. On the gross margin bridge, you sized the 2025 pricing and A2L comparison of roughly 130 bps of the 175 or so decline. Can you walk through the remaining 50 bps? And then maybe just a little bit more color on how we should be thinking about gross margins for the remainder of the year, Q3 and Q4?

Sure. Well, first, if you noticed also in the data, the equipment business outgrew the non-equipment business. There is a margin differential -- gross margin differential in the 2 populations of products that accounts for a chunk of the remaining difference.

We're also owning less inventory all year long, which also means purchases are less, which also means some of the attributes we gain in either purchase discounts or rebates, things like that can moderate down. That's okay.

That goes hand-in-hand with how inventory should be managed in this environment over time. Other puts and takes in there that aren't material, but that would be the view of what's in the numbers today. Again, I need to stress to you, if you look back to the last 12 months, look back the last 2 or 3 years, we're in the range that we've been in at this point in the year, at this point year-to-date.

Looking forward, again, we're not ones that give guidance and give projections. You've heard my comments, you heard our comments about the last 12 months and kind of where things sit today. Time will tell what the rest of the year will be, but that's how I would look at it is looking at trends over the last 12 months.

The next question comes from Chris Snyder with Morgan Stanley.

I guess you guys built more inventory than you normally would in the first half of the year. I think it was up maybe like since the end of last year at 35%, 36%. I guess how much of that was intentional versus maybe just a demand shortfall that caused you guys to exit with more inventory?

And then any reads from that on what it means for your pace of inventory purchase into the back half, but also price cost into the back half just because you guys did buy a little bit earlier this year?

Barry?

Yes, I can give the answer. Yes, I mean, I think we're probably about $100 million ahead of what we might have thought that 7 days' worth of inventory, which is a remarkable statement actually. And so I don't think there's any strategic or tactical thing that went into a June 30 inventory balance. Our field stock is down almost $200 million.

You need to account for the Jackson Supply acquisition and your analysis that we bought about $60 million of inventory June 1 as part of Jackson Supply. So you need to consider that. As far as the last half and next half, the idea is to continue to grind on keeping inventory ready for customers while owning less over the rest of the year than we did a year ago.

We've done that for 6 months, and we intend to do that over the next 6 months.

Inventory is peak for the year, I believe. And the supply chain amongst our OEM partners is healthier than it was in previous years. And so we expect inventory turns to slowly creep back up.

I appreciate that. And then just maybe a higher level one on just kind of end demand. I mean it seems like from a lot of the sell-through numbers, that end demand is not getting better. It seems like it might be getting worse if we kind of look at sell-through volume declines on negative comps at this point.

I guess my question for you guys is, is there -- do you -- is there any plan or strategy or anything that Watsco can do to help improve affordability in the industry, whether that's carrying lower cost brands that are out there?

Or is there just anything else because it seems like a challenge, and it doesn't seem like it's getting better.

Well, first, let me say we do carry various brands. I think we have 26 different brands. So we can compete at any level. But also peak in the next quarter shows growth for us anyhow in the mid-single figure in the low about 4%, 5%. So maybe things have turned around.

I would say the market is ahead...

Go ahead, Paul.

No, the market is stabilized. I don't think it's getting worse. I think that's an overstatement on your part. But when I look at the market out there right now, it's stable. It's continuing to grow. I think we've hit bottom and we're coming back out of it again. And so I feel very good that the market is not going to go down further.

I think there's still going to be some regional differences that occur as we look out. And as I mentioned earlier, the West Coast and the South have been fairly weak to start the year, but the northern tier states have been very, very strong.

I appreciate your perspective. My point was just more that like the sell-through volumes are seemingly negative if we look at the industry data, and we are comping at this point now negative volumes. So that's why I said that. But I do appreciate that perspective.

Yes. Go ahead, Barry.

I have to say this because it's very critical and really understanding it. Yes, units were down 17% in the calendar year last year. Why were they down 17%? Why? What components -- what's inside of that number?

And obviously, I need about half an hour to give you all the analytical pieces I could give you in that analysis. But the question is the -- was the market really down 17% last year just on some kind of holistic basis, or is there something longer term that went on that caused it?

And my view, our view and the data, looking at our data is the COVID period clearly borrowed replacement volume from the future. And if units were up 10%, 15% for 2 years, that borrowed some measure of replacement volumes from the period that followed.

And our analysis would show that last year's correction in volume, down 17%, fixed much of the overhang from that dynamic. Time will tell. The data is pretty sound in our view, but time will tell. So as we look at this year and replacing systems and consumers rolling out of bed and calling contractors and doing business with us.

Clearly, the consumer is the one that has to pay for this stuff. Clearly, the consumer is still a little heavy in terms of that dynamic economically. But when the systems break, they're going to have to be repaired or replaced. And if that -- if we're right about our data and the trend line that we see, this is the baseline.

This is the foundation from -- over the next few years. And looking back a year ago and feeling like there's an easy comp, I don't think is a good way of looking at it. Question is, is this a foundation that is -- has momentum or at least stability, and that's why we use the word stability.

And is this foundation something that is going to grow in a conventional way over the next several years, I feel better about that. And -- but I don't do it because I look back a year and say, look what happened a year ago. I think at some point, you've got to only look forward in this discussion.

Yes. No, I appreciate that.

And I remember that cumulative growth analysis that you talked about last quarter, and I thought it was like a really thoughtful way to frame it up.

The next question comes from Ryan Merkel with William Blair.

We've covered a lot of ground, but I just want to focus on what are you seeing in July? You're talking about the market being stable. I'm curious if July is getting better. And given we have such easy comps in the second half, are you guys expecting volume growth year-over-year in the second half?

Barry, Paul, both of you jump into that.

I know I asked a guidance question, so I appreciate...

You know us, Brian.

Yes. I mean I think Al said earlier, we're seeing 4% to 5% organic growth in July through July 28 as it is. And both the second quarter and July would have unit growth going on to accomplish that. So yes, Ryan, I think nothing magical usually happens June to July. So I'll believe that unit growth is on its way for at least what we're seeing through the third quarter.

Okay. I appreciate that. And then...

And Jackson obviously add something to that.

Right. Okay. And then my follow-up is just on price. Only 2% for equipment is a little bit lower than I was thinking, right, because we had the price increase in March, you had another one kind of May-ish. I know it got pulled back a little. And then isn't there some A2L mix also still you're helping? So help us frame that. Is there anything going on with competitive conditions? Or why isn't price a little bit higher than 2%?

Well, we had the A2L price come out from the government with the new tariff. And then like a month later, it got pulled back. And I don't know what percent we got pulled back, but we didn't recover completely the price increase.

The only other thing I would add to that is that the -- when the OEMs announce this, they're usually announcing it in a careful way where they say up to blank and the up to is the operative part. It doesn't mean that everything went up x. It means that -- so you usually blend into something less than what the OEMs announce.

The other thing that matters there would be your customer mix. I mean, really, at the end of the day, you yield what your weighted customer mix tells you should yield. And if we're 100% RNC, then you yield one thing. And if you're 100% AOR, you yield another thing.

And again, you sometimes oftentimes blend into something that's right in the middle. So I would say the blended cost for us was up pretty close to what price was up and whatever got passed through based on your customer mix is what we ended up passing through.

I think part of the issue that we had was I think the larger customers clearly dominated those that advertise and promote on the add-on replacement. They dominate and they did not get full. So we had a lot of the smaller contractors and the non-advertising contractors, the business didn't flow down to them as quickly as it has historically.

So it was a difference in customer mix also that probably drove that price down.

The next question comes from David Manthey with Baird.

I know it's a small segment, but on commercial refrigeration, maybe, a, what happened there. But b, are there any gross or operating margin implications for that very strong outgrowth in that segment?

It's Rick. I'll take a stab at that. One of our business units that's in that segment had a couple of nice customer wins this quarter. They shipped. Generally, those larger refrigeration equipment jobs do carry a lower margin. We didn't try to dissect that too much in terms of the margin trend. Yes, it would have weighed, but we'll take the volume and we'll take the growth that came from it.

Yes. Okay. And then as it relates to the other HVAC segment, I know at various times throughout history, you've had certain initiatives going there. I'm just wondering, is there anything new? Or are there ongoing initiatives to improve the growth in other HVAC equipment?

Yes. Keep going.

Well, I mean, A.J. talked about supply sync, VCR, Hydros and those all directly influence future other HVAC product growth. I'll start with supply Sync and A.J. chime in here any time. The basket of customers to which we think that segment applies to is even more weighted towards equipment than is the total Watsco mix of, call it, 70-30.

And so there is absolutely incremental nonequipment opportunity as we scale supply sync. VCR is not just about consolidating vendors. VCR is about being more relevant, having a broader array and having better replenishment of non-equipment products throughout our system. And then thirdly, Hydros is the logistics and the replenishment that enables that to a local branch.

So a branch in Tulsa, Oklahoma doesn't need to have x amount of stuff of nonequipment to be relevant in the market sitting on the shelf in that branch. Hydros can resupply that within 24 hours and enable 650 domestic locations to be in the non-equipment business.

And so everything we touched on at our Investor Day and all the core technology platforms, whether it's e-commerce, whether it's the digital adoption. I'll remind you that there's extra lines when we transact digitally with customers and those extra lines are usually some accessory that's accompanying the order, which is accretive and enhancing to the margin of that order.

So non-equipment growth and non equipment excitement is really embedded through every initiative we've got going on, both technology and otherwise.

Yes. I'll add one more to the mix, which is our pricing optimization efforts. And there's a lot going on there, but part of it is making sure that every customer has complete pricing profiles for every product that's available for them to purchase, which sounds obvious and easy, but because of the complexity of the SKU count and the markets and you name it, there's a lot of complexity there.

And the tools that we now are employing allow us to do that at a scale that we couldn't do before. So the pricing optimization effort is not just about maximizing margins, making sure that we're competitive for all products in all markets to all customers.

The next question comes from Jeff Hammond with KeyBanc Capital Markets.

I just had some clear points. So one, I think HVAC equipment up 3%, resi up 5%. Can you just walk through the other pieces like commercial and I don't know if the international markets are still a drag?

Yes. We have a few commercial segments. We have VRF, which is the one that was down the most. I think overall commercial was down 8%. And most of that decline is in VRF, which has gone -- which went through its own transition to A2L over the last 12 months, which disrupted some of that comparison would be unitary commercial relatively flat and applied relatively flat.

International still has -- domestic outperformed international, less of a gap. I think international is down single digits. But given its overall percentage of our total business, not a big drag.

Okay. I jumped on late. I didn't know if you gave any more color on Jackson in terms of what the revenue contribution was in the quarter? And then just how should we think about early days profitability and some of the opportunities as you bring that into the fold?

Yes. I mean I think analytically, we showed that same-store sales was up 1%, overall was up 2%. So if you do the math, it's about a $20 million contribution for 1 month in June, we closed June 1. But the more important analysis is where are they going? What's their growth plan? And I don't have to like guess. I can look back over the last 5, 10 years, and they've doubled the business.

They've opened up locations. They've added states, they've added markets. a complete blend of parts and supplies and equipment. And when we use word entrepreneurial, maybe it's used often, but this time, this is the most definitive kinds of entrepreneurs we can possibly partner with and hang our wagon to over time.

So they have a very aggressive plan to do more of what they've been doing with our capital, our relationships, our technology and a team that's been together as a family and staying together as a family moving forward. So the profitability, I think, is consistent with the overall Watsco kind of profile at a profitability line.

And to double that and is their goal, not our goal for them, it's their goal. And the question is how long does it take? And it didn't take them too long to go from $100 million to $230 million in recent years. So it's something very exciting for us.

Yes. I would say just to double down on that, Barry, to know Jim and Jennifer and their team is to love Jim and Jennifer and their team because they are growth hungry entrepreneurs that are scrappy and competitive and like to win and grow. And that's why we love them so much.

And I think part of why they love us so much is because we give them a home base with a lot more weaponry, a lot more tools, a lot more capital, a lot more everything to go do that with and do it in their way and use anything and everything we've got to help.

The next question comes from Aidan Harman with Wolfe Research.

Yes. This is actually Nigel on for Aidan here. So I'm not sure what happened there.

Is that a British accident?

It's a British accent, yes, and Aidan definitely does Brit accent. So thanks for the question. We got there eventually. I'd be curious, how are the economics of replace versus repair evolving? And what I'm most curious on is how is the price of 410A refrigerant, R22, you can still get it.

How is that changing the economics of a replace versus repair? And then just a quick one on the other equipment. I know we addressed that earlier on in the call, but I thought commodity prices might have been a bit of a tail to that business this quarter.

So just maybe just double-click on the decline and where the declines there.

Paul, do you want to take the first part of that?

Yes. The difference between 410 and the A2L product is with the 410 product, you can just remove the outdoor unit and replace it. You don't have to replace anything on the inside. Obviously, with the A2L product, you've got to do a replacement of the coil, be it a fan coil or a regular coil because you have to have a sensing device in case it springs a leak because it is slightly flammable, the refrigerant.

And then the second piece of it is you got to -- you have to have a switch that will switch on the air blower and dissipate the gas in the event of a leak. So that's the big difference between A2L and 410.

More about the price, the cost of replacing as opposed to the actual technicalities. I mean -- and I was thinking more about the refrigerant price as opposed to the engineering.

Well, yes, the refrigerant pricing is higher than 410. 410 is a very inexpensive refrigerant.

This one, because you've got R-1234yf in it, will have a higher refrigerant value to it. But refrigerant is a very small portion of our business as far as what we sell. And right now, refrigerant sales are slightly down.

Okay. That's helpful.

Yes. I think just to make it clear, you said something about -- I didn't hear you, Nigel, you said you expected commodities to have what impact this quarter?

Yes. I just think within that segment, there's a bit more commodity-related products there. So I would have thought that with the high commodity prices ex PVC perhaps, but I would have thought that, that would have been a tailwind to revenues, but maybe I'm wrong there.

Yes. I mean I just want to be precise about it. So commodities in our mind is refrigerant, steel products and copper, right? So 3 things. That's our commodities. That's where we see inflation deflation in ordinary times. It's $35 million of revenue in the second quarter, okay?

And there was refrigerant headwinds in the quarter because a year ago, we were launching A2L refrigerant. And this year, everyone has it. So the price has come down. But even if I tap dance about that, it's $35 million of business in a $2 billion quarter, just to put things in context.

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

Well, first, let me thank all of you for your interest in our business and our company. We appreciate your support and your questions. It gives us a chance to answer them, and we'll see you the next quarter. Bye now.

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

Good day, and welcome to the Watsco First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

Welcome to our first quarter earnings call. This is Al Nahmad, Chairman and CEO. And 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 selling 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. Jim Durrett, Jackson [indiscernible] owner and his talented group of leaders, all of whom will remain with the company, certainly meet the definition of great entrepreneur.

Our relationship with Jackson dates back more than 20 years, and we are grateful to Jim for entrusting us with this company's next chapter. Jackson will expand their Sunbelt presence by 25 locations and provide diversification of brands and products, given 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 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.

E-commerce sales increased 16% during the quarter, well 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 first quarter results. 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 the first quarter progressed. Gross margins remain 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 operation efficiency offset incremental technology investments and new locations. We expect overall operating efficiency to further improve and our technology can now show its metal 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.

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. 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.

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 the highly fragmented parts and supply segment, which comprise almost 50% of the interest market share. And we have begun to harness the power of artificial intelligence, offering the potential to further transform our customer experience, improve our operating efficiency and create new data-driven growth strategy. These investments, along with our scale, entrepreneurial culture and the capacity to invest are unmatched in our industry.

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

[Operator Instructions] We have the first question from the line of Ryan Merkel from William Blair.

Yes. Can you hear me?

Now I can. Yes.

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?

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

He just [indiscernible] I think, he dropped off the call. Please let the operator know.

Yes, we are trying to reconnect him in the meanwhile, yes.

Okay. Rick, do you want to jump in there?

Sure. I'll take a stab and then Barry can backfill and enhance it, Ryan. Yes. 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. 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.

And we exited the quarter nicely with March up high single digits on a same-day basis. And so far, 3 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.

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 of -- a little cautious in our tone and our optimism. But this is certainly, I think, incrementally more stable, more positive, less complex, and we'll take that in the first quarter.

Yes, 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-we-go industry and then COVID hit. And it seems like all chaos broke loose over the last 5 years. We had extreme demand as people were investing in 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 or limitations on refrigerant canisters. It's just been kind of one thing after the other for the next 5 years. And 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. So we look forward to a more normalized 2026 as we started the year.

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 "more normalized environment" and getting back to business and hitting the streets and taking care of our customers and growing the business. And I think that's materializing.

Go ahead, Barry.

No I was going to say I think it's interesting, too, that we see e-commerce sales kind of bloom this quarter. That tells us the contractor's daily life is kind of reset into a good place to start this year. I always mentioned contractor credit as a critical measurement of how the market looks. And again, that is in very good shape.

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, and it's kind of what we have been looking for as some indicators.

We have a next question from the line of David Manthey from Baird.

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 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?

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. We know they have the right strategy. And all we want to do is support it so they can continue to expand.

And if they need more capital, we'll provide that. If they need more technology, we'll provide that. They need more equity for their leadership, we will provide that. So it's just a wonderful business to become part of Watsco 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.

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. I don't want to slice this 2 things.

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 -- would go the other way, we grow, whereas price would sort of tail off toward the end of the year. Is that how you're thinking about it?

Well, we certainly are hopeful that we're going to grow, 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 [ garment ] market conditions that we have experienced in so many years.

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, but let's wait and see. Regardless of what the markets do, we're going to do well. And we have a competitive edge over other distributors that we told you about over and over again.

We have the next question from the line of Tommy Moll from Stephens.

To start, I wanted to expand a bit on the year-to-date comments that Rick made. If March exited the quarter in the 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 2 months? And how long has it been since that was the case?

All yours, Rick.

Yes, Tommy, we're not going to 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 -- this time last year is when we saw volumes begin to degrade a little bit. 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. 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. But we had some of that in our fourth quarter of last year, and it was about 60% of our mix in the second quarter of last year. So the ultimate comparison here is what did it look like versus 2 years ago versus 3 years ago, and we'll be in a smarter position to answer that question after the second quarter. So far, so good is how I would describe the start in April.

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?

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, actually get worse. So we expect our inventory turns to increase and contribute to cash flow for the rest of the year.

Yes. Plus we've got -- our supply chain is a lot more solid than it was in the past. A.J. mentioned that we had COVID, and we've had all these changes in models and products. 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.

We have the next question from the line of Jeff Hammond from KeyBanc Capital Markets.

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 like normal course that would suggest more pricing -- upward move in pricing?

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

We've had a number of price increases to date from several of the manufacturers, which have already become public. So they're well known. 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.

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. Was that this A2L transition? Or was that the consumer kind of being tight?

So -- 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.

I think, yes, 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, 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 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.

Yes, 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. So there's broad-based growth there, and it's not necessarily a read on repair versus replace all the time.

And to say it analytically, I mean, parts, replacement parts, parts sales are less than 10% of Watsco. So when we say 30% is non-equipment, that means 20% is everything else just from analytical point of view.

We have the next question from the line of Nigel Coe from Wolfe Research.

I wanted to go back to your comments on inventory turns continuing to increase. The 1Q's inventory build was a little bit higher than what we expected. 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. And I'm wondering if the inventory build is getting ahead of price increases, slightly better demand. Just wondering anything more there.

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

Okay. Nigel, 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 mentioned, the supply chain and our OEMs and the whole process is more stable, more reliable than it has been.

So now we 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, and we expect to turn inventory better than we have been able to because there's less noise in the system.

Just 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. 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 margins last year in 2Q versus 1Q on the price increases. I'm wondering if you expect that still -- did that to happen this year with the price increases coming through?

Yes, go ahead.

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

I'm sure that the sophistication pricing system that we have is superior to anything else on the market. That will 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.

I want to go back -- I'm sorry, to the inventory discussion, just to be, again, try to be educational about it 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, 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.

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. 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. So it's much more subtle than the big stick we took to inventory at last year. This is the subtlety of improving inventory turns over a period of time. And frankly, we're going back to where they should be and where they have been for many years before all these changes.

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, 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?

I think, like we disconnected -- are we disconnected?

No, sir, you're connected. Do we move to the next question.

Yes, go ahead.

We have the next question from the line of Stephen Volkmann from Jefferies.

I guess you wanted you to think about it before you took my question.

So we reserve the right to change our mind, Stephen.

Yes, feel free. 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.

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 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.

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. 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.

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, and it's generally less than what the announced price increase is.

Yes. 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 in OEM, it's touching thousands of SKUs and we -- 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. 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, where we otherwise did have that risk and sometimes missed making changes that needed to be made, if that make sense.

Yes. Good...

That's interesting. I appreciate that. And then 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, that growth in that platform is accelerating, does that have an impact on your gross margin target? Is that a tailwind? Or is it just more sales?

Yes. It's all of the above. We do realize a higher gross margin with our online sales and our offline sales. And e-commerce sales are increasing. We expect that trend to continue. And also, our cost to serve is lower with our online sales and 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.

So it's really -- it's a win for all of us, including and especially the customers. 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. 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 is like an $800 million business for one of our subsidiaries, where there almost 70% of their sales go through the e-commerce tools. So that's the possible.

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 4 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 3, 5, 7 years.

And while on the subject, we also sell more line items per invoice when we sell online versus offline. So it's a good -- it's a winning formula to sell more products online, and we're focused on it.

We have the next question from the line of Chris Snyder from Morgan Stanley.

I wanted to ask about Q1 inventory. So it was up about 25% quarter-on-quarter, which matches what we saw in the last 5, 6 years. But the last 5, 6 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.

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?

Yes. 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. So 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. So that element, that sales mix of A2L is still being compared a year ago to a heavy mix of [ Fortune A ] product. So that gets simpler and easier to identify as we get into the second quarter. But to keep it simple in my statement, we do own less units at the end of March than we did a year ago.

But I guess on that, like sequentially, it's kind of the same. Like sequentially, like the 25% up Q1 versus Q4 presumably is almost all volume or units. So I guess just like that kind of more like it feels like you guys were building in Q1 the same way you built the last 5 years.

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. So I guess just the question was like, is that a function of demand turning and you're more optimistic there? Or there's just very well anticipated price increases?

I think, if you look at our March inventory versus our March inventory a year before, you see that the dollars are down. Also, when you sell an A2L product today, you've got to sell an indoor unit and an outdoor unit. So we 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.

Interesting. I appreciate that. And then just maybe following up on the inventory point. Over the last year, it seems like it was very difficult for the industry, both the distributors and the OEMs to have a sense of how much product their customer is holding.

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. I guess just like 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?

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 one. Two 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. 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. But 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 will smooth out by the end of the quarter, by the end of the season. It's not substantial enough to really jolt the picture.

I don't think most of our contractors are not carrying a lot of inventory. They don't have mega warehouses where you put inventory in. So I agree with A.J completely. Yes.

Yes. 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 until 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 team to get the right product out of our stores to go and sell it in that home or that building.

I appreciate that. And I know it's hard to pinpoint, but it did feel like last year, there was some unexpected downstream inventory. So that's why I wanted to ask.

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 and Florida have 100 locations to take the pressure off of them having to stock anything ever. That's our value in Florida. We have -- 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. 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 -- and kind of evaluating the answer and listening to your question, it is -- there is a different answer if we go across brands and OEMs as well in that equation.

We have the next question from the line of Patrick Baumann from JPMorgan.

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?

It was better than last year.

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

Yes. No, I mean we're obviously trying to answer that question. Sorry, go ahead.

Yes. 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. The other equations of the answer, existing home sales, new home sales, consumer spending, consumer confidence and contractor confidence ultimately is who actually sells the product in someone's home. I would say, again, it seems like a better situation, but time will tell.

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.

Yes. 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 complement the weather in our discussion, but the northern markets had a bit of disruption in the quarter that resolve itself as time goes on, too.

So the Sunbelt because of what I just said, the Sunbelt was outperformed the north, I think, for those reasons. But that's just the first quarter and not something to draw an inference from over the longer term.

It's meant to be geographically diverse so that all that just, again, is becomes normalized over time.

Yes, of course. And then my final question is, I was wondering if you could opine on 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?

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 going to say what I really think because it wouldn't be nice. But no, it's not something that we worry about at all.

Yes. I mean I'll say we've known the Mingledorff family for a long time and wish them well in that business well. But it takes 2 to Tango, especially in our business model and 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.

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, and it's a wonderful fit. 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 those opportunities in the future.

We have the next question from the line of Jeff Hammond from KeyBanc Capital Markets.

Just follow-ups. Just on gross margins, you held the line pretty well, and I know you got some price benefit in 1Q last year, so that was good to see. Just wondering how you think -- you had a particularly tough comp in 2Q. So just wondering how you think gross margins trend? 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.

That's a big question.

Yes. 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.

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 and the cooling season and RNC 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. 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, 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 is a different profile of margin during season versus out of season.

Offsetting that is -- and we haven't really talked about this much today is -- we -- Supplies [ Inc ] is now launching, for example. And so we expect that to be helpful as it scales. And A.J. mentioned Hydros and DCR, its companion initiative around purchasing in non-equipment. That is gaining momentum and scaling. So there are 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.

This concludes our question-and-answer session. I would like to turn the conference over back to Mr. Albert Nahmad for closing comments.

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 and that sort of thing. So in for the long term, and we're happy you're with us. Bye-bye.

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

Thanks for coming back here. We're going to -- we have Barry and Rick from Watsco. I'll -- maybe Barry, I'll just let you kind of intro a bit. I know you guys have a very consistent and simple message. And then maybe we can get into what you're seeing out there and the business strategy and where you're going. But thanks again for joining us. Always good to talk.

Sure. Thank you. While we're here. We were just talking, it's been 20 years being here. So I like -- I try to remember what I said 20 years ago and see if it came true or not. So I think it did. Watsco's a distribution business, over $7 billion in revenue. We've been a public company since the '60s. Our CEO got there when it was doing $3 million, $0.80 stock price. And through culture, through hard work, through consistency, through sustained culture, we've built the largest business in our industry. But yet, we're only about 10%, 15% of our industry, and we're still not in 50 states. We're still not in all markets. We still don't have a fully representative market share in all markets. We're still building the company. We sell HVAC products and refrigeration products to contractors 95% of the time.

I make the distinction about contractors because that's really who sells products in this industry. It's a contractor that goes into a home or business. It's their pricing, their erector set, their recommendation, their prescription, their technical know-how that sells you something once every 10 or 15 years. And so the contractor is the central theme in this industry, in our view, and our job is to help them every single minute of the day through product, through product knowledge, through convenient locations, through product depth, through multiple brands, through technology, through friendship, through taking them on fishing trips, through advancing their own technologies and how they sell products to a point now we have technology that helps them actually sell you a product in your home through a point-of-sale type device; revolutionary in many respects in this industry.

But as I said, despite all of the long-term view of what we've done, total shareholder return for 30 years, around 17% compounded for 30 years. We still have a lot to do. Our largest market is Florida, our largest market share is in Florida. And if imputed -- if I imagined and dreamed a bit and imputed what we've done in that market, we would be a $15 billion, $20 billion business or more in just North America. The only thing I'll also cover is Rick. Rick has been with us, how long now? I want to get after it.

Almost 9 years.

But we've known each other almost 20 years. If you met -- came in Miami and met our inner circle of our corporate office, we've all been together 10, 20, 30 years. If you went and visit all of our business units, you'd find continuity like that in our marketplace. We've been through major changes of OEMs, major changes of ownership of OEMs, major changes in the market, major changes in customer types. And yet, we've consistently performed well. And we do that through an equity culture. Watsco has about 150 key leaders that own or shifted stock. It's an odd that I am even mentioning it, but this is a cultural discussion. So if you decide to invest for a long time, you know who you're investing in. So our culture for equity is 150 key people running our businesses, running our markets, developing technology for our business. And the vesting period is over someone's career.

So my first grants were in 1997, 10,000 shares at $8, it vested last year when I turned 62. I waited that long. And to say that we have 150 people where average age is more like 45 that have, on average, 17 years to vest. And if they quit, they lose it. If they get fired, they've lost it. And yet, 92% of the shares we ever granted either vested or remain unvested, only 8% forfeited over almost a 29-year period.

So the idea of continuity and I like it when companies say, we're aligned with our shareholders. There are maybe 3 to 5 years [ older ].

And I can look in the mirror and tell you that our leadership team across all Watsco, not just the corporate office, is aligned for a very long period of time with our shareholders, and we're something we're proud of. So I'll leave it at that and I'm sure you have questions.

Yes. Maybe just stepping back in -- from a longer-term perspective, you guys have done a lot on the technology front to innovate around customer service and everything fulfillment. Maybe just touch on the technology you guys are investing in and how it differentiates you versus competition in local markets.

Go ahead, Rick.

Yes, a quick state of the union on technology. I mean has been a 15-year journey in the company, and it started very simply with data on everything we sell and all our customers on a host of different things. Today, we have the industry's largest repository of PIM. PIM is incredibly valuable and as we're fond of saying, it's the most important asset that's not nowhere on our balance sheet actually and that is the gating item to everything else that follows on that technology stack. So PIM was kind of the first endeavor than getting real-time actionable data about markets and customers and products in the hands of our business unit leaders through a very sophisticated BI platform was the next step. Today, that BI platform probably has 4,000 or 5,000 users across the company.

There's not a decision or a thought or a debate had around the company that doesn't involve a critical evaluation of the data behind all of it and all of which augments the intuition of the leadership that is there. It doesn't supplant intuition. It doesn't supplant the human, it makes -- it augments what the decision-making capability of that human. Those things enabled then a digital ecosystem that we're very, very proud of. We think it's the industry's best ecosystem for a contractor to basically do everything within their entire business infrastructure from the moment you walk on to home and you've got to assess warranty, you need help repairing or replacing a system, you need help with a wiring diagram, you need to check inventory or price. You need to build an AHRI match up. You need an AHRI certificate.

These are all things that used to entail manual touch points that are now digital processes in our mobile ecosystem, digital ecosystem such that there's about 75,000 contractors, average weekly users that are doing this with us and there is a value, there is a definite value in the form of growth and reduced attrition that comes when our customers become tech-enabled.

The next layer of that technology stack is what Barry was starting to mention, which is what if we can influence the trajectory of growth at our customer level. In other words, not just make it easy for them to engage and interface with us, but can we actually help improve their outcomes when they're at the proverbial kitchen table. That's what OnCall Air is. That's what now drives $1.8 billion or so of gross merchandise value through the platform. And we're now, for the first time ever, and the only distributor fully integrated, that can say we have a view as to what's going on at the kitchen table, and we have a view as to what's going on really throughout all the parts of that contractors business.

So everything I've just described is kind of the existing stack, and now we're adding to that. So we spent a good few hours in our Investor Day in December, outlining some new initiatives, all of which are absolutely rooted in the tech stack that's been developed. And now the goal is to keep improving upon and keep adding feature and functionality to it, widen the moat that already exists for us, and we like where we're headed over a 3-, 5-, 10-year period there.

Now what's been interesting is we used to do 7 million, 8 million transactions, field another several million phone calls. All the contractors calling up and saying, what do I do? How do I do this? Do you have it? What's my price? What -- and we had our business I mean before technology, we had an 8-hour business because that's when the phones were answered. And just having a 24-hour business where anything can happen digitally has grown the business. It's grown the margin of the business. It's reduced attrition in the business, which has a great value.

In my investor 30-year career -- plus career, no one's ever asked how much attrition do you suffer every year in your business? Start asking that question. I think it's a great question. How much business do you give up each year so for you to grow 5% or 6%? How much attrition do you overcome?

Well, in the technology stack, where it's now over -- almost 40% of our volume is de minimis versus probably an 8% or 10% historical average. So 40% of our business has virtually no attrition that makes growth rates long term easier to come by. And that's one of the values of what we're doing. And by far, we have markets that are 70%, 80% e-commerce driven. So we're far from maturity in that respect. But it's been interesting, and we drive our OEMs into this. We drive a lot of our customers into this still developing and still expanding and adoption, but I think it's been a profound change in the industry.

Is there anything on the AI front that's making its way into that stack?

Yes. I mean it's kind of fun with AI. So again, 10 years ago, you called our store and said, I need a motor, I'm not sure which motor, can you tell me which motor and then tell me if you have it, what my price is and isn't under warranty. So the grumpy old man behind our counter would find out which put you on hold for 20 minutes while they found out. So now a mobile device has all that data -- is linked to all that data, and I can find those answers in under 5 minutes in my pajamas on Sunday night. And AI is going to accelerate that. The AI is going to say, this is a serial number of machine I'm working on, what motor do I need? Where can I get it? And how do I install it? And we call it Ask Al in deference to our long-term CEO, you'll ask Al and Al will give you the answers and we'll log that in Salesforce. We'll save that -- the customer service level thinking and outcome and it builds a database further for inferences and answers in AI. That would be one example.

Another example today is we get tens of thousands of calls that run to voice mail, AI will listen to the voice mails, prioritize them, translate them, know the sentiment of the voice that was spoken, knows who to send it to, knows what product it might be. It's going to get smarter. It's not going to get -- it's not mature, but that would be another customer service-driven example of AI that we have going on in addition to building code and building marketing message for a product group, something like that. But the more customer-driven, customer-focused thing is where AI will have a big impact. This accelerating from grumpy old man to something much more accelerated.

Are you seeing any more, I guess, intelligent at the consumer level from AI? Are they -- you seeing a little more contact on that front maybe poking around?

I'm trying to think -- I'm trying to think of how would we know Yes, if somebody said, "Well, I heard Trane is a good brand, is it?" And before if you Google Trane, you would get 68 Trane paying dealers in your neighborhood, which wouldn't help you very much. So I'm sure searching for information is obviously something we're all doing. I don't know what the outcome is. It's an interesting question.

I mean I was at the Lennox Investor Day a couple of weeks ago, they talked about their brand apparently getting more recognition in their data that people are learning more about the brands doing a little more research themselves.

I think that's fair. I think we're doing that almost anything these days. What's the catalyst for the outcome that flows from it. I don't know. That's an interesting question.

Yes. He thought it was positive because obviously, you want your brand to be out front. But I mean, in my view, the lack of transparency for the consumer and the OEM has always been a positive for this industry puts a lot of control in the channel which is good for you guys, good for the contractors.

Yes, I mean, Rick mentioned OnCall Air where we have this engine, this point-of-sale engine that's helping a contractor inform the consumer of good, better, best energy efficiencies or sound or noise or air filtration just something that upgrades the system beyond the base level. But maybe this is part of the answer then is in that platform, where there is more information the higher efficiency sales are close to 70% of volume, where the industry is at best 80% base level efficiency and 20% high end. While the high end is the concentration that we're seeing with a better informed end customer. And ASPs on OnCall Air are considerably higher as a result. And we're helping the contractor consult and do that. So something to a better informed buyer will pay more for something.

Speaking of high efficiency and technology, what are you guys seeing on heat pumps and ductless these days versus the traditional ducted unitary cube?

Yes. I think we're -- I mean if I step back, we've been in a period of intense regulatory and product transitions in the last 3 to 4 years, and it's nice to be able to take a deep breath and it's nice to be able to work with your primary OEM partners and have that innovation discussion have that? Where should the industry be from a product perspective over a 5-, 10-year period. Heat pumps are still critically important. They're almost the mainstay now in a lot of residential new construction application.

Everything that's ductless is obviously heat pump. And so that's a trend that I think will be secular and up to the right as -- and particularly as those products get even better at heating in lower ambient temperatures, which they have gotten over the last 3 or 5 years. So we're seeing great adoption there in regions that normally don't have much heat pump like the Northeast, like the Midwest, where you tend to have harsher climates, the performance of those systems is now better than it's ever been, and it's becoming a more perfect substitute.

And the contractor feels now more confident and therefore, making that part of their bundle and their solution set to the homeowner. On the ductless side, we take a little bit of pride in our performance with ductless, we helped from a distribution perspective, we helped pioneer its introduction into the U.S. many, many years ago. We were early adopters of ductless, one of our business unit leaders in the Northeast describes it this way. He said, "well, the rest of the world can't all be wrong. There's something to this", and he said that 20, 25 years ago.

So today, ductless depending on how you count, it's probably 12% to 15% of the industry. it's more like 20% of Watsco, if I include commercial. So we're, I think, over-indexed ductless. It has outperformed to ducted in virtually every period over the last 10, 12 years. We don't see that slowing down. That too is becoming, I think, a closer substitute for what would be a traditional system in home.

So all of those things are up and to the right. We cheer for it and we root for it. And I think what gives us a little bit of confidence is that we're now at a point where you can work with OEMs in a more direct way to say. Here's what it should look like. Here's how we can go to market. Let's do this, let's do that and neither OEM or a distributor nor a contractor have to worry about massive product transitions for the next several years and that should be a good environment to proliferate both a little bit more.

Yes, I think things happen more slowly than disruptively and what's happened slowly in the last 10, 20 years as ductless has grown share as in the overall market for one reason, the contractors accept it in increasing numbers. That's ultimately what drives the industry, not necessarily even what we want to do or what an OEM is trying to do, it's whether their contractor will go sell it or not.

And that's what's been benefiting that segment of the market. And if it is more efficient or if it's more economic and more efficient and it still has to be accepted by the contractor as a reputational risk. They have to go carry into the market. And so that's what's been, again, a slow change, not a drastic change. And for us, I mean, we obviously Carrier's largest customer is a segment of what we buy and resell with Carrier. We're one of Daikin's largest. We're Mitsubishi's largest, we're Gree's largest in the ductless space. And so very well represented and as I said -- as Rick said, a bit of a driver for that segment and helping the contractor go do something with it because it's also replaced a lot of wind units.

It's also been added to a lot of homes up north that didn't have central air conditioning and the practical answer was ductless air conditioning. I don't think it's necessarily been a substitute for the ducted product. but it's been a complement to what the installed base has become now and again, driven by the contractor acceptance.

Daikin was here yesterday and talked about their side discharge, hybrid ducted product. It's effectively side -- smaller side discharge that plugs into the kind of your ductwork, Lennox introduced something 2 weeks ago, at least talked more about it a couple of weeks ago. Everybody is -- seems to be coming out with a product that is more applicable to replacement application. Are you guys seen that resonate in the channel as well?

Yes. And Mitsubishi will follow and there'll be a Carrier version that will follow. And it will be a new product for -- not a brand-new product, but we expect it to be something that does grow because again, going back to the contractor, it's not necessarily cheaper, it's not lower margin, it's not a commodity, it's a specialized product, specialized control, specialized installation. It's not like a drop in and you walk away from it, there's some technology to it.

But again, if it offers higher efficiency at a reasonable price, contractors will want to figure out and sell it. So there will be a family of products, a family of brands. I'm not sure there's a big head start by any one party. But it's -- we like it because it's something complementary to what we can sell and service and train and add to our technology and as Rick said, we helped pioneer in the first place. And it's -- it's again something that will happen deliberately. It won't happen all at once, but it will be a good ingredient in the industry to have something new to sell. It should help the replacement market if somebody has a dinosaur that they're sitting on that's highly inefficient, made 15 years ago and you're surfing power and a contractor says, "well, listen, this is going to change your life. You don't hear these things, they're quiet, twice as efficient. And here's your local utility rebate check that helps you pay for it." And that will be the kind of things that will lift the tide a bit, I think, across all manufacturers of that stuff. It's not just 1 or 2.

I waited more than 20 minutes to ask about how the quarter is going, which is I pad myself on the back for. You guys had talked about on your earnings negative quarter-to-date trend at that point. What are you guys seeing kind of quarter-to-date today? And how are the indications? Obviously, it's very early, but what are the indications looking like on sell-through on your unit sales?

Yes. I think, again, honestly, when we talked in February about January and February, it's the smallest, most inconsequential at least time of the year to make an inference and so nothing's changed about what's in the rearview mirror with January and February. March is a bit of a view into maybe how the season is starting and a little bit of a view of -- and so your question is, are we in a valley of death still to use your term. It sounds so severe, a valley of death. Not a valley, it's a valley of death.

I got to market.

Yes. And so it's not that -- the question is, is the momentum that we see on the surface of the industry and answer is yes. I think the -- I won't call it entire momentum because it's not May, it's March. But I would say very early in the vision of this answer, there's positive things and we kind of expected that. We didn't know if it would occur, but we're seeing absolute progress in that respect.

So are you guys up like in March? Or is it just kind of like trending more towards flat?

We're seeing absolute progress in that respect.

Okay. All right. So that's incrementally positive. And that would be total sales or that's a unit -- kind of common unit sales commentary?

Both.

Okay.

Just to level set it for everyone's sake, I mean, price has been something of debate and discussion and really, in our careers, there's 3 things that add to price. There's inflation and normal GDP like pressures that our OEMs have to pass through the channel. And if that's averaged 2% or 3% because GDP is 2% or 3%, that's what it is. Then there's a regulatory. So we have that going on. The OEMs announced price increases March 1. There will be some subset of that in pricing, we're seeing it, we -- it will be captured. We're not paranoid about it.

Then there's regulatory changes that add to price. So coming into this year, we're sitting off for our equipment business, we're probably sitting on, I would guess, 5% or 6% price despite showing up in the mix of the new products. Now that does not affect all of Watsco, it affects 55% of Watsco, so do the algebra.

So this year, price and mix and regulatory change is positive overall. And so the key ingredient is what is the unit environment going to be a usual market year or the valley of death. Well, it's not the valley of death and whether it's a conventional growth market. Again, I told you there's progress and -- but I -- we're a lot smarter in May, June, July, in the middle of the season. And obviously, that's what's important.

How are you approaching the inventories at this stage?

Go ahead.

Thoughtfully. It's been my answer earlier about very hectic 3 to 5 years on product transitions has meant a very hectic 3- to 5-year period on inventory as well and some inefficiency that crept into inventory. So just to level set everyone, pre-COVID, pre-supply chain disruptions, pre-product transitions, not that long ago, we would turn inventory around 4x. We're now in the low 3s. So in our minds, we've got some work to do to get back there. That doesn't necessarily mean tactically taking a sledgehammer to inventory, that puts customers and market share at risk. And so a distributor shouldn't just take a blanket approach to that. Our goal from here -- well, let me go back to last year. We peaked last year at about $2.1 billion of inventory. That wasn't a reported number. That's actually what we peaked at during the course of the year.

And so my technical way of describing that is we chopped a lot of wood in the second half of last year to get the company's inventory position to be as well-calibrated as it could to start the year so that there's no overhang. There's no debate and there's no more sizable work to do on inventory this year and let's let demand to tell us what we should do with inventory from here on out.

So that's a slightly abstract answer for Steve. But our goal would be a distributor should always measure their inventory, not in dollars, but in relation to demand and therefore, turns. So what we'd like to do is have more inventory as needed and carry slightly less inventory throughout the course of the year such that we're improving our turns and we're improving our cash flow along the way.

And I think the tactical reaction to inventory that needed to happen took place largely in the back half of last year. And so from here on out, what we would love to do is grind out incremental improvement towards our ultimate goal of being 5-turns inventory company that will unlock north of $500 million of cash flow. That doesn't mean I have to own less inventory to get there, it just means that I'm smarter with inventory throughout the year and managing it throughout a seasonal business. And that's the goal.

The other quick comment I'll make is that over these X number of years that I've described and certainly before that, we have been investing in technology and tooling and humans to be a better distributor and to manage inventory better. And as I said, now with some of the noise of the product transition behind us, that technology can now show its metal. We've talked about AI earlier. There's like a limitless possibility to AI around inventory and pricing and margin. And that's like a whole another frontier that we're going to -- we're going to get to in short order. But I think the summary of the long-winded answer is the tactical work around inventory, I think, is largely behind us. We'll let demand tell us what it should look like. And over a X number of year period, we'd like to take it from somewhere in the low 3s to 5 turns of inventory.

So effectively, inventory normal in the context of sales today and should trend normally with demand as kind of the season approaches. Is that the way we should think about it at a high level?

I think we're closer to that steady-state reality, yes.

Yes. Okay. Okay. And then just on pricing, you mentioned the OEMs have obviously all come out. There will be a percentage of that. How does that for you guys? What's the timing on that and how that plays through into your gross margin?

Yes. Well, if the OEM announces a price increase March 1, we tell our customers March 1, our selling price is going to increase. We may actually even attach the OEM's letter to that dealer, so they see evidence of it and some negotiation for -- will occur with, let's say, large customers that say, can we do better than that? And we'll do better than that, and then we'll get a different cost for that customer. So we're through that interplay now and we'll have a better sense of what was actually achieved in pricing over the next couple of months. But I'll say so far so good. So that helps our gross margin algebraically in the short term because my selling price increased in advance of my weighted average cost increasing.

And I would say this year is more that's happening as we speak, where last year it was more of a May 1 on. So a little bit of push and pull in the timing of it, but nothing that is remarkably disruptive to margin. I think we have 10 other variables we're managing to improve margin, not just that one. And those are all things we've been kind of achieving. So I don't expect anything, again, disruptive with margin. I think the question is, can we block and tackle through those 10 variables and do that well and margin will be fine this year.

And you said basically the guide for '25, if you will, is flat with '26, the guide is flat with '25?

Yes. We don't guide, but the thought would be that we can sustain what we achieved last year. And if our equipment business grows at a remarkable rate, equipment has a lower margin than our non-equipment business. That will be an algebraic difference that I'll accept, it's not one variable. The mix of our business is a major variable. And we'll explain that as we go and educate as we go. But we don't -- some of the worry is commodities and deflation and some kind of overarching competitive price risk.

You've heard me for 20 years, Steve, we don't consider that a major risk because the industry hasn't like behave like that historically. And I think the manufacturers are under too much pressure to sustain margin. And we're also very highly volatile markets for them. And where absorption is also a significant variable for them that's going on.

So I think the sanity and sanctity and consistency of pricing is there this year and that doesn't mean it's simple. It means it's more stable than unstable.

How does that work if we had a few contractors on the panel yesterday, they all talked about negotiating directly with the OEMs. How does that work if they have a direct negotiation with the OEM? You guys get paid some sort of like fulfillment margin on that? Like who eats -- who ultimately -- how do you guys get paid on that, if you will, because you're not setting the price, they're setting the price, right, the OEMs?

Sure. And when we negotiate a margin, we sell the product, we invoice the product. We are not just selling equipment to those guys. We're selling a whole market basket of maybe 80 product lines to those guys. And their technicians don't buy 100 systems today, they buy it one system today with 14 other things that go with it from us.

So the OEMs are not in theory, selling the product to these guys. They're reacting to a price need. Our cost has been adjusted to what it needs to be to make an acceptable margin when we pass those products through the channel to them and that's been done that way with builders from my entire career. That's what been done with national accounts, in my entire career, warranty companies, and there's always been a segment of the market that is price negotiable, if you will. But thankfully, cost is negotiable in those situations for us. And we share in -- we share in the merchant risk of that with the OEM. It's not all our risk. It's not all in the OEM, but I'm also getting to sell 15 other line items that support that business from a profit perspective. The cost to serve is less because I'm not going to send that guy on a trip to Portugal if he buys enough from us. So he's not asking for that. He's not -- it's a different cost to serve for that business as well, and we support it.

One more for you, pathway to 30% gross margin. Is that still a longer-term target for you guys?

Go ahead.

Building blocks. It is. We just made it public and so it better be and operationally, it is. The biggest driver along that journey to get us there is we've invested in pricing technology that is very sophisticated, and it is helping us enhance our transactional margins. And what we've -- a good bit of the margin trajectory and the margin profile of Watsco over the last 3 or 4 years and the gains that have been achieved have been driven by that pricing optimization technology. I don't like the word structural, but I think it's very durable. And I think when we -- when I look at where we are in that journey of internal adoption of that technology and how many customers is it influencing? How many businesses is it influencing? How many SKUs is it touching. We're in the middle innings of that journey, which is to say that there's still room to go and 30% is absolutely a target and absolutely achievable.

Okay. That's it Thanks, guys. Really appreciate it.

Thank you very much everybody.

Thank you.

Good day, and welcome to the Watsco Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Albert Nahmad. Please go ahead.

Good morning, everyone. Welcome to our fourth quarter earnings call. This is Al Nahmad Chairman and CEO. And with me is A.J. Nahmad, President; Paul Johnston, Barry Logan and Rick Gomez.

Before we start, our cautionary statement as always. 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.

As we all know, 2025 marked a year of significant regulatory change to next-generation equipment containing 82 refrigerants. This transition follows several busy volatile years beginning after 2019. We navigated through the COVID supply chain disruptions, [indiscernible] and energy-rated transitions, refrigerant changes and now the conversion to new A2L equipment. It has certainly been an adventure, and we look forward to a simpler operating environment this year.

Through it all, Watsco achieved terrific results and created immense value for our shareholders. We grew our scale and market share, and we added 12 business acquisitions, representing over $1.6 billion in sales. As announced today, we boosted our annual dividends by 10% to $13.2. This marks Watsco's 52nd consecutive year of paying dividends and speaks to the confidence we have in our business.

We also continue to build and expand our technology platforms, which provide an immense long-term competitive advantages. We believe we operate in a great industry with strong long-term fundamentals and the industry's most accomplished leadership team, all with focus of building our long-term success, building on our long-term success.

Turning to our fourth quarter results. We achieved double-digit pricing gains on the new A2L products and raised gross margins by 40 basis points to 27.1%. We have several ongoing initiatives to enhance growth margins with the long-term goal of achieving 30%. Unit volumes declined during the quarter, which does not come as a surprise given the strong 20% comparison unit growth rate last year. Let me repeat that. Unit volumes declined during the quarter, which does not come as a surprise, given that last year, unit growth was had a 20% growth, right?

Operating efficiency improved as SG&A dropped 2%, and this included newly acquired and opened new locations. I expect overall sales performance and operating efficiency to improve now that A2L product transition is largely behind us. We continue to fortify our balance sheet, and we were debt-free for the entirety of 2025. We also met our $500 million inventory reduction goal established at the end of the second quarter and generated record fourth quarter cash flow of $400 million.

Looking forward, we are focused on improving inventory turns and generating incremental cash flow. We expect markets to gradually improve as the transition matures the balance of this year. We continue to invest in innovation and technology that separate us from competitors. We have made terrific progress in driving adoption.

E-commerce continues to grow and accounts for 35% of sales and exceeds 60% in certainly the U.S. market. This year, contractors engagement with our mobile app expanded 15% to 73,000 users.

The annual run rate of sales to OnCall Air, which is our digital selling platforms used by contractors saw a 20% increase in gross merchandise value. products sold through the platform and reached $1.8 billion for the year. We've also made incremental investments to enhance our competing competitive position and add to our long-term growth in margin profile.

For example, we are developing new technology aimed at capturing more sales to institutional customers. We are accelerating the use of our pricing optimization tools to make the further progress towards our 30% plus gross margin target. We have launched a new initiative to compete and grow sales in the fragmented non-equipment market. It's parts of supply that we're talking about, which today is roughly only 30% of our sales.

And we have begun to harness the power of artificial intelligence, offering the potential to further transform our customer experience, improve our operating efficiency and create new data-driven growth strategies. These investments, along with our scale, entrepreneurial culture and capacity to invest are unmatched in our industry.

With that, let's turn to Q&A. We will now begin the question-and-answer session.

[Operator Instructions] Our first question comes from David Manthey with Baird.

The first question on the pricing dynamic. Obviously, with the mix shift that happened materially last year, we had a big increase in the price of units. I think there's been some hesitancy on the part of OEMs when they're talking about 2026 and price increases and maybe not getting the typical increase.

But beyond that, I think last year, there was also some commentary around some of the contractors, maybe not feeling comfortable with the new product, et cetera. And the broad question here, Al is, as we enter 2026, do you feel like we're in a year of sort of normalization and that the channel is prepared to sell this new technology completely as opposed to last year where there was sort of this hesitancy around the transition?

That's a terrific question. I'm going to let several people here answer that. Do you want to start, Barry?

David. Yes, well, first, it is a -- the product line is in place. There aren't two product lines in place. there's one set of pricing for our customers, not two sets of pricing. So I won't belabor that point other than saying it's a much more stable channel this year than really, as we said in the press release, almost at any time over the last probably 4 or 5 years.

Secondly, I think contractors when they have one thing to sell are going to be better at it and more likely to sell product. If we try to evaluate just the overall trend of things and where the year ended and try to sift through the unit decline in 2025 and parse it out and say where are we now? We feel better about it. first, new construction had an impact into that 17% -- by the way, overall, 17% in the decline in 2025, just to level set the conversation. New construction had an impact on that percentage. Clearly, in the fourth quarter a year ago, when we say unit growth in the fourth quarter a year ago was 20% plus, that plays a role in 2025 analysis. And in fact, it's about a 7% component of the 17%, just talking about what happened in the fourth quarter of last year.

So if I try to summarize that in some way, and other people should chime in on this because it's a critical question. We think my best guess, I should say, is the aftermarket replacement market was down 6% and in 2025 and parsing out the actual pieces. And so 6% is that disruption of the channel? Yes, it is. Is that a weaker consumer? Yes, it is. Is it a contractor who's uncertain of themselves doing this stuff? Yes, it is. And so it's probably a better starting place again, than we've seen in the last several years, time will tell, David, but we're not ready to call the season yet because it's not the season. But I would say that the beginning line is in a much better place.

Yes. And I would say contractor has been well trained. He understands the A2L product. He knows how to do the installation now he knows he's got to replace the indoor and the outdoor unit. So I think the training part of it is behind us. I think they're ready to go and offer consumers a good installation on the product. So I don't think there's any issue on that side right now.

Yes, Dave. I think you know as well as all of us that the last 5 years have been a wild ride. There's been macroeconomic issues, there's been geopolitical issues. There's been industry-specific stuff. There's been while supply and demand dynamics, there's been regulatory changes, et cetera, et cetera. Use the world normalization. That's what we're hoping and expecting. And obviously, we can't control the macroeconomic or geopolitical but it doesn't seem like the industry has anything teed up except certainly than it did over the last 5 years.

I mean the inventory changes are behind us. Hopefully, there won't be another shortage refrigerant canisters. I mean that kind of thing is behind us. So we don't have a crystal ball, but we certainly like the starting point more than we do others over the last years. And no matter what our job is to grow and to make inroads with our customers and in this industry. and control what we can control and should be investing. And that's what we're focused on is finding ways to win, given this environment or any environment the way people with the balance sheet as clean as ours, we feel very [indiscernible].

And Dave, you mentioned pricing in the face of all this and a year ago, when we commented on pricing. We thought that the new product would end up being 8% to 10% higher in price. Our price benefit in '25, for the year was 9% for the fourth quarter, 11% and so pricing is just a general theme. And of course, it's the mix of the new products that's accounting for most of that, that's been a very stable part of our business. And the margin opportunity that flows from that has been yielded in a good result this year. And that maturity didn't stop January 1 this year, it continues into 2026, as the full maturity of the new products on fabric play out.

So I think pricing and margin and discipline and industry discipline and channel partner discipline across the board has been pretty consistent and good this year. I don't think that changes or stops. I just think maybe the yield is lower just as again, as things become more normal. But price in general has been a good theme for [indiscernible].

Our next question comes from Tommy Moll with Stephens.

Sure. I want to start on the dividend increase you announced today another 10% increase, this has been a key part of the Watsco story for a long, long time now over 50 years, I think you called out. My question is, if we just look at what was announced today, the annualized rate is a little bit above the earnings you just generated in 2025 for the LTL period, granted, that was an abnormal year. But I don't know if you've ever been in this situation before where the outlook for the dividend exceeds that earnings rate.

From a cash flow standpoint, Clearly, you can do it without breaking a sweat. But I just wanted to ask what's the message here on the confidence on the earnings line going forward.

That's a very good question, and I'm going to go to my #1 adviser on dividends, which is Barry Logan.

Well, I think 2020, by the way, is the last year where that kind of ratio, if you will, earnings per share to dividend was near 100%. And I would like for what happened after 2020 to occur again to relax people on that theory because the dividend was $7.10 and earnings per share was $7 in 2020. So yes, I think it is a track record that's important and somewhat sacred to us and consistency that means you should own Watsco forever. So that's the pretense of what a Board discusses and sustaining that.

And you're right, cash flow is actually how the dividend is paid and cash flow is probably closer to share today. And that's the pool of capital that we look at to say can and how much and when and we're satisfied with that concept. And I like that Watsco was not just debt free at December 31. In fact, we didn't borrow $0.01 every day of 2025, and we're looking for acquisitions, we're looking for investment. We're looking for what our imagination can do with OEMs to grow our business.

At the same time, the dividend is a critical theme and we're going to raise it if we feel comfortable and we do. So let's hope earnings is a reset following this past year, time will tell. We're comfortable with cash flow and keep the track record and that important part of the Watsco story going.

Thank you, Barry. You mentioned OEMs and for my follow-up question, I wanted to hit that theme. If we look back at what Carrier communicated to the market regarding their 2026 outlook for resi, there calling for industry unit volumes down 10% to 15%. They're calling for their own residential sales down 20% in the first half of the year, what are we to make of how to translate those kind of comments to what you might expect? Are these reasonable proxies for Watsco? Or are there some differences that you want to call out today.

Yes. I think -- well, first, there's always forever a disparity and the timing of OEM seasonality versus distributor and contractor seasonality. And that's even been more amplified or magnified by the FA conversion, which started this time last year for us, but had already begun 3 months before for the OEM. So the channel has not been a easy thing to analyze at any time.

I think if my memory is right, carriers unit volumes were down in the 40% range this past quarter. If you look at our math, it's somewhere down in the 20s, mid-20s. And a year ago, we were up 20. So it's just a different -- it's not simple to analyze when there's that type of variation in the spectrum. But I think if I look forward, two things I know is we will sell the exact number of systems that contractors are going to install in people's homes or businesses. We're not selling into inventory. We're not waiting for inventory to clear, we're not wondering if inventory is going to clear. Our business is selling into the contractor channel in real time based on what's being installed. And that's comforting because that's always going to be more -- a much higher level of stability than otherwise.

Now of course, with unit volumes down in the fourth quarter, they don't instantly start going up January 1. We're still working through some of the 410A kind of conversion and activity and pull in the fourth -- in the first quarter. But I think that begins to clear on our side of the ledger, if you will, sometime by the second quarter. So I think it's just always a lag or always a leading indicator or a living indicator and it's been impossible for anyone to analyze this in the last few years. But I think the curvature and the spectrum will narrow and be a little simpler for everyone as the year goes on.

And Tommy, I'll add some color, too, which is not data-driven, but it's culture driven and focus driven, which is -- and this is what we're talking about internally with our leadership teams is over the last 10, 15 years, I think it's safe to say a good job of modernizing its people as team systems, it's technology. And then as I said earlier, the last 5 years, I think it's fair to call chaos between all the implications of the pandemic and everything else that's been sold now. So here we are in to these days where we're hopefully reaching some level of normalization.

And so what is our priority, it's sales. Let's take all this new skill and muscle and capabilities that we have as a company and focus on taking it to the street driving more customer relationships, driving more sales and more products and winning in the marketplace. That's our focus. That's where 90% of our conversations are about right now. And so in this new environment, whatever it may bring, that what we are -- our priority is sales.

Yes, just to put even to completely exhausted that. We have about 15 primary equipment OEMs. And at the start of the year where we can have strategic growth, market share driven, tactical discussion in our markets about product, about how does this market grow, how do we grow the market that's refreshing. I can assure you a year ago, it wasn't about that. It was about getting the product and having the panic attack of having over half our business change in the new products. That's done. And so now it's about growth.

Our next question comes from Ryan Merkel with William Blair.

This is Mike Francis on Ryan. I wanted to start just asking how January and February were going to date. There's still some softness on the compare side of things. So we'd just love to see how the years of -- or how the you're starting off.

Well, Barry, you're my go-to guy so far.

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

Yes. It's down in the mid-single-digit range. So it's better than -- if I want to feel better, I don't feel good, but I feel better. It's down 5% or so in the first half of the year and a -- there's very clearly some severe weather that close some stores that for now, I believe it could have been a bit better than that, but it's still not indicative or an inference into the season. Watsco becomes a 40% larger business in about 90 days when the summer season hits. So that's the data, but I wouldn't try to draw important inference out of it.

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

Yes, I think it's progress, right? So a lot of reduction activities and really taking -- making -- taking action happening during the fourth quarter, it didn't start October 1, it was throughout the quarter. So I think there's an opportunity for further reduction especially out of season.

As we get into season, we'll calibrate what we think we need and what we should have and serve customers in a proper way and calibrate our SG&A then. But I do think some of our growth investments, new branches, new technology, investments we are making can largely be offset by some of the reductions that are in place.

So time will tell. What can make it go up would be variable expenses like commissions, bonuses that will be driven by volume. I want SG&A to be higher as a result of that discussion because earnings would be a multiplier against that type of growth. But in terms of calibrating and starting the year, I think we're in a lower place than a year ago. And again, we'll recalibrate that as we get closer to the season and see.

I'll just add a little color there, too. I mean, our business unit leaders did a good job rightsizing the business for the current market environment, and we hope and expect and they are certainly planning using technology and so forth to drive efficiencies for now and forever. We are a continuous improvement business. But like Barry says, we're not going to be shy to invest where we see growth opportunities.

Our next question comes from Brett Linzey with Mizuho.

I wanted to come back to gross profit margins, so up 40 bps in the quarter. For the full year, I was hoping maybe you could give us some of the building blocks to get to the 28%, how much was the pricing optimization versus maybe mix on parts versus equipment? And then do you think this 28% is the new bouncing off point as we look into 2026 here on gross margins?

Brett, it's Rick, I can take a stab at that. Yes, I think, first of all, the importance of margin, I think, really shows over the course of a year. And so you're right that we should focus on that as being the starting point for what comes next. It's not a floor. It's not a -- we're not saying that 28% is the new 27%. We're saying we've done good at many things over the course of the year to help improve margins. .

Yes, OEM price increases springtime last year helped. Yes, we made more progress on all the pricing technology. The we're very excited about it because it's not yet touching every customer, every branch, every SKU. There's still more to go there.

And then the third component that I think is exciting is we talked at our Investor Day about a new initiative that we're affectionately calling VCR and that has to do with getting smarter and more strategic about purchasing within the non-equipment space and not just purchasing really, but how we bring it in and how we redistribute it across our network.

We think that's ultimately margin enhancing at the end of the day, and that initiative is early days, but good progress so far. So I think the controllables of margin that we are -- that are within our portfolio, let's say, we feel relatively good about. And if this is a year where you could have conventional OEM pricing I think that also is favorable to margin.

So no flashing red. I think there's good optimism and also just a well fit out strategy to grind at this over the next several years to get to our ambition of 30%. We don't want to swing for the fences on this. We want to do it responsibly, and we want to do it in a measured and make just -- I'd love to be able to say we grew XY every year for the next Y number of years, and we'll get to 30%. So it's not that linear, but that's what we're aiming for is Progress along the way and some day will tell you we got to 30%.

And then the goal will be over 30%.

I appreciate that. And then maybe just a follow-up on inventory and more Watsco inventory -- from an equipment standpoint, where do you think you guys are on units as you enter 2026 and exit last year from a positioning standpoint, do you think there's more rightsizing that needs to take place? Or do you think you're in pretty good shape?

Yes, there's always going to be rightsizing taking place in our inventory. There are things that we need to do to further improve the quality of our inventory, which we're constantly working with our subsidiaries on.

However, when you look at the number of if you just take residential units, residential units ended the year down, dollars ended up pretty close to what they were last year.

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

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

Do you guys hear me -- why don't we tell them what -- tell everyone what our dream plan goal is in terms of inventory turns and where we are now, where we like to be.

Our game plan, which is very well acclimated amongst our business units is to get to a total of 5 turns. We used to operate pre-pandemic around 4, that dropped into the low 3s given all the noise, and we're going to climb up that ladder. And when we do that, you guys can do the math for every turn of inventory, what that means in terms of free cash flow, which can then be used to reinvest in the business.

Just to add one analytical thought to it. Units are down double digits at the end of this year. Equipment units are down double digits. So that's okay. That's -- the progress we've made. But if you look at it analytically, I think the ending inventory now is around 18%, 19% of the prior 12-month sales, just use that as an index. And if you look at 10 years, that's the average.

So I think at the beginning point is a good beginning point. Where the terms come is trying to not spike inventory as we go through the year, work with our OEMs, count on lead times, have dependable lead times, replenished to what we're selling and then you have a much, again, simpler curve you're managing throughout the year for inventory.

And it may take a year or 2 to have that full confidence in lead times and dependability of lead times. But that's what we're up to, and that's how it could happen. It won't happen in 1 quarter all at once. But over the next couple of years, as the simplicity is now in place, that's the big opportunity.

Our next question comes from Jeff Hammond with KeyBanc Capital Markets.

Just back on gross margins. So I understand the 30% target and continue to drive for that. But it seemed like the second half, you were kind of getting back down to kind of low 27s and you had some maybe temporary goodness in the first half. So I'm just trying to level set if we take out that maybe pricing arbitrage in 1Q, 2Q, are we looking at gross margins flat, down 50 basis points or just level set us a little more, given that benefit last year?

Well, the reason that you see that variation in [ GPM ] is the seasonality of the business. And the product mix that goes along with that seasonality Anybody else want to add something to that?

Yes, Rick, why don't you add? You and I had a chat earlier?

Yes, I think that -- what I just said is correct, Jeff. You have to look at this, firstly, on a seasonal basis, which is my preference for then looking at the overall year to smooth that out, and 28% is great progress versus last year.

If your question is, did the OEM price increases earlier in the year, distort that in some way, that would be a headwind going forward? The answer is not really. If that round of springtime OEM price increases amounted to mid-single digits, that's been exactly what's been announced so far coming in a little bit later in the season. So nothing that I think would distort or that we need to tell you about as a watch item on gross margin.

Fundamentally, what drives gross margin -- because remember, the pricing and inflation and all that, that is not something we control, and that's really a function of timing at the end of the day. What really drives the gross margin is the transactional margin at which we sell to customers, 130,000 of them out in the field and 700 locations. That will be over a longer period of time, the more important ingredient to whether we can sustain and grow gross margins.

And as I said earlier, I think there's optimism and upward bias to that because that technology is still proliferating and still scaling as we go. The other -- again, just component that I think is underappreciated in margin is the importance of the mix between your equipment and your non-equipment, right? So obviously, we saw just a relative difference there in sales trends. And that is good for margin. And what we want to do, forget about '25, whatever the market grows on equipment, great, let's do better than that. But the whole point of [ ECR ] is not just to get smarter about purchasing and redistribution, it's about growing the non-equipment base. It's a $2 billion segment of our business and $1.5 billion in purchases.

If we're some percentage there bigger going forward, that will be helpful to margin along -- just from a growth and volume standpoint, in addition to all of the purchasing and redistribution benefits we gain along the way. So that transactional margin, the pricing technology and the success of VCR is what really will, I think, govern our long-term success on gross margin.

I also think whenever we have this conversation, it's important to reiterate that the mission to expand gross margin does not necessarily mean raise prices across the board and suffer the consequences of of higher prices, meaning lower sales, that does not the mission, that is not the approach. The approach is to match the right price for the right products for the right customer given that market dynamics and that product dynamics and that customer is purchasing behavior with us.

And because we have such scale across many different geographies products, there's a lot of detail around that, a lot of complexity in that analysis. And so what our tools and our teams are able to do more than ever. And by the way, AI is helping with us now is identify opportunities to match the right price for the right product for the right customer. And when we do that at scale, it's a lot of slices at the apple that add up over time. But it's not just drive price and stuff of the consequences of elasticity. That's not it.

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

I mean commercial was -- for the quarter, Jeff, the reask? .

Yes.

Commercial for the product was down single digits. High single digits and obviously not no giant influence there the way that residential was influenced by the 410A change. So a little better result in the fourth quarter with light commercial. And that includes a weaker international business. So this overall, let's call it.

International, again, we have -- to be clear, we have really two international businesses, Canada and Latin America, including Mexico. And Canada did have a better quarter and our Latin American business, which has kind of been weak all year, was kind of the same kind of quarter. the planning, the programming for next year is better in both markets. But again, we said that were geopolitical earlier in the call. Those are two markets that certainly had some influence with geopolitical issues and tariffs and the like, but not necessarily much better, but not -- certainly not worse as we closed out this year.

Our next question comes from Steve Tusa with JPMorgan.

Can you just parse out the resi performance a bit? Was there like on the ductless side, how did that perform versus kind of the traditional ducted products?

Well, they were affected by 410A and [indiscernible] as well as, so I'm not sure if there's any real divergence in the result in the quarter.

And for the year as well?

For the year, when I look at the quarter -- for the year I mean, kind of as it should, ductless has been outgrowing. No, I'm sorry. So it's exactly the same, yes. The decline in Ductless is identical.

And as far as like the parts and the repairs and things like that, was there any sort of like trade down in that channel that you're seeing at all? I mean, we're just trying to kind of gauge what the appetite is from an inflationary perspective from your customers really across a range of products, not just the boxes. Was there any sign of like a trade down on that front at all? Well, if you look like more price sensitivity from the contractor and not just on the box side?

I think there was price sensitivity. I think if you look at the compressors and motors really represent the bulk of our park sales, not our supply sales, but our part sales. And if you look at that overall, they're up for the year. sales were up double digit. But for the quarter, they were actually flat to down. It only represents body -- fourth quarter only represents about 18% of the annual sales of parts business. So it's not a significant quarter.

Okay. And then just one final one. I'm not sure anybody asked, but the kind of prevailing consensus from your OEMs or from the OEMs out there is them a down unit market so far, again, like that may be conservatism. What is your market call kind of for this year for the industry? I think trains down 0 to 5, Lennox down 0 to 5 and then I mean carrier put out like a down 15 or something like that or down to 10 to 15 What is kind of your call on sell through volumes this year? Are we just kind of like starting it flat? Or do you think you can grow?

That is like the most difficult crystal ball question of all, Steve, I've never answered it in normal years in February.

Do you have the answer?

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

Yes. All right. Well, I guess I had to ask.

We'll be have better information in 90 days. Like I want to take on that was like 8 balls, member the balls when you were a kid and you shake it and it gives you an answer. It's too early to tell. If I shake the 8 ball, it's going to say too early to tell.

Well, I've got a broken clock in my room, and it's right twice a day. So that's what I'm shooting for.

But again, I'll just say this, just to have a little bit of fun with this. I wanted to understand our data, not hardy data, not OEM data, not [ ECR ], our data. So I went back to 2018, said how many units did we sell in the United States, I compounded that at 3% through '25. I added up the numbers and said we should have sold x number of units. And then I advanced over, and I use 3% compounding, which is less than the 20-, 30-year long-term average unit growth rate in this industry. I used 3% just to pick a number, that was more conservative than that, the long-term average.

So then I said, how many units did we sell the last 8 years. And it's within 1%, if not 0.5% of the linear compounding at 3% for 8 years. Now it took this year's unit decline of 17% and for that algebra to come in line. It took the correction of this year for the data to work, where the beginning part, beginning point seems where it should be. But then if I say the rest of the [indiscernible], I have no idea if that will -- if it's right. But intellectually, I feel a lot better looking at our data and that kind of projection I don't feel intellectually worse. I feel better.

Right. So it's normal. So you're at kind of a normal -- you're at a normal level is the point?

Yes. And normal meaning that if there was an oversold market in our markets coming into '25, this year's correction helps that equation for sure. There are other variables than just the ones I'm thinking of. But I would say, I don't like the word normal. I think it's a more conventional starting place this year than after this year -- this past year's correction, the data suggests that, but we don't know it until we see it play out.

And so you're making...

Sorry Steve, yes, which is it feels more normal. I'm not sure it actually is normal yet, but it is -- it does feel more normal. And again, the balance of the season will kind of tell us if that theory holds or not.

And sorry, one more for you on this front. Did you finally kind of have visibility into like what the actual number for prebuy you think in the industry was? Is that what you're saying, basically, it's like 7% or less than that? Like what are you looking back, what do you now think the prebuy was last year?

Yes. Well, no one prebought them. We sold them and they installed them.

Right for you guys, right?

Right. So last year in the fourth quarter, our guess is we sold a systems as we closed out the year, 20% unit growth was the metric that we gave you this quarter that happened a year ago. And if we do the algebra and saying, what would have been normal a year ago and project that into this year as a 7% change in actual unit -- the actual unit change of 17%.

So sorry, I can't myself here. I had to make an [indiscernible] point, which I think you do every quarter, which is -- these are the right questions and good conversations. But what we're here for is not Q1 or Q2 or even 2026, our North Star, our guiding light long term, long term, long term. So we certainly do our best each quarter, each day, each month in the year. But our decision making our investments, our leadership philosophy is all about the long term. We will never set long term for some short-term benefit. So just know that that's at the core of Watsco's culture.

Our next question comes from Chris Snyder with Morgan Stanley.

I think earlier you talked about consumers or homeowners having to buy two units now with the [ 410 ], I guess, fully in the rearview at this point. And I think that, that comment was tied to the [ 454 ] transition.

So I guess I think the question is, I guess I understand that's positive, would be positive for your volumes, selling the homeowner two units more so now than in the past for selling them one. But do you also think it could just keep the homeowner in repair mode for longer? Because it feels like the replace bill in that example would be effectively doubled it would just be a wider delta versus the repair. And any way you can help me think through that?

Yes. When we say two units, we mean you're going to have your outdoor unit and then you're going to have to install a separate coil on the inside. The [ 454 ] and the [ 32 ] product that we sell, that's powering these units now is slightly flammable. So it has to have a detector on the inside in the event of a leak so that the gas is then dispersed by a blower fan switch that goes on in the coil. So there's not two units you have to buy. It's just you have to buy the entire system. You can't just replace the outdoor unit.

Okay. And Chris, I think it's important definitionally the AI data that is published. Those are the outdoor units that have a compressor on it. That's the definition of a unit in the industry is a compressor bearing unit and all the OEMs and HRI and in our comparison data, when we talk about units, that's what we're talking about. So it's definitionally consistent.

And what will happen is as distributors run out of 410a indoor and outdoor systems, where maybe a band-aid could have been put in place to sustain an existing system longer maybe my indoor unit is fine. My outdoor unit is condemned. A year ago, I could fix that by only replacing the outdoor system. Today, with the new systems, my choice is to repair or maybe I can't repair maybe it's chronically broken. And this coming year, the contractor will must replace both indoor and outdoor. And I can tell you even more certainty next year, '27, distributors will not be really carrying any product that can sustain the old system if it's chronically failed. So it's integration, it's a progression, but that gives you some color on it.

That's really, really helpful. And I guess, do you have any idea as to how often the contractor repairs the entire system versus say, a year ago? Just repairing the outdoor unit? Because it does feel like we're -- in your example, if your indoor unit is still fine, they have to replace both so the replacement bill is going up materially versus a year ago. I was just trying to get a sense for like how common is that maybe a year ago and only just replace one of the two.

But you got to remember, unit has a warranty to it a warranty on the compressor and the motor goes for 5 years. And in most cases, it moves to 10 years. So it's the average lifespan of a product, let's say, in the entire U.S. is 14 to 15 to 16 years. You've only got a window of 5 to 6 years where the consumer is going to be paying for the replacement of the [indiscernible] motor. So yes, it really a lot of -- and probably 50% of the compressors that we move will go to warranty, 50% will be sold.

Yes. I don't think we would have data to answer how many chronic failures were replaced by half a system. I don't think we have that data.

No. No, we don't.

But what we know is as we move away from 410A availability, which is near 0 today and will be at 0 soon. that capability moves away and contractors' preference is to upgrade a system, not put a band aid on it because if there's a warranty issue on a repair, it's his warranty issue. And so you're right, the affordability and consumer capability of paying for things is still important. But as we move away from 410A availability, the choices become less, not more.

Our next question comes from Patrick Baumann with JPMorgan.

Let me sneak in here. Steve asked questions earlier, but I appreciate you let me hop on. Quick one on the volume for the year, the 17%. Can you give us any information on the disparity you're seeing in some of your major deducted OEMs there? And I'm really just trying to understand if you've seen volumes recover for the noncarrier vendors. We had obviously some issues at Daikin Goodman with the transition, I think, in '24. And then as well with Rheem. Just curious if those OEM volumes had fully recovered now or if there's more room to go to kind of normalize their share?

Yes. The opportunity for Rheem and Daikin they're performing very, very well for us right now. .

Were they able -- did they grow their volumes last year?

Not going to get into that, no.

Okay. And then last 1 for me on the HVAC product segment side. Can you remind us what the commodity-related product exposure is there as a percentage of the total, you've historically talked about like copper tube and duct work and refrigerants and things like that as being more commodity sensitive. And I'm just curious what you're seeing in terms of inflation-driven price there currently.

Copper goes up and goes down daily. So copper is a hard one to track. Today, it's down 2.5%. It's down to $5.72, it's been as high as $6 a pound. Refrigerant has been holding its pricing, it's not been increasing yet. So we really haven't seen a lot of fluctuation on the refrigerant side.

Pat, in the aggregate, just to dimensionalize it in the aggregate, it's about 5% of total volume. So it's really not material, not significant. And we very deliberately keep. We count inventory in days and weeks, not months there because we don't want any of that price volatility to creep into sales and margins. So it's very conservatively managed and it's only 5% of the business.

Understood.

Just glancing at some volatility across 4 quarters this past year, and there's none. I mean it's -- as Rick is suggesting, it's a little bit of a real-time inventory turn for those products and is precisely 5% of overall revenue.

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

I appreciate your interest in Watsco. Some of you have been with us for decades, and I appreciate that. So thank you very much for your interest, and we'll speak to you next quarter. Bye-bye now.

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

Well, thank you all for coming. Thank you for the interest in the company. We're very excited to have you guys. We are very proud of what we're up to, we're very proud of the team that we have, we're very proud of the investments we're making, and we really enjoy showing it off. And having an engaged audience like you guys is special. So thank you.

We'll also ask you for questions and comments along the way. These are much more fun when they're interactive. So please be -- participants, please keep it interesting and lively. And we'll try to do the same.

I'm required to read this cautionary statement. It says during this call, we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statements contained in our third quarter 2025 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our meeting today.

But again, thanks for coming. I know it's very tough to get you guys to Miami when we deliver 75 degrees and sunny. You come from places like Cleveland and others that are cold and miserable. We like to do these usually in January and February, where you've had 2 or 3 months of cold and miserable. So it's even that much more pleasant to come down here, but maybe next time.

Although it sounds like next time, we do this every about 7, 8 years now. So it's -- next time you may have to wait 7, 8 years. We'll see.

But the point of today is to tell you a little bit where we came from. I think most of you or many of you are probably pretty familiar with the story, but we'll rehash probably some of what you've heard before, but it's a good story. It's where we came from, it's where we are, it's what we see and what we're investing in.

And -- but more -- I think more interesting is that you guys -- some of you know me, I think you all know these two gentlemen up here and Rick and Barry, but we've brought a cadre of other really important and good people from the business and some of our customers as well because we want to showcase some of the talent and some of the leadership that we have throughout the organization that we're very proud of and just give you some new voices to hear from and ask questions, too.

So a little bit about how we got here. Our Chairman, who I share our last name with and DNA with, he got here in 1972. He was looking for -- he was a young, full of [ piston ] vinegar entrepreneur looking for a business to acquire and grow, and he got here into Miami and found this business, a little business called Watsco in a part of Miami called Hialeah, which is a small manufacturing business, doing about $4 million in sales, selling -- manufacturing and selling small air conditioning parts and pieces and other very random products like roller ball bearings for shower curtain and doors. I have a Watsco air boat horn on my desk in the office. They made hair sprays and whatnot.

And the man that founded that business, a man named William Wagner, was selling his 38% interest in the business. My dad who didn't have money, raised money from friends and family and from [indiscernible], bought the man's 38% of this publicly traded business and took over a controlling interest of Watsco.

And the trivia question of the day, Watsco, if anybody doesn't know, stands for Wagner Tool & Supply Company because, like I said, the man that founded that business was William Wagner. So you can teach your grandkids that trivia question later tonight.

So that -- like I said, $4 million in sales, $4 million market cap and off he went, and his mission was to grow through acquisition, and he started exactly that. He bought some other businesses and got from about $4 million to about $30 million in sales.

And then in 1989, he got a prospectus in the mail from Merrill Lynch, which maybe some of you have spent your careers at, that a business up the street from here in -- near Boca was being auctioned off. It was a business called Gemaire Distributors, which was and is the [ re-distributor ] for the state of Florida.

The seller was a business named Nortech. They were ready to exit. They had launched this auction. His first instinct was, "Well, I'm in manufacturing, not distribution." So he first threw the prospectus in the trash. Then as he likes to tell the story, he had nothing to do that day. So he pulled the prospectus out of the trash, and he drove up there, checked it out.

He ended up actually entering the auction with a bid, and he was the only bidder. And so that was the only auction he and we have ever participated in. And that was also the pivot from manufacturing to distribution in 1989.

And since then, there's been 70 other businesses and maybe 68 other families that have chosen to join their family with our family, and that's really what Watsco is today. It's an amalgamation of the 70 or so acquisitions that have been made in HVAC/R distribution and now a little bit of plumbing, as you'll hear today as well. And manufacturing assets were sold off a long time ago.

And today, we go to market really as our 10 primary business units, the 70 over the years have sort of through osmosis become these 10. And those 10 each have a leader. You'll hear from at least two of those -- or three, I guess, of those leaders today who run -- one is Gemaire, one is Carrier Enterprise, one is N&S Supply, who you'll hear.

And it is the -- those leaders' jobs to grow and kill it in their marketplaces. They make all the decisions from hiring and firing and strategy and you name it. And they're accountable and responsible, and their job is to grow the P&L, maintain the balance sheet, excel with cash flow, et cetera.

And then our job is to help them. How can we help you guys grow as entrepreneurs in your marketplaces? Can we help you with capital? Can we help you with Watsco equity to recruit and retain great people? Can we help you with vendor relationships that you may not have on your own otherwise? Can we help you by getting you guys together because you are a community of leaders in this industry who have similar missions in some of the same markets?

So see what everybody is up to, see where you can share assets or collaborate or avoid common pitfalls or team up on something or help you with technology. And that technology story, if you know Watsco at all, it has become a major part of our story. And frankly, I think we need to stop separating that we do this technology stuff.

It's really just who we are now. We are somewhat of a technology company that just happens to sell heating and air conditioning and related products. And I think you'll get that flavor by the end of the day.

So the technology story started about 15 years ago, I guess, now. And even then, we were an industry leader in terms of size. But the thesis then was, well, we're large, we're doing well, but we've been doing the same thing the same way largely for the last 30 years. And if we could infuse the business with technology, and I put technology in air quotes because that can mean a lot of things, and it does mean a lot of things, and it's really people, process and technology, not just computers.

But if we can infuse the business with modernization and systems and processes and humans and teams and the weaponry that they have every day, then we could do things bigger, better, faster and more profitably and have a new foundation on top of which to grow and give our entrepreneurs, who are running these businesses and their teams, more weaponry in their arsenals to go win within their markets to help support their customers, et cetera, et cetera.

So that was the thesis about 15 years ago. And then we said, great, what does that mean? Where do we even take that idea? And it took us a few minutes. But what we realized is that data is that the foundation of all these modern technology platforms.

Anything in now the enterprise really is data, data. And we had lots and lots of data, but that data was trapped in what at the time was 16 different ERPs across all of our business units, which hopefully you are familiar with the software and the machines to run the operating system of the business on.

Our first decision was that we are not going to rip out and replace all those ERPs and put in one homogenized software technology because that's like an Oracle or an SAP or something like that because that's a $100 million-plus program that takes 5-plus years and puts the whole company at risk.

And we don't do things that put the whole company at risk because we are such a long-term thinking business, long-term focus, and we don't bet the ranch on things like ERP conversions or anything else, frankly. That's a good cultural tenet that you guys should write down. Watsco does not bet the ranch.

We think long term and that we didn't have to, that we could buy or build best-of-breed, integrate them with each other, integrating them with the ERPs and create this ecosystem of world-class tools that really can drive that what we are looking for. It doesn't have to come from an ERP, it can be despite the ERP.

And that's what we did. We bought and build best-of-breed technologies, we've integrated them with each other. And really, what we've done is amassed amazing, amazing amounts of mastered data. So it started with the ERP data, right? The ERP data has things like our transactions, our invoices, our customers, our inventory, our financials and so forth.

So the first program was get all that data out of the ERPs into a data warehouse where we have a common data model, and we can put tools against it so that we could put that data in the hands of all those business leaders and all their teams, so that it could go to throughout their day, knowing what's happening in their business.

Because you have to imagine before they had this insight, this ability to see what is going on in any part of their business that they can imagine in real-time on any device anywhere, they got 1 -- maybe 1 P&L once a month, right? That was kind of the extent of their knowledge of what was happening in their business.

Now they could -- they can slice and dice and look at trends and patterns and anomalies and outliers and et cetera, and really become a data-driven business, not just an intuition-based business.

It went from being -- I've been in this industry for 20 years, I know how many of these to put on the shelf. Great, now here's alerts and scorecards and dashboards and other information to help you maximize or optimize that decision, et cetera. And we can do that across the whole universe of what we do.

And we do, do that now, and you'll hear that throughout the day. I mean our business has very much changed to be a data-driven business. There's probably not a meaningful conversation that happens throughout this company without really data being at the forefront of it.

So we've become data snobs is another way to say that. And we've amassed and piled and created piles of data and data and data. So first is that ERP data, like I mentioned, and then we've gone and mastered other piles of data, and I tell you the story, I'll get why.

But first is our products. We sell about 200,000 different SKUs across our network. Everything that any contractor needs in any part of the country or North America to do his or her job, you can find in one of our locations. So now we have digitized everything there is to know about all those products, the height, the length, the shipping weight, the country of origin, the manufacturing number, et cetera, et cetera.

But we've also mastered everything there is to know around those products. So take a piece of equipment, ABC 123. We know the full bill of materials of that piece of equipment. We know the complementary products that system, we know the accessories that go with it, we know the substitutes, we know everything there is to know about that system, and it's all known digitally in our PIM, our Product Information Master, database.

We've done something similar with all of our customers. We know all their transaction history with us in the ERP because we have all their invoice history, but we didn't have their profile information, like AJ's Heating & Cooling.

AJ's Heating & Cooling now we have mastered, has been in business for this long. He are the primary people there, here's where their locations are, here are the brands they like to sell, here's their mix between replacement and new construction, their mix between residential and commercial, whatever there is to know about AJ's Heating & Cooling and the other 900,000 -- or 99,999 customers we do business with now is mastered in the database.

We've done the same thing with our suppliers. Who are the primary people there? What are the products? Same thing with our competitors, who are the prime -- et cetera, et cetera. So now we've masked all this data, and we continue to master that data as things change and needs editing.

And then we can build on top of that. And where do we do that? It's in our analytics capabilities, it's in our e-commerce capabilities and our mobile app capabilities and our Watsco Ventures capabilities like OnCall Air, like you'll see in our Salesforce.com capabilities that our customer service folks and our technical service people use every day.

And now AI has all this data to use and to leverage to deliver new tools and technology to take us to that next generation of capabilities. So we like to say that we were brilliant. We saw AI coming 15 years ago when we started amassing this data. But really, maybe we just got lucky.

But we have more data, I think, than anybody else in this industry, I would say, easily, and it sets us up beautifully for what AI can and is doing already, where I would say we're at the tip of the spear of that. And again, you'll see a lot of that today. But that's sort of a little bit of setting the stage of where we've been, where we're up to and where we are.

Okay. So then I want to say that we have always been, and if you know us, we've always been and we will always remain super ambitious. This is a publicly traded company, our valuation is driven on our rate of growth, and it is our mission every day to drive growth.

And over the years, we've taken a stab at putting out -- well, let me say it this way, 20 years ago, our Chairman put a challenge out to our leaders. And the moniker, and some of you may remember this was [ 10/10 ] equals 10. At the time, we were probably trading around $40 a share. And what [ 10/10 ] meant was if we could become a 10% revenue growth company at 10% EBIT margins, that should translate into a $100 stock price.

And he delivered it in a session like this with all of our business leaders around tables like this. And they kind of all rolled their eyes and said, "This guy is crazy. And that's never going to happen." And sure enough, they met it and exceeded it and off we went, and we kept going.

Well, about 7, 8 months ago, I guess, now, that was called the dream plan. We came up with dream plan 2. And we said, let's put a new challenge out there to our leaders, let's put a new moniker out there. And we came up with 10, 30 and 5.

And that is the theme of today, 10, 30 and 5. And what that is, is $10 billion in sales, they were about $7.5 billion, with 30% gross margins, historically, we've been 25%, now we're around 27% gross margins; and 5 inventory turns, which, again, you can put -- you can do some math and project out what the share price might be if we're able to pull all that off.

And so we threw that out to our leaders again. And we said, "Okay, that's the new crazy goal, big, audacious goal. I guess what you guys are responsible for is helping us get there or for getting us there because you guys are running these businesses. And what would you like to do? And how would you like to get there? And how can we help?"

And so we grabbed everybody but I'm in a room like this. And there was an overwhelming sense of what we should do, which was collaborate more across the business units. Let's do things together across the companies, the Watsco companies, that we haven't done to a scale that we maybe should have or could have that can create and unlock new value, new dollars that we can capture and grow with.

And you're going to hear that throughout the day as well. But 10, 3 and 5, that's the theme. I think it's at the bottom of every slide today. So you'll get sick of 10, 3, 5 by the end of it, just like all of our leaders, I'm sure, are at this point, too.

All right. So is that my 15 minutes? Because I know I can go on for another 25, 15 minutes or 30 minutes. But I think I'll stop right around there. What I want to say and the next person, I believe, speaking is Ed Gaffney, who ran one of our regions for Carrier Enterprise in the Northeast, New York, New England markets until several years ago, he took what I think is one of the best and biggest roles in the business. I think they call President of Digital at Carrier Enterprise and has helped lead the adoption and continued run of our e-commerce tools.

But what you'll see is that e-commerce at Watsco is not just buying and selling online, it's this digital ecosystem of tools that we've created for our customers to help them do business with us to help them grow their businesses and to help our teams help our customers. And Ed is going to lead the conversation and try to help explain that in a much more beautiful way than I can.

All right. Thanks. All right. Thank you. You could stay really. Excited to be here and share with you the journey, the digital journey that CE went on, and I -- like A.J., I was there when it first started.

Halfway through, I'm going to bring up some guests. One is Kelly Harvey, he's President, one of our customers, a very loyal customer of Sunshine Air in Florida; and Chad Wetzel, who is President of Florida and the Texas region, so that, one, you don't have to listen to me the whole time, but you get a perspective from our customers and from our sales teams on how these digital tools have impacted them, which I think is going to be. So we'll have a little Q&A on that piece of it.

And maybe just some background real quick on what CE is for everyone's sake. A.J. mentioned around 10 business units, the largest of which is Carrier Enterprise. Carrier Enterprise, we -- is a joint venture with Carrier. It's now 16 years old in time. And today, CE has its own subset of business units within CE, I think, 9 of them across North America. And it's actually what had been a group of Carrier independent distributors that have been around 40, 50 years going back in time.

So when we did the joint venture, we had to figure out what to do, how to do it, who's going to do it, what to do? And the technology came around, and we borrowed one of the regional presidents to become the technology head for CE. In many respects, Ed was a pioneer for all of Watsco's technologies that you're going to hear from him. So just get a sense of the backdrop of that.

And the other pile of data, as A.J. suggested we own, it's shared across all the business units in terms of one big technology, one big layer of data. CE is a piece of that. They skin it, they show it, they demonstrate it, they teach it in their own version of -- with their own personality within CE. But it's still one shared, again, pile of data. So just some backdrop for everyone's sake.

I remember when I was running the Northeast, I'd always said A.J., we got to do more in digital, more in digital. He said, "Okay. Tag, you are it." So word to the wise there.

So how do we start this journey? What is the best place to start it? How that right in the beginning. So on 8:28 a.m. on March 3, 2015, it's when it started for us at CE. A gentleman by the name of [ Tom Rydell ], he owns a heating and air conditioning company in the Northeast, [ Polytemp ], who became the father of our first order; came in on our platform, weighing in at about $1,163.

So it was a beautiful time from there. Full disclosure, if I was a little bit better in PowerPoint, I was going to do a reveal between the gas furnace and an air conditioning unit for us in the HVAC industry, that would have been funny, but it's a gas furnace.

And from there, we never stopped. We started in 2015, and we just kept growing from there. And we took what we had at CE and all the learnings, and we started to spread that out and open up sites all the Watsco business companies.

So where are we today? $2.5 billion in sales overall through Watsco, of which Carrier Enterprise is about $1.6 billion. That -- in some of our regions, that's about 80% of their sales are going through this digital channel today. That is a huge transformation, huge change. It impacts every corner of every warehouse. It impacts every branch. It impacts how our salespeople interact with customers, all in a positive way, and we'll talk through some of that.

We're processing anywhere between 300 to 400 orders an hour, about 0.75 million orders, it changes based on the seasonality. Those orders were all processed either by a customer service team or by a sales rep. That's all time now that the sales reps have to focus with customers on other things other than taking orders, things that are more valuable.

And you're going to hear throughout today when I talk about this is, we want a strategic partnership with all of our customers so that when they grow, we grow. It's not just about selling boxes, it's bigger. And that's what you're going to see. And that's what the whole digital ecosystem came out of, by the way.

Digital is one part, right? The technology is one part. But we learn quickly, customers want to talk, interact with us in the channel that they're in, and we needed to service them while they were on the website. So we launched chat about 3 or 4 years ago. And we had about 5,000 chats a year. Today, we're up to over 100,000 chats, and that's growing.

That is a big piece that's allowed us to see the growth because customers are confident when they hit the button, everything that happens after the enter button, that product is going to show up. It's going to be on time, and it's going to be the right product. That's what the customer service piece brings in.

In addition to that, our chat actually, we started an hour early before our branches open and an hour after. So our virtual stores, what we call it, is open for them for the early risers, as most of those folks that might have just come to your place of business, your house, sold you a unit, and now they're going back to put the product into the system.

They can talk to us virtually through chat after hours and even on the weekend sometimes. And I think we were the one of the first ever to have our site in three languages, English, Spanish and for our friends up north, French Canadian. And that's going to continue to grow because we have a large demographic base that we deal with, and that's been a huge upside for us. And that includes, as A.J. said, the PIM data and the marketing data, all transcribed for them.

PIM data. A.J. kind of touched on it, right? 900,000 SKUs for a distributor, any distributor trying to get into digital, this is the long pole in the tent. This takes a lot of time. I showed that slide that we started in 2015. Well, like I said, thanks to these guys. They actually started 1.5 years building that PIM data. That PIM data has all the images, it has descriptions, and it's got all the attributes like A.J. was talking about, could be up to 40 per product.

For a distributor, smaller distributor, tough to get that information. You're trying to get that information from thousands of suppliers. With Watsco with our scale, we're able to use that to talk with suppliers. A lot of the suppliers we had to help them get the data.

In addition to that, the model is we have one PIM database that we all share across all Watsco. So when one of the other business units is enhancing the data, we all get that. So that's a huge benefit that we have. That data helps us. One, it's a great customer experience.

But line items per invoice, the one below that, what that is, is we look at how many items are placed with every order online, and we compare it to what the number of line items placed offline. And we see a significantly higher number online than offline. PIM has a lot to do with that. They come in, they build a system for your house. We then show them before they check out all the accessories, all the supplies they need to install that unit in your house. Those are all high-margin items.

We already have a truck rolling there. Our cost to serve is already there. We add all those extra high-margin parts and supplies in, that's a win. That's what PIM can do, and that's how we can drive additional margin online.

Yes, the moniker, would you like fries with that works, especially when you ask that question digitally every time somebody is placing an order, which happens 350 to 450 times an hour.

No fatigue, no Friday afternoon lull, no after lunch sleepiness. Technology is going to do it every time.

That's where we are today. When you go through something as big of a transformation as we did, it opens our eyes to the possible, right? It opened us and said, okay, ordering is important. Ordering is really important, making sure that we've made that easy. And that's what you're going to hear, too.

A lot of what we do, B2B business in the HVAC, it's complex. There's a lot that happens. So our ability to make that easier for our customers is what we try to focus on. But we noticed that across the customer journey, and I'm defining the journey as presales, the actual ordering and sales and post sales; there's a whole bunch of touch points. And all those touch points are opportunities for us to take digital, take data, as A.J. said, and apply it there and be able to improve the customer experience.

So our digital ecosystem starts with putting the customer in the middle. And I still -- Sunshine Air, [ Kelly Harvey's ] logo and stuck it in there for -- that's the Sunshine in the middle there. And then around it, we started to identify all these touch points. And we started to say, where can we use solutions? Like A.J. said, the future on this is even going to be better when we start to talk about AI.

But give you an example. Pickup Express. We have customers pick up product at our branches all the time. When in season, it can get pretty busy. So they want to get in and they want to get out. With Pickup Express, they can go online and they can go on the app.

And by the way, that's another thing. Everything we do, we can do on a PC or on our contractor -- HVAC Pro Contractor Assist app, which allows them, if they're in the field, to do exactly what they're doing, whether in an office because a lot of our folks are working in your house or working on a rooftop.

They can place the order. They can pick a 2-hour window when they're going to pick it up, they can pick the branch they want. And then when they're leaving, they can tell us by clicking on the app that they're coming. And when they arrive, they can let us know. What that does is it allows our team to pull the product, stage the product. When they arrive, we pull it out, put it in their truck, and they can even use the app to pay using our CE Pay app. That gets them in and gets them out quickly.

That's the kind of things that we're looking at. It's identifying from a customer perspective, and that's money for them because they're rolling trucks and they need to get to the next job.

Another example, Delivery Express. It's an Uber-like delivery service where we're able to take product from our locations and get it to the customer quickly at a job site.

Another example. Customers -- contractors at your house, working on your heating and air conditioning. He or she thought she had a thermostat on the truck that worked with this system and not the right one. It's got a couple of options.

He either gets in a truck, drives an hour to the store, an hour back, loses all that time on this job. Maybe the job goes negative or he sends -- if he's got somebody with him, he sends a runner and he loses half his workforce for that day. The other option opens the app, orders the part, clicks on it, Uber driver will pick it up at our location and bring it to them, in many cases, under an hour. They continue to work on your system, no loss of profitability for them on that job, and they continue to move on down the road.

These are the areas that we have many of these situations where we have the opportunity and are working on to enhance the customer experience using technology. And that's our digital ecosystem. It's tools, services and products.

I'm going to drill down a little bit now and kind of show you what customers see when they go online and making how we make things simpler.

So one of the things we have on our e-com site is something called the System Builder. There's different systems that can be built for your house, for a commercial job. And all of them have -- they can be done online now because we've made it that simple.

So for example, one of the ones I'm going to show you here is a system builder for a duck-free multi-zone. That's probably one of the most complex ones. What has to happen is they come to your house or place of business, they select an outdoor unit that they're going to use.

In this case, with the multi-zones, they have 6 zones, 6 options they can attach to the inside. It can be a highwall unit, it can be something that goes into ceiling. It can be even a fan coil. And each one of those, they have to get it right.

So we've built a system, as you can see on the left side, that shows you they pick the unit. And by the way, we're only showing them the products that we have in inventory. We know where they're located. So if they're in the state of Florida, we're showing them the products that we have here. So if they have to do this job tomorrow, it can go. And it's their pricing.

And then on the right-hand side, as they select the indoor, once they selected the outdoor, it gives them a nice green bar that shows them, you're good. This system will work, this system will work.

And we generate what we call an AHRI certificate for them, which is a third-party group that says this system will work and it will work to this capacity and rating. They can use that to get a rebate, which, by the way, we show them online all the rebates, whether they're federal, whether they're local or whether they're from the manufacturer; when they're looking and building this system.

I'll give you -- it's a 30-second video to kind of show you what -- very quickly how it works.

[Presentation]

Though it looks simple, but what went into the back end of that is tremendous. Did you notice at the end there when they built the system that PIM data flowed up and showed all the accessories? Again, that's same concept about with one click, here's all and all the accessories you need to install it, but we know with confidence it's the right accessories, too. And it's their pricing, and it's all -- again, we know it's in inventory. So that's one example.

If you talk to contractors out there and you ask them what's the biggest issue we're facing, I can guarantee you the top three -- one of the top three will be trained technicians. Having that in this industry is a big, big gap. So what we've done is we've launched CE PATH, which is our online training system that customers can go into and they have technical training there on heating and cooling. It's a platform that they access online.

I'm going to show you while I'm talking. On the right-hand side is how they can view it on the app. So you get to see both. This training, it's kind of it's important because they can go in, they can do their training, but they can look at it across all of North America now. In the past, it was all separate.

So if somebody in Northeast wants to come down and take a training class in Florida, they have access to it. We have virtual training, we have in-person training, we have training in our facilities where we tear down units. And then we have even a hybrid type training there. All of that, they have access to. But we're not going to just stop with that.

We hear from our customers, they also want business training. Remember, I talked about being a strategic partner with these customers. But what we're hoping is we're going to help them grow their business, classes like how to do a business plan, how to price for profit, how to market to generate leads. Even things like safety and HR that we have training on internally, we're going to share.

That's what a business partner does. That's something that no other distributors out there are looking at and doing. And we have that capability for them to see online.

Here's a great one, talking about data. Our tech support team collects all the calls we get in Salesforce from our customers. So I know the types of questions I'm getting from a company I can aggregate the data or from an individual. And what we're looking to do now is suggest -- using AI suggest classes.

So if somebody is calling me and calling our tech support team with a lot of troubleshooting questions on heat pumps, well, guess what, we're going to be starting to suggest, here's a great training class that would fit that need. One, it reduces the call volume we're going to get. But more importantly, now you have a technician out there and where I am helping their business, their owners identify opportunities for training.

So one last one, marketing. Again, partnership. We partner with our customers, and we do marketing with them. We created a single page now. Customers can go in 24/7, 365 and see all the marketing value we give them. Depending on the program they're on with us or not, they all get some type of rewards, which in one case, we use Pro Points. Pro Points are the more you buy, you get points.

And then we've created a real easy way for them to collect the money back. They go into their checkout online, and they just enter the points and it reduces the value of their next order. It's a great way to -- customers love it. It helps -- the focus here is growth and loyalty and that focus on growth, definitely has an impact. And as you would expect, they get more points for online and for those high-margin parts we talked about, right?

Co-op funds, we give funds to the customers to market with them. The OEMs, ourselves, we all participate in that. Those funds are there to generate leads. That's going to be on here. We're also doing things like financing we will show up here. On-call air rebates, which you're going to learn a little bit more about today in some of the discussions will be here.

Our salespeople are now using this page, when they sit with customers, to have the value discussion versus the price discussion. Our contractors get competitors knocking on their door all the time. This makes -- this takes it to a different level because we're showing it. And again, it's real-time, and they're able to see it also.

Every one of those things, this is personalized to them. So the more benefits you have, the more tiles you will see. So again, making it simple for them to see the value we're bringing to them.

So as we look forward, our digital ecosystem, we have so much opportunity, so much opportunity. One, because we already know we've cut a path so far. But we see more and more opportunities going forward, not only in enhancing the ones we've already launched, but we have up on the drawing board a few more that are going to be coming in the near future.

AI, you're going to hear more about that today. We're already rolling that out in our customer service teams with huge opportunities there for AI, and you're going to see more there.

But for me, I think I call it the secret sauce or the -- when I look back over the -- because I've been here from the beginning on the journey, it's what I call the Watsco model. And what we have is we have Watsco and Watsco Ventures on the tip of the spear, identifying technology, identifying partners that we may want to partner with, collaborating with all the business units who are bringing the field input; and together coming up with the solutions, the priorities that we want to work on.

And then once we launch them, we all get in a room and we kind of share practices, what's working, best practices, what's not working. There's not many distributors, if any, that I know of that have that type of model or the capability to build it. To me, that has been a big foundational element in our success when I look back and I see it going forward.

Okay. Enough about me here me talk -- let me bring up Chad and Kelly. And we can have a little bit of fun little Q&A here and ask them some questions. And intent here was to try to find out how has our digital tools impacted their business.

Kelly has got an interesting background. He was with a contractor, then he was with distribution, and now he's President of Sunshine Air. Sunshine Air is a very loyal carrier dealer, and they are a President's Club winner, which is a very, very high prestigious, not many people get that award; as well as a [ FAD ] dealer. And I believe they are doing close to 99% of their sales online, and they use many of our tools. So thank you for coming from the beautiful state of Florida.

And Chad is overseas. He's the President of our Florida region and our Texas region. So he's got about 1,000 -- a couple of thousand customers that he deals with. So he can give us a perspective on that side of things.

So gentlemen, why don't you want to sit down and -- all right. Let me go to the next -- let me get my slides out here, little cards.

Alright. So Kelly, like I said, you've got a great background here. So can you tell us over your time, when was it where you first started to see these digital tools and say, "Wow, these things can really have an impact on my business"?

Looking back, being part of the CE leadership team, I'd say 1.5 decades ago, I think about A.J. and Mr. Rupp and team and the idea, the concept of embracing technology to gain operational excellence in our own business, but then how can we extend that over to contractors?

So hearing these things come out and now being a contractor is a very unique position because I was -- I know that I was a part of that on the front end, but it wasn't just about our own internal operational excellence. It was extending that to customers. So there was a big why in the background of saying, how are we going to do it? What do we want the impact to be? And then how do we grow it?

And there were a couple of things that came out of that. It was gaining operational excellence and economy of scale in our business model and then taking that to contractors so that we can help them to do the same thing.

Alright. Chad, you've got a couple of customers that you deal with, right, so -- that are using digital solutions. What have you seen as the biggest difference?

I think Kelly is a live example here, one of the best we have in digital adoption. But it's all about the relationship, what we call the stickiness of the relationship. And it's not -- it's more of a journey than it is going out and saying, "Okay, here's our app, go use it." It's a journey that builds that relationship because we're educating.

A lot of times, the dealers aren't begging to use it. It's a transformation that we have to show them the value. So we show them the tool, we show them the value and then walk them through the process. And it's encouraging when we see -- when they start seeing the efficiencies in their business and they start getting their text to use it and other people in the organization to use it and then go on to the additional offerings that you showed in that portfolio.

It's just -- it's really encouraging in that journey. And that journey is the stickiness of the relationship. It changes a salesperson's conversation when they're going in to visit the dealer. And they're -- come armed with data as well that we collect from the usage of those tools.

When I told you we were -- we had regions over 80% of sales. I didn't mention that those regions were under Chad. So one of the reasons he's up here.

All right. For you, Kelly. I know you have options on who you partner with from a distributor perspective, right? I'm sure you have competitors knocking on your door. How has the suite of digital tools, the ecosystem that you see CE and Watsco providing, how has that weighed in on that decision on who you partner with?

Thinking back to the experience and understanding the wise behind it. I mean, at the end of the day, we were always about creating shareholder value, be able to produce a return.

And as we go to market as a contractor, one of the things I was impressed with when doing diligence to buy Sunshine Air Conditioning, leaving distribution and coming into the private sector, there's a lot of diligence, obviously, that goes into that.

What I noticed there was not a lot of adoption of technology and where some people would look at that and say, well, that's -- it's kind of a negative, right? We looked at it as 100% opportunity. And literally scaling a model out to 15x our EBITDA over the course of 10 years was the goal. We did it in 4. The biggest piece of that was partnering with CE. Obviously, I had a connection there.

But then taking the tools that we had always taken contractors to help them gain that economy of scale and be successful, implementing those in our own business, and what that does is it creates a stickiness, right? Like it is really hard. If you've created all of your processes, all of your direction, all of your goals around the adoption of that technology, then it's really hard to try to piecemeal and buy something from someone else. It just doesn't make sense.

So at the end of the day, you look at it and say, well, we partnered with CE. Both of us are way stronger. We're both taking advantage of that economy of scale, and we did 15x our business. It's really hard to buy from someone else at that point.

Glad to hear that. Great. Thank you. How about -- same kind of question, Chad. How about across the customers you see, how does that impact the thousands of customers that we do business when they have that ability to link into the digital solutions we have? And can you tell us a little bit at a higher level?

Yes. Yes. From -- we're always focused on growth, obviously, and 2 segments in distribution, we have our current business and how do we protect that attrition. And then at the same time, how do we acquire new business, how do we go grow the business?

From the digital platform, I think what's really exciting now is in growing the dealers. We're out presenting this to dealers who may have worked with another OEM for decades, a decade or decades, and they're blown away with the portfolio that we have.

So it makes it easier and especially a lot of new generations coming into the business, taking over the business that are more technology proficient and want to see that, and they're blown away with the offerings that -- in that portfolio that Watsco has.

It becomes more of a conversation about the value and the tech versus price, right?

It does. And that's what makes it exciting. It's not about, "Hey, can I sell you a box today?" It's "here's some solutions that are going to make your business more efficient."

Right. Great. All right. Cut to both of you, gentlemen. There's kind of a perception out there that technology or digital will take away from the relationship, which for those of us in the business, we know is critical, right? What are your thoughts on that in terms of how technology and digital might impact one way or the other, the relationship between our companies?

I know for us, it actually -- it does the opposite of what people would think. It actually grows that relationship because it's the adage of 80-20 rule, right? What are you focusing on and 20% is creating 80% of your outcome or your throughput.

For us, it's the small task that you can utilize technology on one side to be able to free up that time so that 20% of focus can actually grow. The other side of it is the proactive piece, where A.J. talks about ERP systems and all the digital tools and trying to get everything together. We actually have built process around and -- amongst other contractors as well in the industry, where we utilize their tools, and that becomes a part of our business.

And so it doesn't restrict that relationship. It actually grows the relationship because now people can come in and have meaningful conversations. They can bring more tools that can help us be more efficient and gain an economy of scale where when I look at it, we don't have to add a ton of headcount to get the throughput. We can be way more effective and add to that bottom line. And at the end of the day, be able to serve our customer the way that we feel that CE and team serves us.

Yes. I think in distribution, it's all about value. I probably said value 5 times since I've been up here. I probably say it 50 times a day when I'm talking to our sales teams, and it's -- you have to bring that value to the table, and that enables us to do that.

We were talking -- I was talking to Kelly, it was at dinner last night, and I think the term you used was strategic alliance with a partner. And I kind of like that term. And I like to think of us as that kind of a partner with you.

Yes. I mean when I think about the competitive landscape, we were all talking and I said, I remember taking a class, oh my gosh, a couple of decades ago, it was about distribution and account sales. And it outlined the four different ways that customers view you. And it's like a vendor, which is not where you want to be, a problem solver, a business resource and then a strategic ally.

And I remember being in leadership and then calling on customers and being part of the CE team and thinking I never want to be in the vendor box. How can I stay out of that space and create stickiness to where the customers are actually calling us and they're relying on us for best practices to run a successful business?

And that's how we attack the market. Technology was a big piece of that. And how can we take and build an ecosystem around the tools that you have that can create value for us as a contractor so that we can go dominate the market, and that's exactly what we did.

All right. All right. If you were talking to a contractor that wasn't using any digital tools, I guess I have to preface this. It's not a competing contractor because the last time I asked that question, and it was a competing contractor, the answer was, "I'm not telling them anything. I don't want them to know about these tools." But -- so a noncompeting contractor, what would your advice be?

First off, I'd want to buy them, straight up. In the consultative approach, I would look at it as what are your processes? How do you go to market? And conceptually, what do you think about utilizing one tool at a time, let's -- like eating out to pick one little bite.

I'm a big fan of Billy [ Beane ]. And I'm looking at the math and going, you know that you can do these things with the data. Where is your data? We could start there, grow upon that concept, implement the tools. And that's going to build not only relationship between me and their company, right, if I'm trying to help, if I'm trying to consult; but then I'm going to recommend a Watsco company in that because they're the best in the business of technology.

Chad, how about yourself? I mean, you don't have many customers now using our digital tools. So -- but if you have customers that are maybe not using the full suite, what do you typically -- what's your advice?

Yes. The ones who have not adopted yet, we go in and really just start simple, start with that e-commerce and get one person starting to use at the Express Pickup when they're not doing digital adoption, but they may complain that it's a full store and they're not getting in and out as quick as possible.

Start small -- back to my first answer, start small, educate and take them for the journey, take them through the journey. And that's what creates that stickiness, value and more adoption. That's how we've been able to hit the levels that we have in my regions.

It's certainly -- the numbers -- the data shows it's certainly working. All right. I have one more for you. From both your perspectives, you've got both gentlemen, you've got a lot of background. Where do you see this going in the next 2 to 3 years? Where do you see this whole digital impact to your businesses as we look forward?

For us, I'd like to think we're one of the best in the top tier of not only adoption but implementation, I'll see us continuing to grow in the contracting world, continue to grow. I mean when I think about adoption, being realistic, 95% of the contractors in the company do not operate the way we're talking. There is nothing but a runway of opportunity in the contracting world. I believe you incorporate the AI tools along with the data that we already have.

And that's combined. I mean, CE is a strategic ally for us, not a vendor. And the more the tools are, the more that they further. And you group in other tools along with it, there's nothing but opportunity because you've only touched 5% of the market.

Chad, how about yourself?

100% AI. It's what everyone wants to know about. It actually -- that helps us as a tool to sell digital solutions because when you start educating on AI, so many people are thinking technology and how that ties in and when you create that tie of our suite of offerings in digital and what the future of AI is in the industry, it gets their attention, they want to know more.

Well, gentlemen, thank you. I truly, truly appreciate. Thank you being here today.

That was amazing. And I think you hear Barry, you hear me, you hear A.J. talk about this hearing about it from the people that actually use it from the entrepreneurs themselves, I think it's a completely different discussion.

We're going to try and save about 5 or 10 minutes at the end of each session, best efforts. Don't hold me to it. And so if there's any questions in the audience for Kelly, for Chad or for Ed, please raise your hand, feel free.

We got Mr. Manthey upfront with a question. And while Myra comes up, just to let everybody know at the end, we're going to try and bring it all together here in terms of the implications of all of this. So save your more financial questions for the end. And go ahead, Dave.

Okay. Thank you appreciate you being here, Kelly. My question is on switching costs. So prior to this engagement through CE and with the technology, how traumatic would it have been for you to switch vendors?

I'm assuming you've got badges on your trucks, you've got these long vendor relationships, there might be idiosyncratic factors related to different units that you might know from using them for many years. That's the first question. Just set technology on the side, how hard would it have been for you to say, "You know what, I'm going to switch to a different vendor"?

And then, Chad, a similar question for you coming at it from the other side, I assume CE doesn't retain all of their customers. So of that group that attrits on an annual basis, is it just that they're not using the technology, dead stop? Or are there other why they would switch from CE to a different distributor maybe even -- obviously a different vendor completely?

So there would be two different sides of the cost in a company our size, and it is relative to size. I'd say there would be the operational field side of the cost when you talk about the trucks. But a lot of things that people don't think about is you swap brands, go to a different distributor; you have to retrain all your installers, you have to retrain all your technicians.

You have to change the process internally, which when you -- let's just say you're north of $10 million in revenue, which is small, relatively speaking, right? But that's a lot of contractors out there for us. Half of the cost will probably be around $200,000, $300,000. That's just on the field side. When you think about the training, the rewrapping of vehicles and your identity, marketing goes into that.

Internally from a process side, we would go backwards because there's so much process time around the technology directly tied to CE or vendor -- I mean our strategic ally of choice, I should say; in that example, we have to replace those systems. So you're talking again another couple of hundred thousand dollars. So I would say for your medium-sized contract, you're talking $0.5 million just to change, so that you can gain that same level of excellence in the field.

I would say from an attrition standpoint, there's attrition where the ebbs and flows of business. They didn't go away. But because of a market or competition coming in, they went down that attrition. I think what you're asking about is that they leave us.

Utilizing the data if somebody was using the multitude of digital platforms, that attrition rate is so minor. Typically when they do attrit completely, they wouldn't be using -- they won't be using those, and that's when I'm looking in the mirror at what did we do wrong because, obviously, we didn't bring the value to that customer. why don't we get them on these programs?

Any other questions from the audience? Mr. Merkel?

Two questions for Kelly. You mentioned that Watsco is the best in the business at technology. I'm curious, what do you see from some of the other distributors? Like how far ahead is Watsco? That's the first question.

And then the second question is, typically, a contractor would use like a second supplier. Do you use other suppliers? I assume most of your business is to CE, but do you use this -- or is it the case where the technology is so powerful that the majority of your purchases are with CE?

So second question first. So yes, there's a small percentage. I mean, we're 99% CE, again, because our process flows is seamless. Are there examples where you have to buy something from somebody else? Absolutely. It's really hard to be that 100% when we have market demands or whatever they may be.

But the real meat of our business and our real growth is so centered on not only the technology and the empowerment, but the relationship. That relationship has grown because now you don't just care about selling us boxes, you care about propelling our business forward. And that really matters in the contracting work. Going back, and I apologize, would you mind repeating your first question again?

Just how differentiated is Watsco technology [ from CE ]?

What I see is it's very fragmented out there. Watsco is the only one that has everything in-house, it's internal. And that brings a ton of strength to the contracting world to the market because you could say Trane, Lennox, York, whoever may be out there. It's not that they don't have technology, but it's not integrated as well, they don't have the same amount of data.

And based off of how they go to market, they're really more worried about technology as it impacts them directly operationally. And then when it comes to helping contractors, they're sourcing out. And any time you do that, you create an opportunity for that contractor to build a relationship with someone else that doesn't know everything that you buy, that doesn't understand your trends.

That -- and Chad and I were talking earlier about taking weather out of our business. They have the data to show it. Yes, we're a weather-driven business, yes and no because everything we do is based off historical analysis. We have the data. You need to tell me it wasn't this cool or warm last January.

They empower us with that information. We could place whether it be stocking orders or project revenue or sales based off of trends. So that's one piece of the data. And then when we go to market, they empower us with the tools to make that seamless to take that 80% of work that has to be done. But how can we put that into a box to where we can seamlessly transact and grow that 20% of productive time that we're using and getting that economy of scale? They empower us to do that.

Great. Kelly, we're indebted to you. Thank you so much. And Chad, wonderful session. I appreciate you. Thank you. We are going to pivot now to talk a little bit about our pricing excellence and our pricing optimization. And you're going to meet two wonderful humans in Brian O'Mahoney and Kristin Daniels.

Brian is President of CE North America for us. That includes all the regions of CE here in the U.S. and Canada as well. Kristin is our VP of Pricing Excellence at Watsco. And I'm going to turn it over to them.

All right. Good morning, everybody. So we're going to talk about the wonderful world of wholesale pricing. What I want to do is just put a little context about the complexity of what we're talking about here today. It's vastly different than retail, right? And the reason for that is touch points.

So let me give you an example, is it all starts with a fair market price. So whatever the price is for a particular widget, let's say it's $100. This is what a contractor would pay if they come into our location. But let's say that instead of buying one a year, a contractor buys one a week that pricing should be different, right, and incentivize them to come to us and buy more product from us. It sounds obvious, right? But that's a different touch point.

Well, what happens if it's now 3 items per week, another customer. It's 10 items per week. I know the customer is 100 items per week. These are real true examples right here. But the point is you can't keep giving away price to a point where you're selling below cost, right? So now you go back to the vendor and you kind of negotiate a cost point from the vendor to be competitive, another touch point, right?

Now you look at different locations. So you would think that -- like, for example, in the New York City market, there's a little bit more price than you would see, let's say, in Omaha. That's another touch point. right?

So the touch points get really complex. So on the -- if you kind of take a look, if you look at the number of suppliers, multiplied by the number of products by the number of customers, we're talking about billions of touch points. And that's if you touch it only one time a year, right?

Over the last 5 years, we're looking at price increases at some vendors, 6 times a year, right? This is not a Carrier Enterprise problem or a Watsco problem or an HVAC problem. This is a wholesale distribution problem. And we've kind of really done a good job managing through it.

So what we want to talk about today is a tool that we've been used to kind of help us navigate through this. And the great news here is at the end, you'll kind of see that even though we made a lot of headway in this overall industry problem, there's still a boatload of opportunity to go.

So with that, Kristin, let's go through the slide.

Yes, you bet. So we're going to get back to the complexity of pricing in a little bit. But first, I wanted to take a few minutes to talk about the journey that we've been on. We started our analysis and investigation into who we wanted to partner with from a technology perspective back in 2019. It took us about 6 months. We talked to many different pricing technology vendors and landed on price effects as our partner.

As part of that process, we really just had to understand with having several different business units, we started with our 6 largest business units as our scope; each one of them is kind of at a different point on their journey or their sophistication of pricing, but there were some common themes that we knew we had to solve for, which is what I'm going to talk about here.

So prior to our investment, one of the biggest challenges we had was the maintenance associated with all of these various price points or touch points like Brian said. So trying to give our teams easier ways to maintain all of these various prices in our system.

I like to joke that one of our business units, the person was actually hand-keying the prices. He had 200,000 price records in his system, and he was hand-keying changes to those. That's crazy. So we had to make it easier for our pricing administrators to be able to administer all of that pricing through mass updates, through rules-based application of what changes we needed to make to those prices.

And that's a really good point, too. It's the -- it's also the speed of execution. So if you get a cost increase from a vendor that's going to go in place April 1, let's say you get that 30 days in advance, you got 30 days now to get all those touch -- those billions of touch points basically executed on time.

If that takes you to April 10, April 15, May 1, you just took a margin hit for that 1 month. So speed in executing these price points, trying to do it manually is just basically impossible.

So that was a huge part of what we implemented, and that implementation started in 2020 for that ability to maintain these records much quickly -- much more quickly.

On the second piece that we focused on was more the analytical side. So how do we help our business unit leaders understand how effective we are at maintaining our pricing? So we've had -- A.J. talked about how we've had business intelligence tools or we built that whole data warehouse, and we have all of this data.

But the way that you analyze data to understand how your sales are trending or how your margin trending is very different from how you analyze data to understand what pricing actions you need to take. That's what the price effect tool gives us, is ways to mine our data almost more like bottom up instead of top down to say, "Show me all the problems I had yesterday."

Low-margin transactions, overrides, whatever it is, let's go look at that at a much more granular level so that I can understand what pricing actions I need to take. And then having that all-in-one tool means once I identify what problems I might have, I can immediately do the maintenance associated with fixing those problems.

And this ties in also with the e-commerce presentation that Ed was talking about before. If the price is not right, right, and if they keep walking into a branch and the team knows it's not right, and they just do a discount right there at the counter, let's say the price is 5% too high, and they do what we call an override and do a 5% discount; if they continually do these discounts, why would anyone buy online and pay 5% more, right?

So the goal here is we got to get the price correct and right. And part of this tool kind of gives us the ability to kind of analyze that and see where there's overrides, where there's not overrides and where we can make adjustments. And we'll kind of go through that in a second.

So another concept that we used to have challenges with is because it was very difficult for us to update our system, we would sometimes make pricing decisions that were easier to administer as opposed to being more profitable.

So an example of that is maybe we have a pricing record in our system that is that applies a price -- a given price to 10,000 customers because they're all relatively similar customers. But if we could be more strategic, we might recognize that, you know what, there's some attributes of those customers that actually aren't similar. Brian used the example of just volume, how much business are they doing with us.

If we have a really wide band for that, we're not being a strategic or home, and how we're administering pricing. Those kind of decisions were getting made because I would only have to maintain on pricing record instead of 10,000 or whatever it is.

And then finally, as far as pricing decisions, a lot of the pricing decisions were done in silos. So whether it was the sales team, the leadership team, the finance team involved in some of the not necessarily pricing decisions, but the mechanics of how we were viewing our results, those kind of conversations were happening across our business and certainly, weren't happening across our business units.

So now with this consolidated tool, we have many different business units all using the same tool, we can speak the same language and understand, "Oh, okay, you're doing this thing at Baker. We think that makes sense to do at CE as well." So just breaking down those silos by having a common platform.

Right. There's a big thing in the industry called bundles. So if you buy this bundle, this package, right, let's say it's an outdoor unit, indoor unit, a convincing pad, a disconnect, a stat and things of that nature; so everything that surrounds that unit. If you buy them all at once, we can give a certain percentage off, right?

But how effective is that? And what's the ROI? How many systems do we have to sell until we kind of recruit that kind of discount? To do that manually, it's really, really a challenging step, especially with the number of bundles that we're going to kind of produce on a daily basis.

Okay. So I'm pretty excited to show this next slide because I get to be a total pricing nerd for a little bit. And I definitely am. All right. So I can't get value, but showing a scatter plot.

So just to make sure we're all on the same page, the way to look at this number of units across the X-axis, so the further to the right, the dot, the bigger the customer is with us. This is for one product. So the higher you go up on the chart, the higher the price.

So the -- you got it. So this particular scatter plot is, again, for one product without applying any kind of segmentation or understanding how -- maybe this looks crazy to you because it should. It looks wild, chaotic. But when we start to apply what segmentation we have within our business, you can start to see the patterns here.

And remember, it's the same product, but different areas, different business units, right? So it's all together kind of group together.

Look at many different price points we sell the same product at, right? And it's all over the map. Without coordination or sophistication until...

Until, so thank you.

But within that complexity, all right, and within that variability is precisely the opportunity we see with pricing optimization. So when you look at this, it's -- it may look scary, it may look disorganized; it's opportunity, and that's what excites us.

All right. what I've highlighted now is you can definitely see a clear pattern here with these dots. This happens to be one of our regions at one of our business units. Now we focused in on these dots. And we're looking at a residential and construction or R&C customers, again, in this particular region. This is what our software enabled us to do.

So it enabled us to classify customers using all this rich data that we have and then understand where their price point should be in the market based on all the information that we get from our sales team, from our customers themselves, and have logical rational pricing that goes lower as they buy more.

Here's another example, layering on top of these dots. This happens to be AOR customers in another region. That's less, it's a higher-priced region in general. So you can see there's still opportunity for sure. We're not -- this is never going to be a straight line, by the way, or a tiered stair step, which is what on paper in an academic kind of setting, maybe it could be. There's always going to be some variation because these prices are based on relationships and other factors.

So the utopian vision here is if you can get all those dots all the way to the top right corner, right, when you get the most -- the highest price possible, with the most amount of products being sold, that's just not practical, right? So there's a balance here between a price point and the number of units that actually we get purchased from us. What exactly is that balance point? And that's what this is helping us with.

Yes. And I do want to stress too, this happens to be one simple product example, but we can do this on scale as well across the whole entire customer's basket. Purchase is not just always item by item.

So just to kind of follow this through, here's one more example. Again, more distributed now, maybe less of a pattern, but still, we can see that pattern. Again, another AOR grouping of customers in another region. This happens to be highlighting dots from one of our business units that's a newer kind of newer to the platform, where we haven't gotten in there quite as deep to do as much of the optimization that we know we can.

Okay. So I'll stop geek -- one more geek outside. Okay. So here's an example of that first grouping of customers that we showed. So this is those R&C customers. What I wanted to highlight on this particular example is how you can clearly see that band of where the prices are aligned, but you also can see the outliers.

That's really also the beauty of our price effect solution, is that when we find these outliers, the system alerts us of those, and then we're able to take action. So in some cases, maybe we're a little priced out of market. If the pricing looks a little high, we want to consider having a conversation with the customer, "Hey, this is something we can look at."

And then in other cases, maybe the customer's purchase volume doesn't support the pricing that they're at. It could be because maybe they used to have more volume with us and they don't anymore or maybe they just never reach that level.

So this is what I was mentioning before, the exception there where you see price out of market, so it's higher than what you see the typical trends. So that's good news. We're getting more price. But if we were able to get them a little bit lower where it's following that trend, would we get more product and more sales for them, right? That's that ROI piece that we're talking about.

And then the other exception there where we're kind of below that trend, the question there, if they're not giving us the volume, why are they getting a better price than all those players all the way to the right? And what's the cause for that? So even asking that question, having the visibility without the tool is extremely difficult. So this kind of brings a little bit of significant management advantage and kind of understanding where our customers are and where they need to go.

Yes. Just to say that the first part of different way priced out of the market is this whole program is not necessarily about increasing prices, it's getting the right price for the right customer segment or the right specific customer for the right product, the right place at the right time to maximize margin dollars. And that includes capturing sales that we may have otherwise missed because we didn't have the right price for that customer.

Exactly.

Right. And I think I'll just add to it that there's also separate costs, different costs from our OEMs serving this equation. And so the better our data about this profile of data with our customers helps us address cost in ways now that we have insight to it.

So from all this complexity, the 2.6 billion data points, which used to be daunting and frankly, money losing. Now it's exciting and delicious because it becomes all opportunity for us to maximize that output.

So let's talk a little bit more about numbers. So in 2025, year-to-date, we had over 260,000 supplier cost changes, that's actually down. Not surprising to any of you, I imagine. But as the market stabilized a little bit, a little less inflation. Last year, this number was nearly double.

As far as the number of cost changes that we were managing, to Barry's point, that can be different cost changes for one product. It could be where the cost is the same in all of our markets, but it can also be that, that particular supplier has different costs in Florida than they do in New York. So we have to manage all of that.

3.8 million associated pricing record changes associated with that, so that can be in response to the cost change that we saw from our suppliers or could be independent of that.

One of the things I also want to mention is this investment in software honestly came just in time because if we think back the last few years, I don't know how we would have processed all of the cost changes that we received in 2021 and '22 without this investment in technology.

I do want to specify that 3.8 million price records, to me, that's an astounding number. That is a lot of price changes, still entered completely by humans, now granted in mass maintenance type form. We have that capability, but that is a lot of change.

That actually doesn't even include maybe a customer moving from one price level to another. This is truly how many price points do we have loaded in our system. But for those price points, a customer maybe moves from a Level 1 price to a Level 2 price. If I include that, it multiplies number times 3 more, it's up in the 9 million range of actual changes that we're making in our pricing system, all through price effects.

The 200 basis points in margin improvement is based on a baseline of 2020. So that is looking at the pricing actions and costing changes that occurred and how much margin basis we can associate with that type of change.

As far as the -- I mentioned the analytics and the maintenance, but we've really done more than that with price effects. So again, talking about the maintenance is the first bullet here, but -- and then certainly being able to handle cost changes. But some of the things that we're doing with the software is helping us provide better guidance on where to set price.

So we call this TPO or target price optimization. We built a model within price effects that looks like -- it looks at things like the size of the customer, the region, the type of customer, the type of product, the type of transaction, pulls all that together and can recommend targeted specific pricing for any one of our customers for any one of our 200,000 products.

Just one note. You see 200 bps of improvement. This wasn't something where we brought the software and we plugged it in and they go, "Wow, 200, incredible," right? So there's a whole discipline surrounding this, right? It's a management team, basically a pricing team that's associating and analyzing it, managing.

So we developed a complete discipline on understanding what our pricing are to our customers. So it is a -- and we had hiccups when we first started it, right? How many people do we need? right? So we've actually done a really great job over the last few years, understanding what the complexity is. But it's an investment, right? As we invest in those resources and building it, what's the ROI and what's the return on it? 200 basis points is really pretty impressive.

And a culture change is part of that too, right? Who makes pricing decisions, who recommends price, who approves it, so on and so forth.

So Kristin, I'll ask you a leading question. Are we fully done optimizing?

I think we've used the term early innings. I think that's a fair way to describe this. So we've just -- target pricing launched last year, and we're just figuring out how to get that kind of fully integrated into our ecosystem. A lot of it's change management.

To your point, do our salespeople trust that a system is giving them the right guidance on price? We're proving to them over and over again that, yes, this guidance is pretty good, but it's a very different way of operating than what we have today.

One of the things that we're also able to do is track what we -- like the impact of the pricing actions we take. And that is incredibly powerful, not only in the change management piece, but also in just our management reporting and understanding the value of doing various pricing initiatives or price testing in the market. So we have a capability within price effect that any time we run a promotion or we pass through a supplier cost change to our customers, we can track each initiative by name and see within each of our business units, how those are performing, our sales growing, our units down or whatever? How is our gross profit performing? How is our margin rate? So having that tracking capability, honestly, is pretty central to our strategy.

So we're evaluating real time what all this means and then calling audibles as needed because it's giving us that feedback -- on continuous loop. One thing I want to just double-click on for a second for everyone's benefit here. So most of you cover and now really, really powerful, sophisticated companies whether it be Grainger, Fastenal and distribution, whether it be the OEMs, whether it be other companies and other sectors.

They're all doing wonderful things along these lines. Our competitor is a 10 branch $100 million business in Florida. Our competitor might be a 30 branch regional operation that does $200 million, $300 million, $400 million in volume and so relative to what is in the market for HVAC distribution, Watsco is head and shoulders above this above its peer set with regard to this technology. And so this may not seem all that differentiated to you if you cover those big companies, it is extremely differentiated HVAC distribution.

That's true of the whole technology ecosystem that we're talking about.

And I would also say, 12% of Watsco, 12% of our revenue was acquired in the last 6 years. So 3 of our business units doing $1 billion today are just getting access to these tools just in the last couple of years. We don't shove it down their throat, we don't push them into it.

We obviously ask them to be open-minded and gravitate toward it. And with the community of other leaders that have done it like Brian, it accelerates what we can accomplish with an acquired company sooner and more effectively. And so that's part of that early innings is, again, 12% of Watsco was acquired in the last 6 years. A lot of what you're hearing today is just evolving into some of those business units today.

Exactly. Yes. And you asked kind of the road map are we done yet that clearly adding more business units onto this platform as part of that, our big 5 are on, but we have more work to do as far as getting all of our new friends and our family using the software. And it's great because the platform is something, especially because of this standardized data model that we talked about first, feeding data into this platform and getting bringing up a new business unit on to this platform is actually not a huge lift for us.

I say the technology is the easy part because you just have Steve do it.

I love it. All right. So as far as where we're going, of course, we're going to talk about AI. So there's a capability that Pricefx is all in on right now that they call Pricefx agents. What agents essentially are or in early stages still, but what agents essentially do or they're like little bots that are crawling through our data, looking for these anomalies. So that example that I gave earlier of the scatter plot with the red dots circled an agent found those for us. So it's not someone trying to pour through scatter plots, although we'd love to do that.

But it's actually the system kind of highlighting those things for us. Where this is going, though, and really the holy grail for us is not just identifying where we have opportunities to change price, but within our guardrails, actually just doing the maintenance. So we'll start training our system.

Like when this problem occurs, these are the things that have to happen to correct that price in the system. Or these are the e-mails that need to get sent or whatever it is that we need to do to make that more automated, that's where the AI is coming in, and we're actually partnering with Pricefx to kind of move from identification to action. So that's one area.

The other area with respect to agents is today, the agent itself, the criteria that the agent uses to know what to search for in our data is set up by humans. So our pricing analysts are the ones that are actually figuring out, "oh, I want an agent that does this" and they're doing that just based on their experience. What we're moving toward is more of a large language model type interaction with these agents to say, hey, I'm looking at a problem on my screen. I think I want an agent to start scanning for this, having that ChatGPT type conversation to say, all right, set up a new agent, let's see the results.

No, that's not quite right. Can change that, change this until we can get that agent actually built in a much more dynamic way where today, I will be honest, it's a bit of a -- you almost need a subject matter expert to create an agent today.

So that's agents. Anything to add -- okay. The other area that we're really investing and looking towards the future is taking this TPO or target price optimization, in the next level. So we're starting to gain more and more confidence in the data that this model produces as far as giving our salespeople and our pricing teams guidance on where pricing should be for each individual customer for every product.

But we haven't yet put that guidance directly in front of the sales force at the time that they're putting a quote together for their customer. So they can get that information from our pricing teams, but we don't have a full-fledged quoting tool yet. We've been building to that over the last 6 years. So that's our next big project for coming up in '26, '27 is to launch this pricing guidance in the hands of our salespeople.

So I'd like to say that there's some durability to the margin that has been built over the last couple of years. This is the underpinnings of that durability. We've got a couple of minutes if there are any questions on this before we break. Tommy?

Sorry, go ahead, Brent.

So you talked about the penetration rate today being at relatively low across the whole enterprise. Is there a way to characterize the number of SKUs or the percent of branches that are currently using this tool?

And then secondarily, we think about the frequency of price increases, the magnitude price increases over the last 2, 3 years, constantly kind of chasing price these adjustments. But as you see better price stability from the suppliers, the vendors should we think of the margin gain as maybe a little bit easier in a stable price environment as you're making adjustments across the different territories.

To take the second part first, it's certainly easier for us to understand where the pricing opportunities are when our cost isn't consistently changing and we're not changing out all of our models. Due to refrigerant changes or A2L or whatever the -- I mean, that makes it very complicated.

That's only 60% of what we sell to.

Well, that's a good point. That's a good point. What am I complaining -- so yes, the more stability that we have, the easier -- I shouldn't say the easier, the more clarity we'll have as to where we're going to have opportunities to move customers in price. And you have to remind me your first question. It was, oh, about adoption, right?

Yes. So as far as adoption, I didn't mean to mislead. We have 5 or actually 6 business units, and I'll just run through them Baker, CE, Gemaire, East Coast, Homans and CE Canada that are all using Pricefx very effectively. It's the other -- so as far as adoption, they're using it to maintain every single price record. We're using that target price optimization in various forms within those business units. I mean I feel like adoption is fantastic.

But the opportunity is still limitless.

For sure. That's where I was going. Yes. Thank you. No, no, you're fine. But as far as like just using the tool, but yes, to A.J.'s point, is like really taking it to the next level as far as the opportunities that we're pursuing, the analytics that we continue to add different ways of looking at our data and certainly continuing -- I mean I could go back and we can show that scatter plot again, I would not say at all like while you could see the patterns in the data, there's still a massive opportunity.

There is still quite a bit of scatter in those illustrations, and that's true. That's the reality of what we're still working on to enhance.

I would say that's more cultural then adopting the software or pushing it out. It's the culture of acting on the data.

That's right.

There's also a -- when we say culture, right, back in the day, who controls pricing. Unfortunately, it was sales, right? So it was the Fox watching the henhouse. Unfortunately, right? So now it's a debate And guys and just my opinion here, a successful company is when you have a lot of debate. If everybody gets along and high five and on every decision out there, you're not going to have a well-run company. You want challenging conversations between sales and operations between sales and pricing between sales and finance between operations and finance. That's when you get the best decisions are made on this.

So when sales goes out and gets a prospect, and they come back and they say, "This is what we need to kind of switch the business over to CE. " Right? We take that information, we throw it into a tool, and we see where that lies. And if it shows that it's an outlier, where it's far below where the typical range is now you have a secondary conversation, right? But the goal here is when we talk about growth, at least with Carrier Enterprise, it's all about profitable growth.

We're not going to grow just to move the top line and suffer on the bottom, right? So it's profitable growth. A part of profitable growth, right, is not just managing expenses in SG&A, but it's also those profit margins. So we're not throwing business away or anything like that. But now we have some data now we can have meaningful conversations with customers on what we're kind of looking like at price or what's happening in that particular market.

I think Tommy had a question upfront.

Yes, up here in the third row.

Thanks for the question. Brian, just to continue with the example you provided. So let's say, there's been a new customer brought on to see the teams of the sales team has gone back and forth with the pricing team and we agree on the scheme, okay? Month later, conditions have changed whatever market, demand, OEM pricing, whatever it is, something's changed, weather. Watsco is a pretty decentralized organization. So now we're talking about someone have to counter talking to a customer that they've gotten to know that may look at the computer and say, "I just don't like that price anymore. " I'm going to do this other price for you.

So how do you try to align over time and some of this is cultural, right? I mean you've got this new tool. But at the end of the day, you got someone on the front line of the business that's got to say, yes, that's the price I see on my screen, and that's what I'm going to require of you today? How do you make that happen?

So we have -- what's great and that's part of the whole cultural change and the thing with Pricefx and even when our ERP system right is visibility. So we have visibility out there, and we can see what's happening over the counter if sales are going up or going down, right? We could see if there's overrides being made. And the question is, why aren't sales growing, for example, right? Is it price point? We can evaluate that? Or is maybe that we are selling over the counter, but we're giving that example I gave before the 5% discount, right? We actually have a process in place that runs that up through our pricing organization to evaluate the pricing.

We also have a group called product managers. So these are product experts. So a product could be an outdoor split system or indoor unit or ancillary supply. And these product experts basically have a sense of what the ranges are in price. Here's the high point and here's a low point, right? Where the complexity is where in that should that customer be placed? Right? And you got attributes for that customer.

And the biggest one is how much they purchase, right? But to really answer your question is, right now, we have visibility and a process to flow that information up to our pricing team to analyze.

Also trust. I mean because this is a culture change, because this is change management, as this becomes more and more of our norm, as the people that are touching on the street, touching the contract every day, the customer every day, believe in the tooling, believe in the analytics, believe that this is the right price, there are less and less overrides. To the point where and there's another gentleman back there who runs Jim, he's either ready to or getting ready to limit, if not eliminate the ability for overrides in the field.

That's great. I'm just reminded, too, that not too many years ago, our visibility was a monthly financial statement for the Ocala branch. That was the scorecard. That's when the Ocala guy knew what was going on. So it's a remarkable change in culture. And obviously, the result is progress.

So Chris and I will be available during lunch if you guys have any other questions that you want to go grab us, we're open and eager to talk to you guys.

All right. So we are going to take a precisely 11-minute break, and we'll see you guys back here. Is it 11 minutes? No, 9-minute break. We'll see you here on time.

[Break]

So also, we clearly want to demonstrate the power of air conditioning by freezing everyone out of this room. So this cup of coffee is purely to warm my fingertips. Thank you guys so far. I hope you're enjoying what you're seeing. We're very proud of it as you can tell, I hope. And we bought Patrick up here. He's our Head of Security at 64 something. 67. And I've never seen him in a suit and tie or suit, but he's looking good. He's got sleeves, tattoos and he helps sell all the Watsco Ventures products that we're putting together and I'll let you run with everybody to take off OnCall Air.

Thank you so much, A.J. I have to tag on to A.J.'s joke there a little bit that some of you, if you've been in the office, and I've had the pleasure to meet with you, seeing sales and customer success up there probably shocks you because I was likely introduced as Head of collections. So there's some people out there that might owe us some. Jim, looking at you, buddy. No. But I came up here today to talk to you guys about OnCall Air. So again, my name is Patrick Ruhland.

I run sales and customer success. I'm actually going to bring up Rob Rusniaczek from Legacy Service Partners about halfway through this presentation to talk a little bit about how his company is using the tool, the results that they see and how it's impacting their business. I'm going to start off by telling you guys just a little bit about what OnCall Air is, right, introduce you to it, give you some of the high-end features then I'm actually going to do a live demo.

So I'm the one that IT has been sweating about all morning that my live demo might not work properly. So this should be really fun. I'm your guys entertainment going into lunch. So what is OnCall Air. OnCall is the ultimate sales engine in the HVAC space, period, right? This is a tool that was designed, built and developed in-house at Watsco Ventures that helps our contractors build very content-rich digitally engaging proposals that help them close more sales, right? And the entire purpose behind it was the thesis that if we can help a contractor be better at selling. Then that contractor will have a better business.

They will sell more boxes. When they sell those additional boxes, hopefully, they buy those boxes from us, and they'll drag us along with them. And so that was really the point of this tool. And it all kind of started as a dream about 10 years ago. And the -- there were 2 issues that were identified in the space with the sales process.

First was from the contractor's point of view, it's very difficult and it takes a lot of processes to actually get a sale across the finish line. You have to do things like measurements in the home to do manual J calculations. I don't know if that's a term that anyone here is familiar with, but literally knowing what the load calculation is in the home for an HVAC system or their furnace.

Understanding how financing works, making sure that they're tagging into an AHRI database so that if there's municipal rebates or state rebates that, that homeowner can take advantage of that, they're giving them all of that proper paperwork. So it's a really long arduous process. So that was issue number one. How can we streamline this process.

And then the second issue was actually meeting homeowners where they shop today. There's a term in the HVAC industry called the paper towel method. It's a selling method that somebody in the '80s went out and sold, and they did a heck of a job doing it. And I'd be willing to bet that everyone here has been sold on the paper towel method by a contractor at some point in your life. And that paper towel method is literally a sheet of paper. This is what you're getting. This is your price, right?

And so that's what was happening in the industry, but where customers are shopping is places like Amazon, right? You go into Amazon, you can buy a $10 pair of headphones and it's going to give you a warranty. It's going to offer you financing, you're going to have rich product information. It's how consumers are used to shopping today.

And so that was the thesis, right? How can we make it much easier for a contractor to quote and meet the customer where they're shopping to overall improve the sales process. So that was October of 2016. So fast forward to today and what the results are that have gone through OnCall Air, so since inception, again, October 2016, $6.3 billion in gross merchandise value going through the platform since inception. $1.7 billion in the trailing 12 months and on track to do $1.8 billion in 2025.

Patrick, the define gross merchandise value.

So this would be the value to the homeowner, right? If I'm a contractor and I'm selling A.J., a $15,000 HVAC system, that $15,000 would represent that GMV. 1.1 million units sold and nearly 225,000 sold through Q3 in 2025. So really starting to see a significant impact on the market and 600,000 jobs closed since inception. That means that OnCall Air has been the sales tool that was used to close over 0.5 million homes in the United States on what is 1 of the top 3 most expensive things that they'll purchase in their lifetime and 115,000 jobs closed year-to-date on the platform.

So before I dive into my demo, I want to share some more feedback from our customers, right? Of course, I'm going to come up here and say all of the greatest things in the world about OnCall Air, but nothing is more powerful than hearing what a customer has to say about it. So we got about a 30-second video here, and then we'll jump over to my live demo.

[Presentation]

I always love to hear what real guys out in the field say about it and hear how it's impacting their business because that's what gets us up in the morning. That's what drives us is seeing those contractors win. And so before I dive into that demo, I just wanted to quickly highlight a couple of the key features of OnCall Air and why it's such an advantage for our contractors out the field.

First and foremost is the real-time pricing and inventory, right? When a contractor utilizes OnCall Air, they have the pricing as of that minute when they present to that proposal of what they're paying for their equipment. They can see in their local warehouse or warehouses what's available, right? If they're with a home owner that is in the middle of the summer and they're in a no cool situation and they're miserable, they want to make sure that what they can sell is available there.

What comes along with that as well is rich product information, which you guys are going to see in just a moment here of things that actually help explain to the homeowner, right? Watch this video and understand about this system, read this spec sheet and learn more about what your savings are going to look like. All of those things are things that OnCall Air maintains for the contractor.

We have built in AHRI match up. There's over 20 million AHRI match-ups in our system today, and it's constantly, constantly growing. And that is a very critical thing. Again, I said this a couple of minutes ago, but for our contractors that are in areas of the country where maybe there's a municipal rebate or a state rebate and it requires to have that paperwork to file to get that, they need to know that what they're selling is matched.

We integrate with financing. The average cost of an HVAC system in OnCall Air is over $12,000 today. That's a lot of money and the average homeowner needs to have access to financing to be able to support that. And so we integrate with multiple lenders through the platform. We had over 50 lenders used on OnCall Air in the last year alone by our contractors out in the field.

Again that we do things like tools for sales enablement, ensuring that our contractors can get their arms around their business and understand what's happening in it. We -- internally, we refer to it a lot as the blowfish effect, right? I might be that one guy or I might be that 5 employee business or even that 10 employee business, but this is something that can make me look like I'm that national consolidator. It shows the professionalism. It allows me to see the insights on how my team is selling, on how my margins affect my overall profitability.

All of these are things that are available to that contractor inside of OnCall Air to help them have their processes be very, very clean. And then finally and probably most importantly, order fulfillment, right? They can see what a system costs, they can verify that it's available in their warehouse. They can show all of the information to that homeowner to help sell it.

And then when they're ready to order it, there's a simple button that they can click that adds it directly to their e-commerce card for purchase. So we're really just streamlining that entire process for them.

Just to double-click real quick on something Patrick said is the professionalization of the contractor and their selling process. Historically, if you had a very sophisticated contractor come to your home and show you a proposal you would think, well, they're part of a big company, they're part of a big sophisticated company. We've got small contractors here that look like big guys in the space. And so it is really evening the playing field of sophistication across our customers and those that use this are -- you'll see in just a second, the outcomes are terrific.

All right. So here's the scary part. We're going to do the live demo. So if you guys could change over that for me?

Okay. Perfect. So I want to put a scenario out there for everyone, right? We're in Miami. So we'll use this as our baseline, right? It's August in Miami, your AC unit just went out. It's 100 degrees, it's 100% humidity, you're miserable, your spouse is miserable, your kids are miserable, your dog is miserable. I need to get this fixed today, right? And so this is a live proposal on OnCall Air. This is exactly what a comfort consultant, a salesperson in the HVAC space would either be going over with that homeowner. Well, they're sitting across from each other at the kitchen table. Or this could be that homeowner 10:00 p.m. at night, flat on their back, scrolling through their phone or on their laptop. They would have the same level of interactivity that I'm going to show you guys here today.

So to call back to what I said OnCall Air is kind of 3 main purposes that we're trying to bring to our contractors is one that we're going to help them increase their average ticket size usually through increase of high-efficiency sales, increase of attachment rates of add-on items.

OnCall Air is going to help them increase their close rate just by being very, very interactive and features that do things like follow up to keep that customer engaged and it's going to help save them time, right? And the time savings really comes in with the integration back to distribution. So over the next 5 or so minutes as I talk through this proposal, I'm going to continually call back to those 3 things for you guys.

So what you see at the top here, this is just about the business section. GroveTech HVAC is one of my demo accounts. It's what myself and the marketing team used to share what OnCall Air looks like to our friends on the field. But what you notice this doesn't say OnCall Air, it doesn't say Watsco of CE, Baker,Gemaire, it says GroveTech HVAC. It's branded for that contractor and we do that for every contractor we work with.

We give them the ability to offer up to 4 options side by side. And what I'm showing here is very standard or kind of best practice of what we see out in the field, right, offering the homeowner an option for a repair and then offering multiple options for replacement.

Now to just quickly click on the repair side of it. And the reason why is to talk about the kind of the development cycle or the development schedule of OnCall Air is that we're constantly looking at how to improve this tool. I love that our developers approach it as they're never satisfied. It's always what can be next, what's the next feature? What's the next bug that needs to be addressed. What's the next thing that's going to make this to even take us even further ahead of the next sales tool out there, is we work on 6-week debt cycles.

And so our contractors said, we love OnCall Air for service or for -- I'm sorry, for add-on and replacement, we would love to use it for service and repair. And so my repair here was built with a feature that was designed and built in OnCall Air by our in-house developers specifically based on contractor feedback, and that is 99.9% of our road map. I digress.

Jumping back over to the important things, right, our replacement sales. looking at this as a homeowner who's shopping, right? I like to look at this like the cover of a brochure. So it's telling me what brand is being sold in this. It's giving me a little bit of information and I'll do some zooming here about the equipment that I'm going to be purchasing potentially.

And then I start to get driven into the value, right? So we're always trying to drive that homeowner towards understanding why they would want to buy a higher efficiency system, a more expensive system. And so this is one of the first places we do this. We call this our Etag. And so this is using the AHRI match of the system that's being shown, the existing efficiency of the system in the home, the kilowatt per hour usage in that or the kilowatt power cost in that homeowner ZIP code the heating and cooling hours in that customer ZIP code to actually break out for them what is the cost savings, what is the CO2 reduction over the lifetime of the system.

This is a key -- this is a key metric for that homeowner because the average homeowner buys about 2 HVAC systems in their lifetime. So whoever is buying this has either never seen a proposal before, had no idea it was going to cost this much money. Or if they did it spend a decade and the industry has changed completely in the last 10 years. And so there's still going to be a little bit of sticker shock.

So by helping them understand, hey, this is why the system costs more money. It's going to save you almost $12,500 over the course of its lifetime versus maybe a lower efficiency system that will save you half as much or a quarter as much.

This is all demo data that's all fabricated data, right, Jeff?

Correct. Yes, completely fabricated. We also embed financing, right? I said earlier that having financing available for our contractors for their homeowner customers is critical right now. And so I'm embedding financing to show that homeowner what their monthly cost would look like, knowing that, that tends to be where homeowners look today, right? They're not looking at what is the cost of the full system. It's what can I actually add to my monthly budget.

So we enable our contractors to put that first and foremost in front of their customers. Digging a little bit deeper into the proposals. We maintain tons of product data, tons of product information. I talked about this being one of the strengths of OnCall Air is the integration back to distribution. So things like pictures of equipment, videos, digital brochures that we can look at. All of these are things that are maintained by the OnCall Air team.

And so there's 2 main points behind why we do this. First and foremost is homeowners tend to like to do research, right? So we're looking at a ream system here. There's videos that I can look at. There's a brochure that I can click on. If I went and search for the system though in Google, I'm probably going to get a list of the 10 HVAC contractors that are as close to us here in Coral Gables, as possible, maybe some product data, right? It's not where the contractor wants their customer going. So we keep them on the proposal is important.

But then two, is that education piece, right? Knowing that the homeowner isn't necessarily aware of what does high efficiency mean? How does that translate to my utility bill. How does that translate to my carbon footprint? These are the types of things that help them understand that to drive them towards that higher efficiency sale.

Normally, when I'm doing a demo, I would be dropping stats right now, so I'm like biting my tongue because they're coming on slides. And I'll speak to specifically what these results look like in real-world scenarios. Last thing I wanted to share with you guys before -- well, there's 2 more things I want to share on the proposal before we bring Rob up and talk a little bit about his usage of it.

One is that OnCall Air gives our contractors the ability to really put their best foot forward. And this goes back to that blow fish effect, right? Regardless, this could be a one-man show business. But I'm showing things like, hey, here's our installation team's digital business card. Did you know that we have a first year maintenance plan included, learn more about my company and read more about my team. These are all things that can help differentiate them. And then finally, and this might be my favorite tool inside of the proposal is recommending.

I like to look at this like Amazon and to cart. Can I ask for a quick show of hands on Amazon shoppers. Okay, That's like the most honest I've ever got when I asked that. Usually half of the group is like you're lying. You're a lier. So Amazon add to cart, I'm a big Amazon shopper. It's becoming like an addiction at this point. But what will happen is I will be on buying something and it will say, "Hey, Patrick, you're about to buy this. Customers that bought this usually bought these items with it. Would you like to buy those? Yes, I would. I am who that button was made for.

We are pulling on those exact same heart strings here, right? Hey, you told me that air quality was a big issue in your home. Your daughter has -- since you got that new dog, your daughter's allergies have been through the roof, right? You give that -- they can give that homeowner the ability to review items, and it could be things like air quality devices, extended maintenance contracts or even as you see in my example here, full additional systems to the home and then let the homeowner decide.

And that's where stat would come that I'll save for the next slide. And then finally, we obviously allow our contractors to embed that financing when they need to, right? Handling discounts, handling rebates. There are lots of incentives throughout the country that make it more affordable for a homeowner to buy a new HVAC system, and we make sure that our contractors can share that value on these proposals when they're working with that homeowner.

So I'll pause there. If you wouldn't mind switching back over to the slides for me, guys. I'd love to bring up Rob Rusniaczek.

I was going to say 1 thing, Patrick, just a quick question, just to level set the mindset. Our content in that $12,000 average system, what is our content would you guess?

Between 17% and 20%.

So part of the storytelling with our contractor here is we're helping them take our costs, but they're paying us for the product and building their -- not just a proposal, but helping them build their profitability inside the tool.

Correct Absolutely.

Critical to think about.

Come on up, Rob. So I'd love to introduce Rob Rusniaczek, Rob is the Vice President of Sales and training at Legacy Service Partners. Legacy Service Partners a consolidator that is how have you guys been. Well, we can get into that in just a second when we ask the questions. So everybody meet Rob. And Rob, thanks for jumping in here with us.

Thanks for having me. So we -- I should sit down, right? Or should I stand and you sit -- all right.

Yes. you might want to stand. So starting off, just if you wouldn't mind, just share with the group a little bit like about Legacy Service Partners. You and I were talking last night about how you guys look at the businesses that you acquire. And kind of your strategy when you go in of how you guys look at this. And if you wouldn't mind just briefly sharing with the group to give them a little background on you.

Yes. So I guess the big thing when we're looking at companies is we -- in our name, it's partnership, right? We form a partnership with who we're acquiring. So Kelly Harvey was here earlier with Sunshine, and that's an acquisition that we had made. I mean he's a partner of ours. And what we look to do is go into his business and add the little pieces, if you would, to bolster that relationship and make it bigger, better, faster, so to speak. So if you're talking about the EBITDA growth that Kelly was talking about, I mean, that's what we're looking to optimize. And that's with all of our partnerships.

And we're not a heavy-handed type of acquisition company or anything like that. What we look to do is strategically partner and in many cases, you're looking at 1 degree shift. So it's more about, I would say, it's more about creating an evolution rather than a revolution. Because we're buying good businesses, and we're looking to do those small little things that really are going to have top line growth and bottom line growth.

Yes. That's awesome. And just as a kind of funny anecdote for the group, we didn't realize until practicing that we had invited 2 customers from the same company. It gives you an idea of how big these consolidators have gotten and how diverse their company can be that it took us weeks to figure it out that we had invited the same customer twice.

It was bizarre because we were traveling in Pensacola and talking about it, are you going to -- I'm going to this event, he goes, "Oh, I am too."

Okay. I love it. Great. So when you walk into a new business that you guys have acquired I know that the sales processes are all over the map. But kind of what does that normally look like? What are the -- what are the existing sales processes normally look like at your acquisitions?

I mean, it varies, right? You're talking about the paper towel close. You'll have some guys that will use an Excel Spreadsheet, some that will use PowerPoint, some that will use a different software altogether. And yes, so it's all encompassing. And so in many cases, what you're looking to do, and again, without being heavy handed, you're looking to do those small little one degree shifts. And what I mean by that is just introducing a concept to them and saying, hey, this is a tool that you might like. And this is where you could win with it. And I mean, you take a look at an area of, let's say, Massachusetts, where an AHRI rating could yield an $11,000 rebate whether it's the federal tax credit, whether it's the municipal rebates or whether there's the utility rebates, et cetera.

So all of those things, what we're trying to do is give our guys the competitive advantage at the kitchen table, Selling at the kitchen table in the past, mean you could build all the report in the world, but if you're $11,000 more than the other guy because you're too lazy to figure out all of the rebates and the machinations of that. And so how do you make that easy and so this is a tool that we utilize to weaponize that and make it easy, if you would.

That's awesome. I mean I think you've already answered this, but what made you decide you needed a sales tool, right? And it sounds like it's all those things, right? It's fragmented processes. It's -- I'm going to take these out. It's fragmented processes, it's different tools being used. So -- but what else made you kind of force that decision?

Yes. I mean I don't know if it's a force. It's honestly, what we look to do is we look to win. I really -- in some ways, I don't really care what the customer buys as long as they buy from me or one of our companies. And what we know is that we're going to provide that great installation and that great value to the homeowner. I mean when they're buying the system, what they're buying is potentially a 15-year mistake. Okay? Because they're going to be stuck with something that is going to last for 15 years. And I want them to buy from us and they're going to have a 15-year satisfaction, if you would.

Yes, absolutely.

The other thing, ultimately, what we're selling is time. We're selling a lot of time, if you would. Our production crews, nothing really happens without a sale. And I think you guys know that. But we're -- as sales comfort consultants, what we're doing is we're feeding families. And what I mean by that is we have 7 or 8 installation crews at a company if we don't sell anything, those guys don't eat, their families don't need. So it's one of those symbiotic relationships that have to occur, if you would.

This tool does some unique things. I mean the demo was great, but it doesn't show you some of the things that you're able to interrogate. A customer in the middle of the night starts querying and looking at the system. We have a breadcrumb trail where we're able to look in and see all of the touches and what specific options they were noodling on at what time. So 4:00 in the morning because that guy got up or that gal got up and they started looking at things, oh, they looked at option 2, option 1, option 3, oh, option 2 again, option 2 again, option 2 again. And then you go, all right, well, how about if I give this person a call and say, "Hey, just wanted to reach out."

It's like you know how the phone is listening and you have the Facebook, Reels and all of those things. Well, we have some insider type information. Again, customers are out there. They're more educated than they've ever been and they're looking to shop, okay? And how do I keep them at least in our circle in our sphere. And that's what this tool helps us do.

That's incredible. That's well, I'll let you go a little bit deeper into this, right? So as you guys can see up on the slides there, the legacy Service Partners Group has 23 acquisitions under their belt, 17 companies today are on OnCall Air, and they have a 64% close ratio on the tool, which is, in my opinion, a pretty darn high close ratio. But I mean, this could have been prior too, right? So when you guys adopted OnCall Air, any shift in close ratio, any shift in high-efficiency mix of equipment? Any attachment, more attachments of add-on recommendations, what have you guys seen results pre and post tool adoption.

I mean without getting into like the hairy details of different things, I mean, let's just take a look at a partner. They had probably categorically the best sales team. But the tools that we're supporting them, not so much. And they would spend 45 minutes out in the car working to create a proposal. And they wouldn't spend maybe about 15 minutes in the home with a homeowner.

That script has flipped, so to speak, where they're spending more time with the homeowner, 5 minutes with constructing the proposal, but really -- let me just back up. When our guys are selling a product, yes, they're selling time, they're selling the production team's time. But in essence, what do we actually sell as a delivery mechanism to the homeowner.

We're selling air. Can you see air? You really can't. What you're seeing is you have to be an incredible storyteller to be able to talk about the quality of air that, that homeowner is going to buy. One of the things that this tool does, it really helps us sell the quality of air that they're going to be receiving, if you would.

And so if you're talking about that company again that was spending that 45 minutes out in the car they don't really have that ability to talk about the quality of air that they're going to receive. And you could liken this to water. If I have 3 bottles of water, which one is the tap water, which one is the one that's kind of the swamp water. It's all kind of clear, but when you taste it, oh, it's vastly different. And we have to be able to tell that story based on the products and the range of different options that are out there.

So essentially, the tool -- you're almost describing the tool more as like an education tool as much of an education tool as a sales tool, right? You have to educate that homeowner on what they're purchasing and what -- why it matters.

Right. And it's kind of like the soupstone of the story where you have to worry about all those things, oh, and what about the money? So with all the different price increases and all of those things and oh, what about protecting margin? Well, price has increased, but now with the connectivity into, let's say, the CE platform, you're able to see real time the price adjust, so to speak. And based on that, still the preservation of margin. It's just a priori. Everything is just interconnected. And we have to, as Comfort advisers, worry about all those things. And mind you, we still have the production team saying, like what are you going to do?

Exactly.

What are you doing for me today because I still want to work.

Of course, of course. So a couple of other quick questions here for you, Rob. I know that you guys recently launched the new Walmart program with our partners. You guys have shifted some of your product over to our partners over the course of the last year and continuing to shift more. How did OnCall Air affect that decision or did it affect the decision? Kind of which -- chicken or egg scenario, which came first? Did you engage with OnCall Air and then the product came? Or was it product and then OnCall Air?

I don't know. It's like when you -- living at the pace that we live in with consolidation and looking at those things, it's -- I think it was a culmination of everything was happening simultaneously. Right? And so okay, you have all of these different fees, you have this that you have to account for and this you have to account for it. The nice thing -- and I can't answer the question, honestly. But the nice thing was that the tool was able to accommodate those types of things.

And it's like we called your team, we worked through some things. We went back and forth and bingo. We now have a resolution and now we're able to effectively sell. With that program at the kitchen table.

Perfect. So like we were talking about last night, right, is what came first, the chicken or the egg? I don't know, but it wouldn't work as well as it does without the full gambit. Okay. Last question for you. And this one is my favorite. If you asked your top salesperson, what they thought about OnCall Air, what would they say?

Everything that I talked about and then some. I mean, I have Comfort advisers that go, you have no idea that's changed my life. I've -- my average ticket has gone up and as a result of that, their commissions go up. And then they get enamored with the feature. Kelly earlier talked about the seasonality effect of business.

Well, we have different seasonality. We're selling a need. And sometimes in a shoulder season, there is no need. And when you're effectively selling something at the kitchen table, if you sell something at, let's say, 7:00 or 8:00 at night, will you be able to install that the next morning for the homeowner at, let's say, 8 a.m. and have the production team. I have some Comfort advisers that go, well, a lot of them that go, we could pull this off, and we can pull it off tomorrow. And it's not just selling boxes.

We don't just necessarily sell a box. You're not -- when you're buying an HVAC system, you're not buying a box, you're buying that production team. It's not like unplugging a refrigerator and then just going ahead and putting a new refrigerator in. What you're doing is you're buying that refrigerator, like just screen across your lawn and you're paying for the production team that's going to be able to put all of those itty-bitty pieces together in your particular home, which is different than that particular home. And so the logistics is really what the tool enables us to do with the interface with CE and your other partners, right?

So I would say our Comfort advisers having the confidence that when they sell a product to the homeowner that we're going to be able to pull that job off and that's that.

I think that's a winning answer, I love it. Don't go anywhere. We've got 2 quick slides and then we'll open up to some questions. So obviously, Rob is seeing amazing results with this team, utilizing OnCall Air at their locations. But what I want to share is that while Rob and team are definitely the -- they are the top of the pack, they're not an edge case, right? So let's talk a little bit about how these numbers look across all businesses utilizing OnCall Air.

So when we look at how contractors and how OnCall Air is performing in 2025 versus 2024, we see a 20% increase year-over-year in gross margin value through OnCall Air sales. The number of quotes presented through the platform is up 18%, and the number of jobs closed is 14%. Now to add a little bit more color to that, these contractors that are using this tool for our contractors that buy from us, the ones that are using OnCall Air, their product mix of high efficiency versus low efficiency equipment is 2x higher than those analog customers, right? They see a 25% attachment rate when they offer recommended items through OnCall Air. These are some of those stats that I said I love to say these, but I have to wait for my slide.

They see a 25% attachment rate of those recommended items. They have a 44% close rate overall with an industry average that's really closer to 30% to 35%, so significantly outperforming their peers that are not using this tool and a 17% increase in ticket size when that is offered with financing. And so in a market that is very challenging for our contractors, right? Let's be honest about it. We're seeing our OnCall Air customers not only just outperform their peers but continue to grow and show these types of results even in that difficult time.

Well, those are pretty good.

Not as good as yours.

But those are pretty good.

Thanks, Rob. That's my last slide.

We open up to questions now. Anybody have a question or 2 for this group? Thanks, Rob.

So first question is, what percentage of units that you sell through OnCall Air go through are financed? And how is that from maybe the regular channel?

Yes. So what I'll speak to is that through OnCall Air, we give our contractors the ability to offer finance right? Now I know how often a proposal is signed when the financing is still included, but going all the way down to funding is something that I don't have perfect visibility into. So the number that I would be very confident sharing is that about 40% of the jobs carry a financing offer to the homeowner.

No. Rob, obviously, your true real world is probably a little bit different.

Yes, we lead with financing everywhere possible. Average tickets are 30% greater we have -- it depends on partnership and there's a lot that goes into the whole financing discussion. But I would say our tickets are 30%, 35% higher when we offer financing at some partners, we have 70% utilization of financing. At others, we have a little bit less, if you would. But it's -- part of that is based on market, if you would. But we lead with financing. We teach to lead with financing from a framework perspective because we just want to be able to offer the options.

And I would even go for -- I would even go further that our sales or our Comfort advisers, we don't only sell systems, but we also sell the flexible payment option okay? So we have to understand how to offer that Flex Pay option to the homeowner. And Yes, this is 180 months, and they would never do that or you would never do that. But really, it's the flexibility of having the option to pay this low amount. And as money comes in, in a lumpy fashion, if you would, sometimes braces, this, that or the other thing. I know this is going tangential, but we have to be really well equipped in offering those Flex Pay options. And so we do it some partners lead 100% of the time with financing.

What I was going to add is that the contractors range the full gamut, right? We have some contractors that are 99% financing, right? And others that maybe don't even offer financing and they've never -- they still haven't got their mind around the concept of it. One of the things that OnCall Air has done a really good job at is making offering financing for the contractor that's not comfortable with it, very simple and easy.

So one of the things that contractors will tell us when we ask them, hey, why aren't you offering financing, right? Then the average homeowner can't afford this. Why aren't you doing it? Well, I'm afraid that I'm not going to calculate my merchant fees in correctly. I'm afraid that when I calculate my merchant fees in, it's going to put me at some type of a risk of litigation because I did it at the wrong time. I'm going to calculate the payment factor wrong and they're not going to know. And then beyond all of that, when I offer this, I have to account for my costs, and I'm going to price myself out of the job. And so OnCall Air has tools specifically built in to literally address each one of those things categorically to make that guy that is not comfortable offering financing today, very, very, very comfortable and confident offering inside of OnCall Air tomorrow.

But then above and beyond that. Okay? So the question is, we'll show on financing option. At this stage, what we're showing is 3 financing options because simultaneously, the program is able to show a lot more, but we just choose to use 3 because customers are looking for -- depending on the variety of customers that you have, they're either looking to pay, and ultimately, the end homeowner they're your customer. I mean, they're our customer, right? So 0%, some like 0% financing, some like low payment and some like low interest.

And we're able to simultaneously offer the 3 and then have the -- and work through with the customer what's best going to fit their budget and their schedule. So it's not just one finance offer compared to no finance offer. It's -- we're leading with 3 simultaneously.

And then maybe a follow-up, maybe outside of OnCall Air but given your expertise. So Watsco's been consolidating distributors in HVAC for a long time. We've seen this really big surge. It seems like the last 2, 3 years of consolidation of contractors, which maybe we've been doing for some time. What do you see? What's driving that change? And what's it doing to the competitive landscape and just kind of pricing overall in the industry.

That's a big question. I don't know if I have a firm answer for you. We can take it offline. But it's -- again, based on market I think, in many cases, the homeowner wins, yes, there might be more. Maybe pricing has gone up, but the overall value and what they're receiving in terms of consistency and performance. I mean I'll go as far back as, let's say, 2 years ago, I was working with a contractor and they had a system that functioned, but they put it in backwards.

And what I mean by backwards is the air handler was going left to right, and it should have been going right to left. Did it function? It functioned but it didn't perform. What we look to do with and ultimately, this is where the consumer is winning is through process, they're getting performance, and that's what we're developing at least with our platform.

Rob, Jeff has an Excel spreadsheet. We'd like you to fill out at the end of this...

Sure.

Thank you guys so much. All right. Well, sitting between us and launch is a father-daughter team, Wayne and Stephanie that have really joined their family with our family, as you know, and as I mentioned earlier, part of what we do is as families like these to join our family and do what they do and do it on our umbrella and spread their wings and grow and let us know how they can help. So we thought we'd show off some of our newest and finest and let them tell you their story.

We're going for the fireside chat. It's not only a great honor to be up here and share our story. It's an even larger honor for me to share our family story with my daughter, Stephanie, which ties into the whole history of what we're all about.

Our story began in the 1930s in New York City and Bronx, New York, during the depression. My grandfather was struggling like everyone else was, and he had 3 sons at the time. And he said, you just felt he couldn't make it in New York as well as you could go upstairs -- I mean Upstate.

So he went upstate New York for better life for his kids. And he was scraping out a living and he ended up being a junk man. And just like I don't know if anybody remembers the Sanford and Son show from the '70s, that's what he did. He would take a truck, an old model pickup truck. He will go down to New York City for the WPA projects I don't know if anybody -- I'm dating myself here that I've been aware of this, but there were these projects that FDR started during the depression to rebuild buildings and try to get some investment going in the city.

So they tear these buildings down. My grandfather would take door knobs and windows and railings and anything he could, he thought he could sell. And the woman across the street, and I'm old enough to actually have met her when I was a toddler, she came over to my grandfather and said, Blue, I need a sink. So he goes, "Okay, I'm going down a week, I'll find it. " He went down there and found 4 sinks. He sold 1 to woman across the street and put the 3 on the front lawn, and that's how NMS supply started. It was insane and I've heard the story so many times, I said the sinks are out there for like 2 days and everything else got back and up. So they went down and brought sinks and toilets up. And then they sold really quick, and they started bringing accessories and faucets.

And then someone said, "Hey, can you give me a radiator, I need this, I need that." So they really realized that the demand for plumbing and heating was greater than the demand for any building materials. So they started to bring in a few new parts just to supplement and complement the products they had. So they changed the head of business they built a shack next to the house and actually Fishkill, New York and Texas County.

And it was called lose, lose new and used. I still have a journal from when they kept the books in 1942. And A.J. said we can't go back to that form. It's fascinating. It's in and out every day, told plus or minus, in and out for the week, in out for the month and out for the quarter, in and out for the year. And it's one book. And it just makes you really realize how simple life was back then.

But it's really common, we still have that in our archives. So during World War II, it was struggling to get material. So they actually did pretty well because there was -- everything was rationed and it was hard to get material. And 3 of his sons, including my father, Stephanie's grandfather, served in World War II. So when they came back, they collectively decided with my grandfather that they wanted to make the company a success.

And they sat together and said, how can we really grow and become a viable business. So another brother, there was -- he actually had 5 sons. Another one joined right after the war and he decided to change the name to N&S, which stands for Nussbickel & Sons. No offense, Stephanie. And it was really a turning point and then they decided they built a bigger building and stopped bringing used material. And they grew in the 1962. They've added a branch in Cascal and it was very still -- the Hudson Valley, New York was still very depressed at that time. It hadn't really pulled out of depression at all.

And in 1963, my grandfather passed away. And there were 4 brothers, his 4 sons are working in the business, and they assumed control and ownership. And my uncle Paul, he took over as President of N&S Supply. So he was the second President of N&S Supply. So we are and always have been run as a family business, which, in our view, is we have direct connection and make sure everybody has direct connection with all our employees, personal relationships with our customers.

We have a business appreciation trip where we go with our larger contractors. We all get to know them as people as friends and family. And we always support our employees, and we support our community. And we say it's a family business, it's really a family. Our employees say, this is my family here. this like I wouldn't leave.

And we've had some people with us 40 years. And so I mean, it's really a testament to what they did. But we also have some fun and A.J. insisted, I tell a story. We have some traditions like we do pull a truck and we do fund raising for holidays and food drives and things.

But one of the foolish traditions, I don't know it's ever started, but it started many years ago. The top 4 leaders of the company, now with Stephanie and I and our operation -- our General Manager and our Business Development Director, we wear silly hats and put on like slashing necklaces and foolish things for Christmas.

And we go to each and every branch. We can't go all now because we have too many, but we went to the original 7 branches, and we bring everybody around, and we say, gather around elves, gather around children, Sam is here and everybody thinks this is the funniest thing and then we sing a little song for them. And one of the things I love about our culture, the people have been doing this and saying, look, they're making fools themselves. Let's watch this again.

Never tell the new people. So the new people come up and they go, come on Gable. What are you doing? And then we say we hand them a check for the holidays, and they all laugh and who would do that? That is just a great thing. I think one of the reasons that Watsco acquired us was Stephanie and the other reason was the fact that we do that for Christmas.

Yes. I like it Wayne that you called and said, is it okay if we...

Yes. I call I said, can we do that? And it's not an option. You have to do that. You absolutely have to do that. And that's another great point because we closed in November 19 of '19. So like less than 3 weeks, 4 weeks later, we did that, people go, I can't believe we're still doing this. Watsco lets you do that. I said we had to get a special permission slip, but yes, they let us do it. But it was just a fun thing. And that was one of the things that really helped people see that we were going to grow and be who we are, and we part of Watsco.

So over the years, we grew and added locations up to 7 locations. And we felt it was important to be a full-line distributor. We had handled -- actually, we've been handled ICP was Heil, and we...

It was Quaker, Heil.

Yes, Heil, Quaker. And we started dealing with ICP, which was Heil, Quaker in 1957. And I remember growing up, there was a big green and gray furnace in our basement it said Heil, Quaker on it. So that's pretty cool. But over the years, we've had some struggles and one, which was the first one that really affected me as I was in the business at the time, is my father passed away in December of 1983 and my uncle passed away in April of '84.

So 50% of the ownership changed and like a little over a year. So a lot of businesses would have just been devastated, but there was careful planning and everybody said, let's just roll up our sleeves and make this work. And I was in the business with my sister who had unfortunately passed away. And there's 2 other of my cousins were in the business.

So we -- the ownership moved on. And then in 1987, which is only not even 2 years after that, we had a devastating fire that leveled our entire building, a 50,000 square foot building, all our offices. And everybody said, well, what are we going to do? How are we going to get through this? Not all we over, redone. We say we're going to go on. And unfortunately, my grandmother had just passed away 2 weeks earlier.

So I said to my other relatives, don't clear anything out of Nana's house. That's going to be our offices. So we got temporary desks, and we worked at the back of our cars and worked out of our house -- homes before. That was really practical. And we got through it and we rebuilt the business. And like so we added locations and we added Tinshop in the '80s, we became a full-line HVAC distributor. But then it was a separate division.

But now it's more integrated, but then it was a different -- but there was -- part of my expression of the plumbers and the sophisticated HVAC guys, and they hated each other. So we actually put it in a separate facility and ran as a separate business. But now luckily, those walls are coming down and technology is starting to become more prevalent across the board, but then that was a big challenge. So as we grew, we came upon the reality that so many businesses do. That's a system that needs help. I hope anybody...

HVAC contractor.

But as we grew and we -- as we grew, we really believed in moving forward with the company and believed in keeping our culture intact. And what happens is a lot of small and midsized businesses, you get some challenges that are really hard to attack. One is access to capital. We want to grow, but you have to fund what you're doing, and fund your AP and to invest in new locations. It was -- you had to be very careful of how you did that. And a big challenge was technology because technology was really starting to ramp up. And we were not having access to it or if we did have access to be able to budget something we couldn't have done a fraction of what Watsco and A.J. and his team has done because it was just too big of a challenge.

There was no way that we could actually do that. And then another challenge that was slowly coming up more and more was buying power challenge. We're dealing -- we buy 4 skids of a product that we sell a much of we're competing with someone bought half a trailer load or a project -- a product that we moved a lot of. We buy a trailer load and they make a deal have 5 trailer loads.

So it's always a back 5 or another number. We were killing all of the people -- competitors in our range. But some of the big guys really started to make a footprint. And we said this is going to be a challenge for us because we want to be who we are. We like what we're doing, but we want to offer all of our people the best future.

And we felt somewhere down the line, this is going to start affecting our ability to attract and retain talent because -- and you look at -- what do you offer? Well, this is my package for hospitalization health care. Well, they have this, and they have these days off and you can buy into a dental plan. And when you have a company of 120 employees or whatever, it's really hard to have that together.

So we started really feeling we need to step up the game. We got to find a way to really bring up N&S' game. And we had a tough decision, a lot of soul searching. We said, I think it's time we become part of someone else. Then -- so we really started to look for a suitable partner.

And we wanted to identify what was most important to us. We don't want to hear what they have, let's think what are our values. And it's respect for our employees, respect for our customers, operating with honesty and integrity, keeping up our reputation in the community and in the industry. We had a great reputation, and we still do, oh, you guys are great to deal with.

You're so good. Your people always do what you say you're going to do. And so we really sat down and said, okay, this is what we really need to do. So we need to develop a culture of collaboration and resources and some strength behind us. So then we let it known that we're in play. And we fully expected a good response. We are a solid company. We're profitable.

We had a strong footprint in Hudson Valley up through New York's Capital District. Alex said with a reputation. So -- and we weren't bottom feeding. We're profitable. It wasn't a fire sale or an inventory purchase. So we reached out to almost everybody that was interested and entertained it. And that's when the pain, I always call the pain started. We're very proud of what we do and what we did and what we built up to this point.

And every single -- without exception, every single suitor would come up and say, I can do this for you, and I can take this over and then you can give me this line, and we'll change your name and say, what about our culture? Well, you'll integrate well into our culture. You have a good culture, that will work into our culture. And it was all about what we can do for them.

And one eye-opening think, well, how would upper management fit into this? Well, we would evaluate everyone and see you may want to stay on, you'll be incorporating probably another division and you could stay on as like a branch manager or kind of like, we built this business. What are you talking about? And the irony of the whole thing was -- and we almost laughed about it.

We said, what are you buying? These people want to buy us and getting good cash offers. But if you want to dismantle us and take us apart, what are you buying? I mean you wouldn't even guarantee our people. They said, well, probably keep maybe some of your accounting and merge that and you're purchasing, well, I'll have to look at that. And we think we can probably cut 20% or 30% of your workforce.

So we said, I don't know, we have to do something, but I certainly don't want to do this. And this would just cut everything we've ever done and built. And then we get a call from Watsco. It was the most refreshing change having someone come up and say, it was particularly Rick Gomez, give a little shout out there. He's like the most important thing we want to know is how can Watsco help you grow your business? How can we make you be a better company? How can we give you the tools and the capital you need?

You need to tell us what you want and then we can give it to you. And we're going, should we pinch ourselves? Is this really happening? And then I said, here's a list of people that we've brought into this -- everyone elses, we'll acquire you. Watsco, I love it, Mr. Nahmad says, we want you to be part of the Watsco family.

And it's almost -- it's kind of a tongue-in-cheek thing, but it's really true. That is the philosophy. So when we sat down and we really looked at what was best for our people, what was best to grow the business, what was best for everyone. And then I finally -- as almost a later note, I said, well, how would I fit in this? And they said, "Well, you would leave, would you?" And I said, I want to. And they said, as long as you make just a commitment, nothing formal, would you want to stay? I said, absolutely. And they said, well, we believe in people who build businesses, and we want them to stay and continue to build their business. We don't want to plug someone in and take away what everyone here has done.

And I was like, wow, and proof of that, it was -- they said can stay at least 5 years. And I said, absolutely, I'm on year #7, I'm not going anywhere. So -- but that was really amazing difference. So they support us financially. They've supported us with technology, with advice, I mean, Stephanie going this a little more. But it was so clear that I could stay present. And that wasn't the point.

The point was to keep everything the best we could. All our management team was into it, and we said, this is what we really need to do. We need to become a Watsco company. And like I said, as Mr. Nahmad said, we're not acquiring, you're becoming part of the Watsco family. And that's truly what up to the point of the sale, it has been and is still.

Yes. I mean 6 years ago, during this whole acquisition process, I was a bystander. I didn't know where my career was going to take me. I had no clue if Watsco was going to fundamentally change N&S supply. I mean -- and I can seriously say 6 years later, that has been an overwhelmingly positive experience. And now as the fourth President of N&S Supply, I truly do believe that statement.

I remember the day of the sale, Barry came to N&S Supply and told us the Watsco story, the same one that A.J. told us this morning. And we were in our conference room with a group of all of our upper level management, our best salespeople, and they couldn't believe it that somebody as high up in the organization as Barry would fly all the way to little old Fishkill, New York to make us feel comfortable and welcome and to ease the transition.

And one point I forgot to mention was I love what Barry said. He said, if you got anything you don't like, don't call me call Wayne. If there's anything you do like, don't tell me call Wayne. You have any suggestions, tell Wayne. Wayne and his team still run this company. We are investing in this. We're not considered buying you. We're investing in you. And everybody had the most like, wow, to hear Barry say that with such sincerity.

Right. And the day after the sale, our counter -- one of our counter people came up to us and said, what do I do today? And we asked, well, what did you do yesterday? You're going to log on to the computer and you're going to help the customer. We didn't change our ERP. We didn't change our operations. We did -- we kept running our business exactly the way we saw fit, which is how we define our relationship with Watsco.

Honestly, since the acquisition, the day-to-day feel of our business is very, very similar. How we make all the day-to-day business decisions. We run our operations and trucks as we need to. And in turn, has helped keep our employees in-house. We -- during the transition, we lost no customers and we lost 0 employees. I mean, 6 years later, many of our customers and most of the community still think the Nussbickel family still owns N&S Supply.

And now being a part of Watsco, we immediately got better IT infrastructure, legal support, loss prevention and safety platforms. And we were relieved of the burden of health care negotiations and fleet contracts and 401(k) administration, and we could focus on the business that we're passionate about, wholesale distribution.

And actually, I remember after the sale, he's like, well, I don't want to leave all the stuff I hate is off my plate and now I get to do the fun stuff. So I think that -- we've had to no longer struggle with these benefits and these packages. Now we have this enhanced benefit package and our family culture. And truly in our market area, we are an employer of choice. We post a job and we get multiple people applying for it from other top competitors that want to join our company because of these values that we have.

One of the biggest wins after the acquisition was all of a sudden having the purchasing power of a company that buys $5 billion worth of products annually. We had better access to vendor -- better access to all sorts of vendors to buying power to better terms. But Watsco being Watsco, there is no they'll shout buy this and they'll shout not buy this. They give us the liberty to decide what works for our regional needs and what works for our customers.

And -- but one of the ways that we could layer in these opportunities is with Watsco's private label line. We saw immediate margin gains when we added those products to the comparable ones that they replaced. And Brian, I think, alluded to this a little earlier. One of the less obvious value adds is our network of sister companies. I mean, Watsco considers itself a family. And yes, there's definitely sibling rivalries.

But I mean, there's no better way to make a plan better to move forward without somebody who's running alongside of you. I mean, honestly, poking holes in your plan because sometimes you're just blind to those things. So we end up making each other better. I mean I think now that being part of this closely connected network of business units led by what I consider to be the smartest and most talented people in the industry is one of our most invaluable resources.

I mean, to be able to talk openly about anything, operational issues, what do you do when this happens, pricing problems, Oh, how did they go with that transition to price FX? All those sorts of things are so helpful. In fact, there's a standing Zoom meeting every Friday morning where all the business leaders get on a call together. Sometimes there's an agenda and sometimes we have a general business discussion. And we talk about trends, challenges, best practices.

And I really think it's rare to see management empowers leaders this way. I mean, I have A.J.'s cell phone number. What President of a Fortune 500 company gives his cell phone out to anyone who might need it. He truly puts his money where his mouth is. He clears the way to help us achieve our goals, sustainable, profitable growth. Whenever we want to grow or invest, we put together a thoughtful plan.

We presented to Watsco and then they help us achieve it. Back in 2022, we found a smaller multigenerational family-run business that was looking for a partner. And we -- they were in the market area that we needed to grow in and with tremendous help from Rick and Ted, we were able to acquire that distributor, Capital District Supply in 2022, and now they're part of the N&S Supply family. And Capital District Supply was a plumbing supply house.

They had 3 very strong retail bath showrooms, and they happen to sell some HVAC. And with their 3 retail showrooms that sell to high-end clientele, and we have designers that sit down with them and go through options, we were able to add that into our fold and bring our company total to 7. And that is -- they were able to help us strengthen this part of our business, which is unique in the Watsco family. But like I said, they were a plumbing supply house that just sold some HVAC. With Watsco and our resources, we taught them how to sell HVAC to dealers, which as from HVAC distribution is a critical part of our business.

And that is something that we were very familiar with. And we think that we see that a lot in plumbing supply houses getting into HVAC that they lack that dealer development. I mean, N&S Supply has sold HVAC and plumbing for a lot of years. And like my dad mentioned earlier, they -- plumbers and HVAC contractors for a long time did not get along. We operated them as separate divisions in our own company. They are literally separate buildings because they don't want to be near each other. But over these past few years, we've merged these 2 departments.

We've cross-trained all of our employees, and we actually physically house most of our inside sales team in one location so that they can collaborate with each other. And I think everyone kind of knows, especially in this room, that these 2 parts of the industry have remained siloed for many, many years, but we're seeing more and more distributors and contractors offer both services. I mean, we'll see -- we see this a lot with the emergence of the home service contractor. And even that contractor has changed how we do our business.

And I think there are benefits. I mean, it's easy to sell a wide array of products. You can cover a whole job from the air conditioner to the boiler to the water heater, even to the kitchen sink. And that's a win. But it's not without its pitfalls. I mean being everything to everyone is very, very difficult. There's a lot to manage and balance I mean, the first thing I think is most obvious is technical expertise, but that could just be me...

But that's what we're showing.

But for these new guys in town, price and availability might get you the first sale, but it is rarely going to get you the second or the third. And also believe inventory management is extremely challenging, especially at the branch level. Just by nature, plumbing has significantly higher SKU count than HVAC.

In another way, I mean, just coming -- growing up in the industry, plumbing supply houses have a totally different go-to-market strategy that doesn't always translate to the traditional HVAC contractor. I hate to say it, but it does sometimes feel like a used car salesman. But...

They call me toilet bowl salesman. I say I like to segment after dinner wear of toilets -- was much better.

I mean it's going to be interesting to see how this all evolves over the next couple of years. And since N&S has had a long tradition of both, we have received nothing but support from Watsco. Even if that just meant trusting us and trusting us to run a business that ran completely differently in some ways than other business units.

I mean we were the first acquisition -- or remember, the family that actually was heavy into plumbing and hydronic heat. Hydronic heat were in the Northeast. So there's a lot of water heat in boilers and baseboard and radiators. So that was something that's a big part of our business. And we're looking forward to opportunities to share that with other folks in the Northeast that can be part of their market as well. So sharing back and forth in collaboration is just what's been really, really exciting.

Yes. I mean as we look to 2026 and beyond, we're looking to collaborate more with our business units, our sister companies, grow more locations, deepen our adoption of the Watsco technology platforms. But really, what we're really excited about is continuing to serve our customers in a way that no other distributor can. We have the values of a family-run company with the backing of a Fortune 500 company. And I think that really all I have to say is thank you to Mr. Nahmad and A.J. for allowing us to be a part of your family.

We appreciate it.

The only thing I would add is that we always ask an owner like this, who do you know? And who can -- who are your friends? And what -- because these guys go to trade shows, these guys go to a buying group, they all know each other. It's a tight industry. So Gateway Supply, which we acquired 3 years ago, one of his friends. And his advocacy meant a great deal to the owners of Gateway when they sold us the business.

And if we had Chris Williams on stage as Gateway Supply's founding family, it's the same advocacy that you would hear. So now we're taking that same advocacy of Wayne and Chris, there's probably 30, 40 businesses like theirs that have done HVAC and plumbing well for decades. And so part of our progression and our acquisition strategy is to build on that. So we've done 2, but there's many more out there. And again, we think the culture will be as attractive for them as it was for these guys when they tell their story. And I love the way you told the story.

Just don't ask...

Anyway I need hugs. Honestly...

You can reflect it in myself.

I'll give the hug...

That's between you and Wayne. But I'll just say this. I mean, I've learned a lot from my dad over the years, but the core foundational strategy has been find great businesses like your guys with great families that lead great companies in great markets. You know your customers, you know your culture and so forth and basically stay the hell out of the way and just ask how we can help. And this epitomize that exemplifies that to the maximum. And just thank you guys for what you're doing.

It's actually been a great honor to be part of Watsco. It really is.

Yes. I think we have time for like 1 or 2 questions before lunch, if anybody wants to have a question. There's one right up here in the front.

Just as far as the negotiation, and I don't expect details, but could you just -- you talked a lot about when the initial bids came in, the competitors wanted to change everything about N&S and that was a key decision to go to Watsco. But could you just qualitatively talk about did you have to take a materially different price than if you would have chose to go with a financial buyer and give up some of the...

I can answer that safely. No, I can answer that safely, and I've said this many times. It wasn't necessarily the highest offer, but it was absolutely the best offer without question. And it was -- they were really, really realistic and fair, and they're really good to deal with them.

Yes. I mean, just again, one of the things I learned from my dad, our Chairman, the last thing we want to do is get into a contentious debate about valuation because this is so personal, and we're not -- we need to be trusting and loving on the way in because we rely on these folks to run their business. We can't do it for them. We're not going to try to do it for them. That's all risk. So that's true in the "negotiation" it goes like this. What do you want? And is it reasonable? Great. Let's do it. If it's not reasonable, then probably you're not reasonable, maybe it's not a good fit. All right. Lunch time.

Thank you all for your time, and enjoy your lunch.

Appreciate you. Thanks, guys.

[Break]

Well, thank you guys so far. I hope it's been interesting and insightful. Like I said, we're very proud to show up who we are and what we're up to and what we've accomplished so far. Part of that idea is to give us some credibility that as we make more investments in new and different things, we got some credibility that we can -- that you guys believe we can pull it off and then it's going to make an impact on the business.

And like I said earlier, the theme of today, and now I guess we're really going to get into the crux of it is this [ 10, 30 and 5, ] $10 billion in sales, 30% gross margins and 5 inventory turns. And again, as I said, we challenged our business leaders how to do that and what to do, and it came up with collaboration. Yes, keep the individuality of the business units and the culture and the people and the teams.

And thank you again to Stephanie and Wayne for sharing their story, which really moves me actually, but leverage what we can leverage in terms of shared resources, shared buying power, shared whatever we can do. And that's translated really into this more specifically to this 3-legged stool, which is not the most elegant terms maybe, but it's how can we -- or let's buy together, let's supply chain together and let's sell together.

And as macro forces change in the country and in the industry and the markets, let's leverage our strengths at scale to take advantage of what we can take advantage of, which is our size and our strength. So that's really -- that's taking the form of 3 things. I can go one more, right. Collaboration optimization, foundation, right. So sorry, I must also tell you that I'm filling in here for another one of our business leaders who cannot make it last minute for some reasons, and I have not seen these slides. But I do know the story.

You through the short straw. And had to present with me.

Yes, exactly. Also, I should introduce Jim. Jim Brady is, I think, our VP of Supply Chain or something along those lines, but has helped us get smarter on our all things, transportation and safety and supply chain. But so go back to the story. So the 3 legged stool is what we're going to talk about that's buying together is supply chain together and selling together. So the buying together is what we're calling this VCR, which stands for vendor consolidation and rationalization.

So again, this came out of a session like this where we asked our business unit leaders, what's the next move? How do we -- what should we do going into the future? And you heard Stephanie and Wayne and others mention what we do not do today, we have never done is tell the companies, tell the business units what to do in terms of what to buy from what vendor, at what price or anything like that.

Each of the businesses negotiate their own deals. They're doing their own product selections. They're meeting with vendors and suppliers. They're negotiating deals and so forth. And then we have a group at Watsco and have for 20 or 30 years that goes to those same vendors or maybe if we do business with 2,000 manufacturers, we go to about 100 to 125, and we negotiate a strategic deal with them. Somebody like a Resideo and Diversitech, some of these vendors that all of our business units buy from. I'm talking about on parts and supplies mostly. On the equipment, really, that happens more at the business unit level.

And we say, listen, yes, you're doing business with N&S and you're doing business with Gemaire and Baker and you have your deals with them, but we should -- we also want you to look at our entire buy and give us a program that makes sense for that buy. And that means things like rebates and payment terms and right of rebalancing the inventory and freight allowances and so on and so forth that makes sense for us and our size as a customer.

And then we have a book of these deals, if you will, and we go back to the business units and say, as you guys are making your purchase decisions, just know that this is also there for you to take advantage of. That sort of has been the as is. Where we're going to -- yes, the as was. Where we're going to and as will be is what the business units have said is that we want to go a step further and make decisions together strategically about who we should buy from, which vendors we should buy from and combine our strength and go to those vendors and sign up to be bigger, better partners with them, give them more of our business, commit more to them and get deals more appropriately that fit that expected buy.

So that sounds easy, but you have to understand that these 10 business units are 10 personalities and have 10 cultures and have 10 different leadership groups and so forth. So the gentleman that I'm standing in for Rich Iandoli, who's one of our best and leads our business Homans in New England, he likes to say he got volunteered to lead this effort. And he calls himself the chief cat herder, right?

So he's got armed with all the data from all the business units and really from the Watsco team of what's being bought and where and he [indiscernible] everybody in a room and said, let's not leave this room until we make decisions about who we're going to buy from and what. Just to give you an example, by product category, and I'm making up these numbers, but we may buy thermostats from 30 or 40 different manufacturers.

Let's -- and again, I'm talking what these guys did. They say, let's pick 5, and I don't know the real numbers or maybe 6. Let's make our primary vendor partners in this product category. Let's all agree to consolidate our buy, consolidate our spend, consolidate our partnership level with these 5, and that will be more meaningful for the vendor partner, and they'll make it more meaningful for us. And that way, we all win together.

So that's starting to happen. We're having more and more conversations with vendors that way. We're consolidating our 10 different business units and their approach to our vendor partnerships, and it's going to be meaningful. How am I doing, Jim?

You were doing terrific.

Anybody want to jump in and save me, that would be great.

Sorry, Barry, that was you. I think the one thing in our partnership meetings, and I think it was Kelly that mentioned that it's really about being a partner is we're not looking at them for, hey, we're big, we want more money. We're looking at how do we take our supply chain together and really streamline it so we're more efficient. And I think the theme of it is we want to grow -- for us to do that, we have to sell more of their products. So how can we enable that and roll that through our business.

So it's a really different approach than I've seen in my prior life in other distribution. And I think it's something that I'm seeing our suppliers being very, very excited about as an opportunity for them because at the end of the day, just like us, they want to generate more sales. So it really helps us better align along those paths.

And the other approach, like you said, is not just price, it's not just rebates. It is also supply chain expectations, right? We want to raise the game of all of us in the channel to be better. That means let's get the right amount -- let's order the right amount of products that we need for the moment. Let's receive what we order. Let's get those in a timely manner and just increase the efficiency and optimize the supply chain so that we can take care of more customers the right way more often and turn our inventory faster, and therefore, generate cash. So the world we're talking about is this parts and supplies world really, which is 30% of our business, which in dollars is what is $1.6...

$1.6 billion.

$1.6 billion of purchases in 2025, for example, which that number we expect to grow. But that's the world of what we're talking about. So what's next?

I want to say about -- we think about half the industry is the parts and supplies.

Half the industry is parts and supplies and what's ours? 30% of our business is nonequipment. So that's opportunity for us.

Do you want to...

Yes, I'm sorry. So I mean, really -- again, I was -- he threw the shorts through us, some say I did, but -- this will be my last formal presentation. Actually great working with everybody. So the other pieces and the topic that we're going to lead into is you saw that's 30%. And our competitors are able to be more at a 50% marker. So if we take without impacting our equipment sales and we can provide a platform that gets us to that 50%, that's a big number. And that's a big number on a high-margin set of categories. So that's really what we're focused on.

So we've been -- over the past probably 1.5 months, 2 months, we've been having meetings with -- it's now 45 suppliers in total. When you're sitting in them for 9 hours a day, they're excruciatingly painful, but they're very productive. And the -- what we've been doing is working with these top suppliers who make up the bulk of that $1.6 billion that we're spending. And we've been like truly looking at like how can we work more efficiently together and then gain share in that.

So this isn't about, again, it's easy to go back and say we're big and we want an extra point here or better pricing. We're now looking to say, how do we take maybe 10 points out of the supply chain and let's figure out to gain share for that. And those are pretty much the candid conversations that we're having with them. And some of them are really pointing because I know our solutions are going to deliver that.

Yes. And I think there have been 2 that said no thanks.

Yes, there have been a couple that have kind of shied away. And it's totally fine. The thing with our industry, especially on the parts and supplies, unlike equipment where brand is king, parts and supplies, there's usually 2, 3, 4, 5, 10 alternatives. So we're able to -- if one group doesn't want to play and take advantage of this, we have another group that will.

And once you're in this and with the businesses supporting it across our 10 businesses, the collaboration and the commitment, and I'll go over some numbers and kind of as we move on, is just astounding as far as how we're driving our business to really consolidate and leverage our capacity and our spend overall.

Prior -- if you want, yes. So we're $7.5 billion. We're made up of 10 organizations. Everybody is basically placing their own set of orders. Everybody -- even though we're that big, we end up approaching our suppliers as 10 separate independent companies. And yes, we have the meetings at a top line. And yes, we're negotiating spend, but they also know transactionally, everything is happening at the business units.

That's the -- as A.J. said, the as was. So what we're trying to do now is work on how do we change that? How do we, as a Watsco family, start acting more as one. Key part of it is we don't want to lose -- this isn't about command and control. This isn't about consolidating purchasing organizations, and now it's all under one. I came from an organization that, that was the way they drove things. And that's a fine approach.

I think if you look at Watsco's success, it's been driven by the fact that we have an entrepreneurial spirit. Our businesses are constantly hunting. We compete against each other. And we're constantly driving that kind of hunger, if you will. So now what we want to try to do is find a way of really being able to combine ourselves as a business unit or as an overall entity, but not take away from that entrepreneurial spirit. And that's why we have people like Zach and Brian, everybody is committed at the business unit level.

This was not something that we sat in, I would say, in the grow, but I'm from the Northeast. So I do appreciate the weather. But it's something that the businesses came and said, hey, we can't do this as 10 individual businesses. So how do we do this when someone to kind of quarterback it? And that's what Splunk.

Yes. And none of this will affect or denigrate the identity of the business unit. I mean they're still making decisions. They're still approaching their customers their way with their cultures and their people and so forth, all the things that Wayne and Stephanie said so eloquently, this is more on the backside, right? This is not customer-facing. This is making tough choices together as a group and then leveraging the benefits of that. So the second leg of the stool is the supply chaining together. If the first leg was buying together, the second is supply chain. These are my very fancy words.

And for that, we have started a program we call Hydros. And just, again, the as was is each of these 10 businesses of ours has their own supply chain network. That means their own branches, their own trucks moving products into the stores, between the stores to customers with their own teams that are running those routes and so forth and running the operations. But for the first time now, and this is only about 9 or 10 months old, we have a shared cross-business unit distribution center. And we call it Hydros. And Jim has helped lead that effort. So go ahead, Jim.

Sure. The -- first, the name Hydros. Steve Rupp in the back came up with the name when I asked because I had no idea what it matter, why we would call a supply chain solution at. He looked at me, he's about 1.5 taller than me. And when I asked why he asked why not? We decided Hydros was. So that is forever, it's opportunity. And A.J. mentioned it's a DC. I'm looking at this -- part of the reason I came to Watsco is a number of years ago was because part of this opportunity. And as much as I'm an operations guy, I look at operations and supply chain as really an engine for growing our business.

So when the idea came through and we started looking at these challenges of how can we start getting the most out of our supply chain, out of our vendor base, but not disrupt what's made us a success over the years. So that's a kind of fine-tuned balance.

And what we decided to do is Hydros is going to be made up of a distribution center, but it's going to be a little bit more than that. It's going to be what I would consider a master distributor of parts and supplies for the Watsco companies. So as we go kind of old way, old way is I'm placing 10 orders with 10 different vendors. New way, I'm placing one order with my master distributor, and I'm getting that entire shipment together as one.

So it's a little change in the way we do it. But our business is nothing is changing. We've agreed on what products are in the warehouse. So no one is telling you you're selling this brand. It's something that we jointly agree on as an overall company and driven by the business units. So that's kind of the foundation part of it. So as far as when we built it, the one advantage we had is we weren't just tagging on to another business unit or just trying to fit it into an existing operation. That always becomes a challenge, and you're always -- you almost get to where you want to be. What we have the ability to do is really just greenfield this. So we started from a technology perspective, A.J. made it very clear, we're not going to create an organization that is high in overhead and just really kind of is a burden to the business.

So we leverage technology, and I know it was mentioned throughout the thing, but truly, we're able to synchronize our data across all the business platforms, bring it in through our forecasting system and now have a single view of -- if you take tie wraps, 36-inch tie wraps, we have -- I can tell you how many are bought at the entire company level, how many we can ship to every single branch, bring that together. So then when I turn and I order from the vendor, I'm placing one order for a truckload of tie wraps, and that's a lot of tie wraps. So our entire ecosystem across that from when our subsidiaries generate an order until when that order is received on their end, the only touch points that are physical are when the person picks the item and puts it on the pallet and then the receiver receives it.

Other than that, the transaction itself is -- you'll see on the next slide, it's about 98% digital, no touch. Flexible and scalable. Obviously, we have seasonality. So we don't want to go and buy hundreds thousand square feet, and then we find that for 7 months of the year, it sits idle. So we've built a model, and this has been our first year of Hydros. We've been able to scale up by 1/3, and then we came beginning in September, and we scaled down by 1/3 in our distribution center. And the numbers and the things I'm quoting are specific to our Hydros initiative. So we've built that and we did the same with labor. So it's there, and we're still adapting it. We're far from perfect, but we're building it on a scalable platform so that we're able to ebb and flow with it.

Parts and supply growth, this is the part that I'm personally excited about. If you go and you look at our branches, and Stephanie mentioned taking out private label. One of the challenges for our branches is private label, a lot of them, you got to buy a box of them. Box has 100, whatever in it. That might be 12 months. So if they want to get into the game, they got to invest in a year's supply of this item in that. So now to get that broad array of product, I always look at it as you have a fixed amount of money if you spend on groceries.

So if you go to Costco, you got a lot of stuff. It's just a very narrow selection. With Hydros, what we're doing is we are literally buying things like these tie wraps, the whole duckwork together. And we're buying them by the truckload. And for a small branch that's in Paducah, Kentucky, when they need 10, we're shipping them 10. So now that small branch is actually able to get into that segment. So things like private label, where a lot of branches had a hard time entering that market, they're now able to get into that market because we're able to break it down and get it to them. Obviously, private label growth, the fast and consistent replenishment, every branch every week.

Now I want to see that even be more as we have additional DCs. I want to be able to turn this even quicker because I want us -- if you run out of something today, I want you to be able to get it quick. I don't want you to have to carry 4 weeks' worth of safety stock if you know you got a truck in next week, place an order today, it's here on Monday. So by doing that, you obviously have the cash flow gain. So instead of our branches starting to carry 8, 12 weeks, I mean, if you're a branch manager, 2 things matter to you. I've been in multiple industries. How many trucks do I have and how big is my warehouse and -- or 3 things, sorry, and how much c*** do I have all over the place?

Whether it moves or not, they don't care about, it's a matter of how much does it look like I have. Now I want them to still look like they have a ton. I want them to have double the amount of SKUs in that building to sell without having to stock the depth and the cash flow requirement for it.

So the next slide, I'll go -- and I do get like I just love this c***. It's definitely fun. But the point of this slide, we're still relatively small now. We've been operating a year. So this is not something -- we're not doing $1 billion through it. I don't want to come there. But what I can tell you, is it has gained scale. So we started this year, opened up, integrated all the systems, got everything up and running. We're now servicing 550 branches across the United States. So we have one distribution center.

Our goal, and we're letting the data and the science tell us is what's our breaking point to move to that second DC. But the data that I'm going over here is real. So we're able to replenish and hit every branch every week. We also -- if you need something quickly, we can UPS overnight it, get it however you want. So this single DC is taking orders end-to-end from -- automatically generated in our -- I call them customers because in my mind, that's how they're treated, those are our subsidiaries.

But we take that order, it flows through our system. No one even looks at it. I mean there's -- here and there, there's an item issue, some data issue, but it flows into a transportation planning system, our PIM data, which you've heard us talk about, it determines, is this 1 pallet, 2 pallet or is this a truckload. And we have a transportation management system that says, what's the best mode to ship this? Is it UPS, truckload, LTL, whatever it may be? Once that is planned, it then drops to the warehouse. We're using a Tier 1 WMS that supports it. That just drops a handheld gun, guy goes out, wave picks it, zone picks it, puts it on the dock, it ships.

We now track that order all the way to receipt. All of our branches have visibility using salesforce.com to see every order from place to end. I mean it really is a pretty cool transparent process. The businesses are now coming -- I'm working with Stephanie, we're getting her group on board, and we just have a couple -- we're almost complete with that. But there's a desire to do it because the ease of business. Again, if I go old way, I have 10 POs, 15, 20 POs going out to 20 different suppliers. That's AP transactions. That's issues. That's everything that goes with it. Now I'm placing one order. Our first-time fill rate is double what our manufacturers are.

Our out of stocks are almost nil. We're stocking 98% of the items we sold. So we look back 12 months and say, what items make up 98% of what's been sold? That's what's sitting in our DC right now. So there's -- I can't say enough like we're really on a roll. And the whole point of it is this isn't a concept. The trains left the station. We're now at a point of just hitting acceleration. Our vendors, and that's why I kind of earlier alluded to it. Our vendors are excited because for the first time, they're going, oh my God, they got I don't have to get 10 different POs.

One of our suppliers had a conversation with them, and they were talking about a little bit of the discount. I said, listen, I said, what if instead of you have a $3,500 freight minimum, what if I guarantee every PO is $0.25 million. We could do that because we sell $25 million worth of stuff. That's not even -- I'm low ball in it. So it's like you can't give me the same discount for $3,500, you give me for $250,000.

So those are the discussions and I'm like, I know I'm taking money out of your supply chain. Let's have a little give and take on it. And that's really one of the ways that we're funding a lot of this. And they're excited. I mean they are over the moon to do this with us. Because it simplifies -- I mean, you just think about it from business, they're used to dealing with 10 different people, 10 different sets of orders. They're maintaining 10 different item numbers. Pricing, Kristen talked about the pricing up here. Right now, they send one price sheet to us. It flows into our system, we disseminate it out to our businesses. old way, they're doing regional pricing. They're doing all sorts of things. It's just a nightmare to really manage.

Now we're funneling in and we're really driving efficiency on their side. And that's where I said we don't go with our handout. Usually, it's about this part in the presentation to them, then I put my hand out because I know I'm saving them a bunch of money. So I think fair is fair. And that's where we save money together and then we try to grow together. And then -- so now we talk about kind of the futures and capabilities. I want to see where we are now. I mean I'd love to see it quadruple in -- when I talk months, I don't mean 4 or 5, but talking in multiples of 16 months, 12 months, be able to double, quadruple where we're at. The opportunity is massive.

If you just do -- and I'm sure everyone here definitely could do it more accurately than me. But if you do the math, if we were a 50-50 business, even with our existing current sales on equipment, that's all incremental sales. And that number starts to matter. And again, there's a couple of things as an operations person, I'll now kind of put that hat on is longer term, we're thinking about what if we start looking potentially like an equipment depot, a big warehouse, I mean equipment, it takes up a ton of space.

When I came here, I was like, holy c**p, this is a little bit different than I'm used to. And it just takes up a lot of space. So now you have all the businesses in prime real estate and everybody is storing a month's worth of inventory. What if I just stored everybody's inventory kind of in a middle of the place and I hit every branch every night. Now my branches go down to 8,000, 10,000, 12,000 square feet. And candidly, it's not just to reduce square footage, but then I want to open up 10 more dots.

HVAC tends to be a very local market. I go to what's close to me. And I'd rather have more dots rather than have just a big dot in one place. So as we look out long term, this also starts to play in our real estate portfolio at the scale we're at with 15 vendors, no, it's not going to impact our overall turns right now. But what we are seeing, and I forgot to mention it from the other side, but Hydros as itself selling to our business units, we're at -- we've hit 6 turns within that business unit.

And we've seen our weeks on hands at the branches come down. Now again, the scale of Hydros where it is today is small compared to a $7.5 billion business. But I'm kind of thinking if it works here, there's nothing that can't take it 4, 5, 6, 10 levels beyond where it's at. I mean, transactions, transaction, warehouse space, warehouse space, if I need more, you get more. It's not like there's some capacity limitation that's achievable, if you will.

And then the improved inventory, I think I hit on. So I mean, I think as you guys could tell from my approach, I am super excited about this. I look at it as just a way of really driving parts and supplies. I think equipment is kind of an anchor. But everything else, there's no reason that if someone is buying an indoor and outdoor unit from us that the thermostat, the wiring that every single component can't be sold with that one package. Why are they going to a second distributor? Is it we're not stocking something? Those are the things that like we got to fix that problem. And I really believe this becomes that enabler or mechanism for that.

That's what I was going to say.

And you didn't push me off the stage.

That's perfect. And maybe we'll open up to a couple of questions if anybody has any. I was just grabbing a microphone, give me one second. There in the fourth row, please.

Maybe just comment, the industry is at 50%. Is it the other HVAC distributors are carrying as much working capital to hold the parts and supplies? Or are those HVAC contractors getting the parts and supplies from general industrial and distributors?

Yes. I mean, Barry, you can answer that question nicely.

Well, first, there are legacy distributors that compete well in this segment for 50 years, just like if we buy a large equipment distributor that's built a legacy 50 years doing equipment, we see that in the same community of nonequipment distributors. if he's listening today, Charlie, we want to acquire a business and make you part of the family, a company here called Tropic Supply...

Also, it's return my calls, please.

No one's ever heard of it. It's a great company. They've built their legacy serving contractors in this segment. And we're not going to put them out of business. What we want to do is chip away in our business model to better compete, to better serve and use our overall strength of technology and so on to do that. It takes a bit of a change in the logistics model to accomplish that, the way that you heard today. You heard private label, Grainger, a great company. In my early career, they were not necessarily a great company.

Today, they are a great company and private label and logistics and product selection and what goes with small cube and Fastenal, another great example. So again, in the culture, we have business units inside of Watsco that does all of this very well. We have 2 business units inside Watsco that is 50-50 and others that are 80-20. And so part of the evolution is part of our challenge to the business unit leaders was how will we compete and grow that part of the market, knowing there are -- there's even more fragmentation, more good competitors in that segment. And what's bubbling up here of let's buy together, let's have logistics together.

We're going to talk about let's sell together is the evolution of that discussion with our business unit leaders. So today, I think the average contractor might go to Carrier Enterprise and buy $4,000 of machines and still have an account over Tropic Supply where they might buy their concrete pad to put it on. And the question is, does CE have concrete pads in stock? Is it competitive? Do they know what they're talking about? Do they have -- is there a way for them to connect that dot with their customer? And what Jim is saying and what we are saying is, not all of our stores are in that position to have sold those types of accessories as well as Tropic Supply has over the last 50 years. And this is part of that evolution that we see a big opportunity for.

David, do you have a question? Thanks, Barry.

So increase from 70- 30, 40 is bigger than 30.

Yes. And I'm not in financing, right?

So no specificity, we're just going to go greater than 30, right?

I mean, I think you know us by now, Dave, right? I mean we also want to give you a guidance on the fourth quarter just before you...

We appreciate that. So when we think about this sort of hub-and-spoke situation, especially in the parts and supplies area, how do you -- when you balance that out, you look at the margin profile, I suppose it's good for cash flow and turns, as you mentioned. Can you just talk a little bit about how that changes the model, if at all? I mean, as you grow that piece, is it margin dilutive overall? Or is there something about that methodology that helps you close the gap versus equipment, for example?

I'm sorry, as we add parts and supplies, is it margin dilutive? Is that the question?

Yes.

No, it's the opposite. It's margin accretive.

It be margin accretive.

Yes, parts and supplies we sell at a higher and typically, as categories, we sell those at a higher margin than equipment.

And then relative to the parts and supplies business today, the hub and spoke, is the profitability higher in that method than it is in what's going on today?

Well, the intention of doing it in this method is to do a lot more of it, right? And that's part of what Jim was trying to explain is that we can help more of our branches, more of our businesses and more of their branches to sell -- get into more of these product categories without making such a large investment as they used to have to make. So they can -- instead of carrying a year's worth of these, they can carry 6 days' worth and buy them out of our master distributor -- internal master distributor, if you will, and get replenished every day or every week or whatever it is. So they can be in that business of selling that stuff and not -- it's an easier entry point. It's an on-ramp to selling more of this stuff.

I think, too, there is a segment of parts and supplies that is a lower margin when you start getting into truly the commodities. There's that segment. But the bulk of that category is when you start talking about thermostats and some of the electrical and the pumps on it, the motors, those tend to be very solid margin products. And then as far as what we're doing, like I was saying, when we negotiate, just as an example, with one of our motor suppliers, we're now buying factory direct from their plant because we're able to buy at that scale because our demand is all 10 businesses.

And that is going to put us at a different price point and cost point. So there's some improvement for us on the cost side. Obviously, there's cost to redistribute it and it's finding that balance. But the key is having a little bit left over for our business to drive that margin. And that's a lot of what we're trying to do.

But just to say one more time, it's about selling more stuff and also making a higher margin doing it.

Just on the topic of the equipment depot, it always felt to me like the -- especially on the equipment side, this is all about being necessarily local. And just so I'm clear, you're not suggesting that there's not as many SKUs. It's just you have less in quantity...

Yes, what's an equipment depot, I'm not sure.

So think about it this way, though, right now, we have a lot of our branches who are buying a truckload at a time. And they tend to have a very narrow breadth of SKUs. If I'm replenishing you every day, so like I have this -- when it comes to things like equipment, it's overnight, every night is that mindset I have. So if I have a DC that has every SKU out there, every SER rating, everything you can need, I can have it to you overnight. constantly.

Now that regular piece of equipment that c*** burned out, I got to replace it today, that's going to be at the store. And again, it comes down to now I could stock 1 or 2 of these, 1 or 2 of these, some breadth there. But then when the guy calls and says, hey, I want 10 units for a job I'm doing or I need this one-off unit, we become the guy that says, I have to be here by the time the store opens.

Yes. But let me clarify, we are not at equipment dealers...

No, what that is on there for and what all this is and really one theme I want you guys to take out of this is that we're increasing our world of what's possible we didn't have the data, if we didn't have the systems, we didn't have e-com and the apps and all these things build on each other and integrations and so forth, they create new worlds of opportunities for us, things that we couldn't do before because we physically were not capable of it. Now something like Equipment Depot can be on the list because it is actually something we can dream about actually playing off. That makes sense?

Yes. I would say that the second half of today, just to be clear, is a little bit of a future state, a little bit of a dream state, if you will. first half of the day is this is what we've done. This is what it means. This is what it's meant. We're going to keep doing it. so this afternoon, it is a little more abstract.

Right. Well, to say it more the vendor consolidation and rationalization, we're 3 months in. Hydros, we're 10 months in or 11 months in or something like that. And what you'll hear about coming, which we call Watsco, you saw in our press releases now we call supplysync.com. We're still on day 0, right? These are things we're telling -- giving you insight on what we're investing in because we see -- a, because now they're possible, and we see the opportunity that they present in terms of return.

So before we go to the WatscoOne and SupplySync story, we're going to talk -- I got to advance the slide about customer experience in the AI world. We've alluded to it a few times. We are doing a lot in the world of AI. We are very confident that we are at the leading edge, if not the bleeding edge, certainly in the HVAC and industrial world of taking advantage of the new tooling, and we're uniquely positioned to do so because of the data elements that I explained before. These 2 gentlemen, Zac runs Gemaire, Zac Linde and I think he's got a lot of play today, so you got to get Gemaire...

We got to start getting the limelight a little bit.

And Rich Martin, who is our salesforce.com guru and which a lot of the new AI stuff is living inside. So we're being delivered to our constituents through the Salesforce platform. So take away, guys.

Thank you. So as A.J. was saying, my name is Rich Martin. I lead the Salesforce platform, which means I'm responsible for a lot of the screens and the tools that our associates use every day to complete their job and how that influences the experience they're able to deliver to our customers. And we know that AI has the ability to shape every part of our business. And everyone you hear present today, you're going to hear them talk about AI and how it's influencing things. And you'll hear Zac and myself do that, too.

But before we get there, I'd like to talk about how Watsco is uniquely positioned to take advantage of that and to implement these technologies. So we do that in 3 ways. AI takes on the role of a credible, reliable and instantaneous source of information. It leverages the rich data resources that we've spent years building, curating and putting together. We're talking about data on our products, data about our customers, data about how we troubleshoot our equipment and what the resolutions are for different modes of failures and different things that go wrong. And the list goes on and on and on to all the things that A.J. mentioned earlier.

The next role it takes on is a guide. It's intimately familiar with our business processes and our offerings to our customers and how we complete things so we can guide our associates as well as our customers themselves to the right solution right away. And the last thing it does is it saves time. Both of those come together to save time for our customers. And we know when our customers are more efficient, they can complete more jobs during the day, which turns into more sales opportunities with us, and they're happier. When there's less friction to do business with us, it makes it easier to do business and they're stickier. They tend to continue to buy from us and do business with us and grow with us.

And when those same things happen to our customers, we see the exact same 2 outcomes. We see -- I'm sorry, our associates. Our associates are more efficient. One individual is able to get more work done in one day. And when you take frustration out of someone's job, they're happier at work. They stay around longer. They don't leave as quickly. And when we do bring new employees on, it reduces the time to onboarding. We can get people up to speed more quickly and get them efficient sooner.

So now talking about how AI has been able to influence some of our processes and some of our customer experiences. Let's start with onboarding. Every time we bring a new customer into our business, there's a long list of things we have to do to get them set up for us to validate if they're creditworthy, for us to learn about them, so we can target them and segment them and put them in the right sales channel and give them access to the right tools to do business with us. And then to set us up with all of our OEMs, with our partners with all the systems they need access to that we have them in that they don't even know about in order to serve them.

And we have to do that 18,000 times every year. This is a customer -- or this is an industry that always has new customers. There's churn, which is normal. And there's new businesses starting every day. Every single day, there are people starting new HVAC companies, establishing new relationships with distributors and who need to be set up and need to go through this entire process. So this is a process that used to be measured in weeks for time to complete. And through AI and robotic process automation, we've got that down to minutes. If we receive a completed credit application digitally on our e-commerce site, we're able to get that customer set up and ready to buy from us with access to our systems in under 15 minutes now, which is a tremendous improvement from where we were.

Then another way AI has impacted our operations is once the customer is on board with us, they interact with us in a number of different ways across all sorts of different channels, digitally and in person. And in the old world, all of those were siloed. Someone would walk into the branch, branch person is there, eager to talk to them, eager to help them, but completely unaware of the conversation that customer had with credit a week ago. The conversation that customer had with technical support that morning or what technical support recommended they go to the branch to buy.

We've done a great job the last few years digitizing that information, consolidating it, putting it all together on one platform where people could see it. But because we have such vast relationships with our customers across so many different channels, it can be a lot. So how we're leveraging AI is to surface the most relevant and contextual information based on what an individual's role is and what the task is they're trying to complete.

So in this example, we see someone who's logged in as a sales manager. They're responsible for a set of customers, and this is one of their assigned accounts. And their main goals driving sales growth and transitioning customers to digital experiences, getting them on e-commerce. And we see right at the top of that summary, online sales have skyrocketed. Overall sales are up. You're doing great with your 2 goals for your role in the business.

Then below that, it's summarizing all of the interactions this customer has recently had with the business. So then our sales rep, when they're preparing to talk to this customer, they know this customer has recently had a positive experience. They've had 2 cases in the last 30 days. Both of them were resolved and the customer sentiment through those cases was positive. They were happy with that resolution. And we're able to prepare our reps with that information and also alert them and allow them to be proactive when things maybe aren't as positive. And then the last thing it does for our example, sales rep is it provides insights.

So it's noticed that this customer is on our website frequently. They're looking at supplies products, but they're not actually purchasing supplies from us. And it's letting me know as a rep, that could be a great thing to talk about. And again, it's highlighting the most relevant pieces of information to me and my job. It's not giving me a long list I have to dig through where I have to look at charts and identify trends to see, oh, there's something going on with supplies. It's letting me know so I can jump right to that.

And when you're a sales rep with 20 to 30 to 50 customers, it's a challenge to manage, but it's possible to manage that customer set. When you're an inside salesperson, when you work in a call center, you could be servicing hundreds or thousands of customers. And if you're receiving an inbound call, you have 12 seconds, 12 seconds during pleasantries to identify who this customer is, how we interact with them, what tools you might need to solve -- you might need to use to solve their issue. Just in those couple of seconds while you're saying, hello, how are you, with AI, we're able to do that immediately and have that on the screen before you even say hello.

We receive millions of phone calls annually and a large proportion of those phone calls are fairly routine and frankly, could be handled by our app or e-commerce site. Do you have the product? What's my price? And is this product still under warranty? But we do get a few hundred thousand calls that require a unique service, and that's through our technical support group. You heard in this morning's session, one of the biggest challenge for contractors is to hire and train service and installation technicians.

And so because of that challenge, we staff a technical support group to provide a resource for the field if they're on the job site and are having problems with servicing or installing a product. Now in the past, the handling of these phone calls was a challenge because these are emergency-type calls. If you think about it, this is originating from the job site in an attic on a roof and usually with the owner or homeowner standing by. And so responsiveness is very important on this. And we struggled with that because it was either a call center with these technical support experts or chat or e-mail, which is not very responsive. And it was difficult for us to really gain the data and insights on what is the purpose of the call, and it limited our ability to be proactive on how we're going to solve these issues in the future.

And so we introduced Wingman. And what Wingman does for us is it's a structured way to request technical support and give us the insights on what was the fault or the issue that contributed to the call. And so this is accessible through our mobile app. And a technician has a mobile app and they go in there and request wingman support. They provide the model number, serial number, basic narrative of what the fault or issue is that they're experiencing on the job site. And then any relevant pictures, diagrams, anything that they're struggling with.

And what that does with my team is it then comes in and creates a sales force case, populates this case with all of the information, and then we begin tracking that interaction between the technical support team and the technician that's in the field. And so the process is fairly simple. That information comes in. It gives my team the ability to view it and do some background investigation on what's the model number, serial number, warranty status.

And then they've got the narrative of what the installation or service technician is struggling with. And they can pull up any sort of relevant diagrams or product information and then they reach out and call or video conference the technician in the field based off of their preference. The video conference has been very effective for us because a lot of times, the technician is looking at the unit and they're struggling, they turn their camera around and then my technician in the office can help diagnose and troubleshoot the challenges that they're having.

So once that issue is resolved, then they can close the case. And the true power of what I mentioned before is now we're starting to compile all of the data on what created the fault in the first place, what are our most common calls, what are the quantity of calls. And with that data, then we can be more proactive with how to potentially train those contractors upfront on what the most common issues are they're coming in. We can create ready to make videos on common faults so that they call in or text in or have an issue, we can shoot a video on how to quickly solve it themselves.

And also, we can communicate more effectively with our OEM suppliers on here's common faults that we're seeing. This needs to be a quality assurance piece of the factory on these given faults. And now that we're in this position, and we've got the data, we've compiled it, now we're going to be able to use AI to better -- in the future, better create programs around solving these common issues.

And a fast anecdote talking about the live video support Zac mentioned, I just love the story. Shortly after we launched the feature, I was part of a technical support call where the customer called said they're getting an error 310. Our technical support person, not familiar with that error code is looking up and down the manual, can't find it anywhere. says, hang on, we just got this video feature, turn it on. Let me see what's going on. Instantly, they saw that the display board was hanging upside down, and it was E01.

It's the kind of situation where a picture really is worth a thousand words. They've been on the phone, both of them frustrated for longer than anyone wants to admit right now. And as soon as they saw it, it was instantly clear and they were able to jump right to what they had to do to troubleshoot it. But now that we've talked about what that process is like overall and how it looks to our customers, I want to zoom in and look at exactly what it looks like for one of our internal technicians who works those wingman cases and answers those calls now that we're in the age of AI. And in the old world and the way this has been done historically, that job is a very swivel chair heavy job. Someone takes a call on one screen, they're taking notes on a second screen.

In a third window, they're pulling up product manuals, wiring diagrams, all sorts of information on for that system. They're trying to look up inventory if there are replacement parts needed, and they're trying to look up service history along with a whole bunch of other things. And now AI is able to do all of that. So we see 2 tools that we've launched with our associates on the screen here. The top one are suggestions. The AI is sitting alongside me on this phone call, whispering to me, telling me things that might be helpful to say or might be helpful for me to think about as I'm on this call.

So if we look at the transcript in this example, customer calls up, they have a particular model and they're getting an error code. Before I do anything and without requiring any action from me, the AI pulls out the model number so that I can look up the relevant information for that equipment and translates the error code. It's telling me that error code is a problem with the pressure switch and the manufacturer recommends troubleshooting that by measuring the voltage across it. So all I need to do as a rep is repeat that back to our customer if based on my experience, I think that's the right thing to say.

And then our customer did that, and they're reporting the voltage is 5 volts AC. And the AI immediately recognizes that's outside of spec. That switch has failed. Not only has it failed, here's the replacement part number. And then it takes that part number and checks our inventory for the branch that, that customer likes to purchase from. And very quickly, without me having to copy and paste a part number to 3 different screens, I'm able to tell the customer, your preferred branch has 3 of these in stock. You can get it tonight, they close at 4:00. It's increasing the velocity. It's decreasing our time to resolution, and it's making the entire process a lot more pleasant and a lot more smooth for everyone involved.

And the other tool we've launched is an AI coach. With the first rule being all about suggestions and concrete ideas and things for me to say and do and help think through, this is about the softer side of doing business. Historically, if I was a rep who took phone calls, every 2 weeks or maybe every month, I would sit down with a supervisor, team leader, whoever, and they pick 1 or 2 or 3 phone calls that we would listen to together and review. This is weeks after those calls occurred. I'd get feedback. But in the meantime, I possibly have taken hundreds of calls in between when those were recorded and when we actually review them.

Those are hundreds of interactions where I haven't had an opportunity to better myself. Now we're able to tell people live during the call how they're doing, if they sound professional, if they're mentioning the promotions that are hot right now, if they have a habit of interrupting the customer, so people can see these things real time as they might be doing them so that they can make corrections. And it allows us to be extremely transparent with our associates and really helps everyone provide a better experience all around.

And then the last thing we do, at the end of every call, reps are tasked with writing up notes about the call. They have to type a short summary. On average, that takes about 30 seconds, which really adds up. Some of our call centers are extremely high velocity, which we'll talk about in a few minutes. 30 seconds times the number of calls a rep takes in a day really does add up to a lot of time. Right now, you'll see on the left side of the screen that AI has been transcribing the call live as we're going.

And as soon as we disconnect, it's able to summarize those notes, save them to the case, I'm done and I can move on to my next call. I don't need to be burdened with writing notes on sticky notes the entire time I'm talking on the phone, trying to remember what I need to put in my notes and then spending that time at the end of the call to write it down. AI takes care of all that for me and AI is accurate and makes it easy.

In 3 languages.

Yes. So that's how we do one phone call. But we don't take one phone call a year. We take a lot of calls. We take 5 million customer phone calls every single year at this company. And over 60% of those we found are what we call routine inquiries. These are not problems that customers need us to solve. These are people asking for a single piece of information. They want to know, is something in stock at the branch I buy from? What's my price on this particular part? Is this serial number under warranty? And those are all things that in the future, our voice-to-voice AI will allow customers to call and immediately get an answer to.

Ed mentioned this morning that chat is open an hour before the branch opens and an hour later, which has been a great service to our customer. AI will be able to be available 24 hours a day. No one will have to wait on hold. They'll be able to call up and immediately get the answer they're looking for. And in the case where it's not one of these routine inquiries, in the case where this is something we want to route it to a person, we'll be that much able -- that much better at routing it to the correct person because they will have told the AI what they're calling about, why they're calling, and then we can route it to the person who has that skill.

If they're calling about a multi-zone ductless system, we can route it to the product specialist for that. If they're calling about a technical support issue, we can route them back to the same rep they spoke to earlier in the morning when they were given some troubleshooting steps and said they would call back later. It's such an evolution from press 2 for sales and press 3 for technical support. So it really makes us that much more powerful and that much more able to serve our customers both better and faster.

Just a few more points on AI. And Steve, join me, if you would.

Thank you, guys. So 1, it's important to note that while this -- a lot of what you just saw is being delivered by Salesforce.com enriches our Salesforce guru, this is not Salesforce technology.

This is Watsco technology that was homegrown, developed in-house and just delivered through the platform that our customer service and technical support reps are using. And there's a lot more technology that's being delivered in other locations outside of salesforce.com. But we want to highlight that because it's so tangible. But just to give you a quick flavor of other AI that's happening or other areas where AI is being used in the organization, and we started this, I don't know, 2 years ago, maybe is we really built an internal AI chatbot, much like ChatGPT, we call it ask.Watsco, so that none of our data leaves Watsco when we have interactions and conversations with AI.

So we have a very early partnership with Microsoft and their OpenAI partner relationship. We get key so that we can access the foundational models of the AI frontier models, if you will, but we have no data leakage. Every conversation we have, every piece of data that we share and have conversation with our AI tools, and that's happening by like 2,500 people in our organization every day or week or whatever it is, stays within our 4 walls.

That's a hugely important piece. And that AI chatbot is developed again in-house and it's got new tools and technology coming out every so often. And then we built -- so -- and that's the engine of what you saw a lot and now that's being delivered through salesforce.com. The other engine that we built in our building is more external facing or can be more external facing. It's a digital HVAC expert.

So all that PIM information we have, every Salesforce case that's ever existed with the customer service and technical support people, all the -- every piece of data that we've talked about can now live in the brain of this AI, we call it Al as an Omaj to our Chairman, and can answer questions about installations or troubleshooting or what have you.

So if I'm installing ABC 123 system and I need to know the -- how much length of a line set can go between the indoor and outdoor system, I don't even know if that's a thing, I'm making it up here. I can ask Al that question and get a real-time answer and get a citation from where in the literature it's getting that answer. And that's being delivered today to our counter representatives and others internally and coming, not I was going to say tomorrow, but in the very near future to our customer base through our mobile apps and other interfaces.

So I just want to make that clear that this is really our homegrown stuff that we're leveraging and continue to build out.

Yes. The most important point there is that if we don't get out of this conference soon, we're going to be behind.

Yes. We're very eager to get back to work. What questions can we ask or answer rather about anything AI or anything else you heard? Come on. Wow. Dave, nothing? You guys nailed it, then I guess. Appreciate it. All right.

This is the pen ultimate, I think, right? Supplsync.com. So back to [ 1030 ] and 5, big ambitious goals. We asked our business leaders, what do you want to do to get us there? And they came up with a 3-legged stool of buy together, supply chain together and sell together.

Supplsync.com or you may have heard us refer to it as Watsco One, we're going to go to market as supplyync.com is the sell together piece of that. These gentlemen, Steve Rupp, our Senior Vice President and Chief Technology Officer. Brian, who you met earlier, leads Care Enterprise, are going to take you through that.

Well, this is the last presentation before the roundup. So we're leaving the best for last.

Yes. And everybody wake up, right? Yes. So I've had -- over the last 15 years, I've had the pleasure to lead the digital transformation at Watsco and really leading this crazy talented technical team, which has been a blast, right? There's just so much going on. And the latest thing that we're bringing to the organization is supplysync.com.

And some may say, what is supplysync.com? Others have heard this Project Watsco One. So we rebranded it. We went from project name to go-to-market name supplysync.com. And what it is, is an enterprise-grade procurement marketplace, right, built and designed for enterprise class customers. And Brian will go through a little bit more about what that means, but it's what those enterprise customers look like.

But it's all about unifying through this digital platform, the entire Watsco portfolio to better serve these organizations that have a broad need and oftentimes do business with more than one of our Watsco companies. You heard the word marketplace and why that's important is because the architecture is built in a manner to preserve our decentralized culture, right, and allow each of these businesses that were -- these first-party businesses that we're bringing on board to continue to bring their culture through in the offerings that they're making, but harmonize a little bit better on price and service levels and such with their sister companies.

So it's all customer focused. You're going to hear a lot about how we built this thing, and it was all through voice of customer of this class of customer. And it maintains that full value stack that kind of Ed walked through earlier of our commerce environments, right? They're not just procurement platforms, right? They're ecosystems for the HVAC trade, right? So there's a lot of tools and capabilities that shine through in these platforms. This will continue to exist.

So here are the customer segments, where we're going to -- the initial focus is going to be on. 1 our contractor consolidators. So that's an entity that purchases a contractor or multiple contractors, a large contractor purchasing 1, 2, 3 over a different geographical area, PE firms buying contractors.

The second group is called institutional organizations, a significantly huge opportunity. So think about repair and maintenance departments in these institutions like in a hospital network, school network, pharmacy network operations across the country. So these are organizations they're actually looking for some kind of solution and we're going to show what -- how we're going to provide that in a second.

Then you got home warranty and property management groups. So you're looking at countless opportunities, where equipment is needed for either a repair or replace. So what tool can we use to kind of access those?

So you heard me say how we design this thing with our customers. And so enterprise customers spoke and we listened, right? But we went and we visited with tons of these enterprise-grade customers, and we said, what are the internal business challenges that you have right, working with the Watsco companies, but more broadly, what are the areas that keep you up at night and make it challenging for you to grow and scale your businesses?

And we heard a lot of very consistent threads, inconsistent pricing across their locations. So as they have organizations that are regional or national, right, they get price drift across all the companies. So even though we may have well intentions of setting a price with an organization, over time, right, these prices company to company may not harmonize as well as they should.

And so that's one of the big challenges that they had. limited ability to influence product selection and vendor selection within their own company walls and ecosystem. fragmented billing and credit. Paying -- we talked a little bit about how Watsco benefits from some of that on the VCR side.

On this side, it's -- these companies experiencing much the same phenomenon of multiple vendors, multiple lines of credit, just a lot of complexity on the AR/AP side. Inconsistent logistical commitments. So we are not having full visibility into how things are transacting, when they're to be delivered, how often they're to be delivered, et cetera.

Minimal procurement visibility. So as they acquire new companies or as they have different parts of their organization, what does that look like? How can I influence how these operating companies are going to buy from the enterprise perspective?

Which is everything Steve just mentioned, it's not much different than the challenges -- so the goal here is to basically provide an avenue to take all those different aspects that Steve's talked about and be consistent really from the parent company down. And we're going to kind of get into a little bit more of the nuances of that.

But remember, these groups, these channels that we talked about aren't under one location, right? They're spread out throughout the country, right? So how do you get your hands around all of that? And how do you ensure that they're following the processes that come. It's an interesting predicament. It's a challenge out there, and I think we have a solution to kind of tackle that.

Right. And the last one is a little bit more nuanced, but loosely integrated technology systems. And what we mean by that is all of these complex organizations operate field service management platforms, right? They have associated financial systems. And all of them want product catalogs, pricing, it's inventory levels, all introduced into these field service management platforms.

When you're doing business with 10, 12, 15, 20 different companies, embedding all of that in your field service management platform is very challenging, right? With supplysync.com, that becomes extremely feasible. So what are we building, right?

You heard all that voice of customer. Rob from legacy Service Partners. Do you have any -- did we miss anything on that prior slide that were -- the challenge that you see or that we're facing?

No.

What could we do better? I mean, Rob was a big part of specifying some of these things. So...

I think it comes down to friction and right? When you have the ability to scan across the country, very quickly where something is located, it comes -- I mean, there are so many different tentacles. We have one business that stretches from North Carolina all the way up until Boston.

And they are dealing with multiple Watscos or Watsco type locations, if you would, whether it's Gemaire, Baker, CE, Peirce-Phelps. So that right there, that one company spans across so many different regions, if you would. And if you're talking about pricing inconsistency, it's not always the cheapest price. But as an example, you could have a heat kit in one market that's $800 and then realistically knowing that, that thing should be around $200 you're tearing your hair out, like do I get the $800 one because I need to service the customer, but I know everything is based on my price book, and I know what the margins are so that I'm going to go ahead and supply that customer, if you would. But all of the rigor role that's required to have that pricing inconsistency, if you would. That's one thing.

Yes, that's a great point. We should have brought that up on the innovations with pricing. But when we talked about market pricing, remember, we can maybe get a little bit more price out of the Northeast than we would out of the Midwest, for example. With these channels that we're talking about, that's basically our problem.

They want one price to manage their business. They can't worry about the velocity of each individual area with the different prices in that scope of business, right? So for them to make their life easy, they really need to have one provider, right, provider, right, that be able to provide one price across the entire footprint of where they're doing business. So how do we fill in that one provider mode with 10 business -- Watsco business units. And that's the solution we're talking about.

Right. To a degree, I mean, if I go on Amazon, I go on Amazon and I'm seeing a price. That's right? But when I go on 5 different Watscos, if you would, and I see some disparity in those types of things, that -- but yet, my pricing engine is really predicated on the price that -- it just -- you can understand it just throws a wrench into the whole thing.

But it's not also that. It's the stickiness that you then provide because I know based on our service level agreements in multiple areas, you're going to open the store at 4:30 on a Saturday or what have you. Again, it's being able to -- because I don't have it in stock, I don't have it on a truck, but I could find where that's located and I could say, compared to a different contractor, I could go ahead and take care of you, Mrs. Jones today. And this is how I'm going to do that.

Consistent logistical commitments, right?

Absolutely.

Yes. Well, thank you. Appreciate that. And feel free to pop in wherever you want, Rob. So what are we delivering, right? Based on all that voice of customer and all those requirements that we heard, what does version 1 of supplysync.com look like, right? Again, supporting that consistent pricing, regional or national, right?

Very, very critical for these organizations, and we've got to deliver that, and we're planning to. Procurement control, right? So enterprise-level visibility, right, allow these enterprise organizations to monitor and have full visibility into how their organizations are buying and where they're buying and why they're buying, right?

I think today, if you talk to these customers in mass, right, that's a big challenge for them. And they need to arrive at their economies of scale, they need to be able to have that visibility all the way through their organization as to where and why they're buying.

Unified billing, right? Unified billing is a challenge for them, just like for a company like Watsco. They want to minimize the number of vendors that they do business with for simplicity and back-office scale. And so with supplsync.com, we're going to be able to harmonize and unify all the invoicing to a single pay.

So Rob's organization will only need to deal with the payables for supplysync.com for the entire Watsco family of businesses. Reliable logistics, Rob touched on it a little bit there. Just we make service level commitments. We meet those service level commitments, and it's consistent across all of the Watsco companies that they're doing business with.

And then just complete visibility through the entire experience, pricing visibility, logistical visibility, procurement trends and capabilities, et cetera. And then that integrated experience, we're also going to deliver a branded mobile app for those enterprise customers that are interested. You guys are familiar with the HVAC Pro+ mobile application for each of our business units, right? We're going to build for each enterprise customer, if they so choose, a branded mobile app specific to their business.

And so they can deploy that to their teams with logo for their organization and giving them full visibility into the entire process all the way through from the field to the back office. And then a single point of contact, and I'll let Brian dig in on this one, but we hear this a lot, single point of contact, sort of that ambassador of the relationship with the organization, but from a selling perspective.

Yes. It's the one throat to choke, right? So throughout HVAC, there's going to be issues, right? It's pricing issues, availability issues, service issues, whatever the issues are. What you can have is customers that are spread out across the entire country, figuring out, who the point of contact is in each individual market and reach out and make that call, right?

It's just completely inefficient. You need one person where you can talk about opportunities with that you can talk about next steps with that you could talk about issues with. right? So that what we call an ambassador. And that ambassador would actually own the relationship, get the feedback directly from the customer and then that person is going to do all the legwork reaching out to all the different contact points to get the opportunity accomplished or the issues resolved.

Well, that's kind of like groundhog stay, right? Because what we -- I mean, we live that and breathe that every single day. And what I mean by that is we have a partner in, let's say, Nebraska. And then that same partner actually does business in 2 locations in Texas. And I'm on 3 calls having that same conversation with 3 different regional locations and choking.

I want to choke all of them, Mandra. So it would be really nice to just kill one of them and kind of be done with it so that they know that I don't have to do that again and again. But in reality, that is think of that times '23. And that's what we have many, many times. And what I'm talking about like something as simple as creating an HVAC partners login for all of your regions.

Nice to have one person rather than going to, well, it's this person here and this person there and so forth and so on. And I love it. I'm telling you I love it.

Perfect. Perfect. So what does that unlock? It unlocks access to our 600-plus locations, right, through one login, one harmonized set of pricing, et cetera, across the Watsco footprint.

If I could just paint the problem just a little bit more with a specific example, right? So let's say, a customer needs air conditioning and they're going to call Carrier Enterprise, right? They're going to get on their website. They're going to sign on, they're going to see the box. They love the price, they love the service, they place the order.

But now they need flex. And I got to tell you that with Carrier Enterprise, that's not our core competency. We're not good with Flex. We're good with a lot of things, but not Flex, right? We have a sister company that's phenomenal with Flex, right? But for them to order that from a sister company, they have to log off our platform, go on to the sister company, log on. By the way, it's East Coast Metals, phenomenal company.

Log on to East Coast Metals website, order the product. Right there, that's 2 orders hitting 2 basically credit lines, 2 processes and 2 invoices coming in. And there's breakage there. right? So if this is all spread out throughout the country, and we all talked about this being a relationship-type business, right? What stops from a certain person in a certain office ordering it from a friend of theirs in another facility, right, or another vendor. And that happens constantly.

So if we can get one platform where that customer can see all of the complete assortment across all 10 business entities and at that point, have that product arrived from when they need it with the one price, et cetera, we think that's a complete home run for us.

Sure. So thing these voice of customers with their outcomes. And I'll let you guys read some of these outcomes, but it kind of goes all the way from exciting to impactful to valuable. But at the end of the day, when you look at these kinds of comments, and I think Rob just kind of also gave us another 1, but to a number, we got very positive feedback from this customer group that this is going to hit the mark.

And so we think that it's going to -- it's not going to address every challenge of these enterprise organizations, but we think it's going to address a lot of them. And so we're excited to get down the path of development. So from this point forward, we're going to go into -- Kristen, you thought that the scatter plots were the nerdy stuff.

I got you beat big time, right? So you get the CPO up here, and we're not going to have a conversation without architecture diagrams, right? But now -- so what we're showing here is this is 2014 and not all concepts are ready for their time, right? So I drew this architecture diagram on 55 of 14, right? And I called it Hydra back in the day.

For all those nerds, right, Hydra is a multi-headed fire breathing dragon, okay? And so it's Project Hydra, and it was amazing, right? The concept was incredible. But the reality was, at that time, we didn't have the technology stack to support a concept like this. That was the first problem.

The second problem is no customers were asking for it. Certainly, no business leaders were asking for it, right, because we're very decentralized at the time. Enterprise customers weren't as sophisticated as they are now, right? So the demand just wasn't there. But we also didn't have the technology stack to support it, right?

And so what we're building, and you've heard a lot about this, and we haven't talked a ton about it is, since we started this mission of digitization of the Watsco companies 15 or so years ago, we've built so many capabilities, but these capabilities have really built upon themselves. And so we started with data and analytics and then data and analytics and Fed PIM and then PIM enabled commerce, right? And then we wanted to go down the pricing path. And to do that, we needed product data, right? We needed analytical data from our ERPs, et cetera, et cetera.

And so over time, we've built all these capabilities, and they piled on top of one another. And when you're looking at building something like supplsync.com, it's really just a mashup of all the technologies that we've already built and launched, right? So there's a ton of efficiencies we gained. It's got a heavy commerce backbone. It's got a heavy PIM backbone without the pricing platform, we'd have no luck, trust me, synchronizing and harmonizing pricing across our companies and on and on and on.

And the conduit infrastructure that we haven't talked about today, right? We talked earlier about we allow through acquisition -- through acquisition, they come in and they maintain their existing ERPs. We don't migrate them to an SAP or otherwise. That's extremely intentional. And as long as they're safe and patched and secure, that's okay because they're efficient operating systems for these companies. But when you're sitting in my role, right, building enterprise solutions that bolt-on are very difficult unless you can build what we built, which is Conduit, which is enterprise messaging bus that can speak to all the very typical ERPs in our space.

So you take Epicor Eclipse, Profit 21, Inforce CSD, Mincron, all of the standard ERPs and wholesale distribution, we can plug into any of those, communicate with them and deliver our enterprise solutions. And that's just not a supplysync thing. That's everything. So conduit is thread throughout. But the point here is that we've built upon all these things. And so as we develop supplysync, it's just the next generation of a digital solution, and it just happens to be the newest digital platform that we've developed and we're delivering, right?

So what does that look like? This is where it gets really exciting. So on your left, right, is that e-commerce front end, right? That world where just like carrierenterprise.com or gemaire.com, you're going to go to supplysync.com and you're going to have access to all the capabilities that we just said. But how does that work?

And it gets into this marketplace design. But the magic happens in that marketplace center area, right? How do we evaluate and make offers to customers and then evaluate where the best place to place that order is and then get it off to the ERP, which then moves on to the WMS within each of the business units for fulfillment. And then you got to do the money side of it, invoice and like I said, consolidate and provide that single pay.

So this is a little bit of how the sausage is made or underneath the hood, but it's critically important to enabling what we've got today. So when and how are we going to do this? We're already building it. So we started in about August, building out the capabilities. And our plan -- so -- and that's all the way from voice of customer through technical design, et cetera. The most challenging place is business process design, as you guys can well imagine.

Now all of a sudden, we're going to provide this marketplace where all of our businesses can create offers and compete with one another on the service side, not compete with one another on the price side, right? But we're going through all that process right now. Our plan is Q1 of next year to have a pilot customer and then move through from there to a first wave of customer onboarding in '26.

So extremely aggressive compressed time line. One of the reasons that we can move so fast is because this is the first platform. I don't know what that's all about, but technical issues -- it's the -- it's not the Wayne took care of that. But one of the reasons that we can move so quickly is this is actually the first platform that we've planned, designed and begun developing, particularly on the commerce side with AI.

So A.J. mentioned Ask.Watsco, program manager, Alex and I and everybody are heavily using these large language models do a lot of the planning and program management, et cetera, a lot of the design. And then we're using products like Amazon's Q developer to develop the code far more quickly than our developers could in the past.

So -- and we're using that same technology through all of our other programs, this is the ground-up AI-first development program. So it's pretty exciting. At the end of the day, what do we get? It's designed for enterprise customers by the enterprise customers, and I think we're going to wind up being proud of because we're going to design exactly what our customers are asking for. It's not going to be right day 1, but we'll just keep iterating on it like we do with all of our other programs and eventually, it will be perfectly dialed in and serving those customers.

Well, I think what's exciting though, it's also -- it can be designed specific for a channel. So for example, right now, our e-commerce platform, it's for all customers, right? But if you're in a hospital network, for example, you may not want to see residential product, right? If you're in home warranty or property management, you may not want to see commercial.

So we can get to a point now where we can actually custom the platform by channel and make it a lot more efficient for our customers.

Right. So in conclusion on supplysync.com, right, what's in it for our customers? And it is that sort of design spec all the way through support, single platform, single place to do business, right, single place to interface and execute your organization, but looking for visibility, confidence, efficiency and control, right?

Those are the things that these enterprise customers are looking for, and we can play a big part of that, right? On the Watsco side, right, what do we get? We get deeper partnerships with these enterprise organizations, right? We get significantly expanded share of wallet. We know the analytics around this, right? There's a lot of opportunity in the share of wallet space. right? And then, of course, improve product mix, right, sell more parts and supplies than we do today substantially and gain the associated margins.

And that's the Flex example that I gave, right? So driving that mix kind of offsets a little bit of a concern that I was hearing earlier regarding the margin elasticity and things of that nature. But mix is a good solution for that, right? And you see the opportunity ahead of us. We got a way to go on it, but it's all upside. And this is really a way to kind of break through that for us.

So another interesting point, we're designing this as an extensible platform. So we're starting with first parties, right? This platform is more than capable of extending to third-party HVAC as well as other verticals, right, which I think is pretty interesting longer term.

That's it. Got to get back to work.

Well, we may have stunned everybody. Any questions?

I had a quick question on the wallet share. Is there a material difference in terms of what's your average wallet share with, let's say, a smaller contractor versus, let's say, a larger enterprise contractor?

I'm not sure if I understand the question.

For Watsco and Watsco companies, like the wallet share that they have with a smaller contractor customer versus, let's say, a larger enterprise customer. What's the difference in the average wallet shares today?

It all depends on the size, right? So if you're asking the impact of a larger customer with share of wallet versus a smaller customer?

No, I think the epic question is, on average, does Watsco have a higher share of wallet with smaller contractors or larger contractors? I think that's the question.

Yes, it depends on the business unit. So for carrier enterprise, it's the latter. We have a higher share of wallet with the larger customers. Zach, I would say you have a larger share of wallet with the smaller customers or gemaire exactly.

So it depends on which business unit. And that's really the power of Watsco, right, is that diversity, right? If the larger customer is doing well, we get a piece of that. If the smaller customers are doing well, we get a piece of that. Either way, it's a really solid dynamic mix and blend across the board.

And on average, is it like 30%, 50%, 70% -- like I'm just trying to...

Yes, we got...

I'm also curious to answer to this question.

So I can't speak on the other business units. But for CE, we have markets that on the low end, blend at 10% on the high end, blend at high 20s. It kind of all depends on the geographical area and where they land on it.

And in the case of Carrier Enterprise or businesses that are developing dealers. So we talk about contracts, we talk about dealers. Dealers are customers that we develop really important thorough relationships with where they -- in the case of CE, for example, they'll wear a carrier on their trucks and their badges and their shirts and they buy into a marketing program and special training and special product access and special, special, special.

And in that case, in those cases, of which there's hundreds in the case of CE, we are 800 -- theoretically, 80%, 90%, 100% of wallet share there. And then it goes a complete opposite side of that spectrum, too, where we have the long tail of customers that may buy one thing from us each year. And that's, of course, all target-rich opportunity, right?

And our goal is also, at least for carrier enterprise is diversifying that. So back 4, 5 years ago, predominantly, everything that we did was those larger contractors.

Actually, we would walk away from a business if they didn't want to become a dealer. So if a customer was not exclusively carrier O'Bryant, at one point, we didn't have any interest. We changed that now.

So we worked with Carrier and came up with a product line that's competitively priced that we can go after those contractors where it's okay if they install multiple different brands, right, or service multiple different brands, but why can't you include us in the mix mean that's a venture we took on about 3.5, 4 years ago, and we grew it to a $300 million business. And we're just starting.

We're going to need another Investor Day to...