Watsco, Inc. Q4 FY2025 earnings call

• Achieved terrific results in 2025, grew scale and market share, added 12 business acquisitions. Boosted annual dividends by 10%. Built and expanded technology platforms. - In fourth quarter, double digit pricing gains on A2L products, raised gross margins, unit volumes declined but SG&A dropped. - Focused on improving inventory turns, generating incremental cash flow, margins to gradually improve as transition matures. - Invested in innovation and technology, ecommerce growth, mobile app user expansion, OnCallAir sales growth. - Developing new technology for institutional customers, using pricing optimization tools, launching initiative in nonequipment market, harnessing AI.

Fourth quarter achieved double digit pricing gains on new A2L products, raising gross margins by 40 basis points to 27.1%. Unit volumes declined, but SG&A dropped 2% due to operating efficiency improvements. Ecommerce accounts for 35% of sales, exceeds 60% in certain US markets. OnCallAir digital selling platform saw 20% increase in gross merchandise value to $1,800,000,000. Commercial product was down high single digits, international business had weak performance with Canada having better quarter and Latin America similar to prior year.

• Expect margins to gradually improve as transition matures. - Focus on improving inventory turns and generating incremental cash flow. - Continue to invest in innovation and technology. - No specific clear call on industry sell through volumes for 2026 yet, but data suggests a more conventional starting place after 2025's correction.

• Regulatory changes in past caused disruptions, although largely behind us, still potential for unforeseen regulatory impacts. - Geopolitical issues could affect international and certain domestic markets. - Price volatility in commodities like copper could potentially impact margin if not managed properly. - Uncertainty around industry sell through volumes and market dynamics making it hard to predict exact performance.

Q: On pricing dynamic and channel preparedness for new technology in 2026.

A: Discussed that channel is more stable, contractors trained on A2L products, pricing has been good with maturity continuing into 2026.

Q: On dividend increase and earnings outlook.

A: Dividend increase based on cash flow confidence, track record important, earnings expected to reset.

Q: On OEM comments on industry unit volumes and Watsco's translation.

A: Discussed disparity in timing between OEM and distributor seasonality, Watsco's business based on contractor installations.

Q: On January and February performance, SG&A.

A: January and February down mid single digits, SG&A had reduction in fourth quarter with potential for further reduction and growth investments to offset.

Q: On gross profit margin building blocks and inventory.

A: Margins driven by pricing optimization, mix of equipment and nonequipment, inventory in great shape compared to prior year with goal of 5 inventory turns.

Q: On commercial and international product trends.

A: Commercial down high single digits, international had weak performance with Canada better and Latin America similar.

Q: On resi performance and ductless vs ducted.

A: Resi performance affected by 14a and A2L, ductless and ducted performance identical.

Q: On industry sell through volumes and market call.

A: Difficult to predict, data suggests more conventional starting place after 2025's correction.