Watsco (NYSE:WSO) executives told investors that the company exited fiscal 2025 with improved profitability, a strengthened balance sheet, and what management described as a more stable operating backdrop after several years of regulatory and supply chain disruptions tied to HVAC efficiency and refrigerant transitions.
Regulatory transition and 2025 overview
Chairman and CEO Albert Nahmad said 2025 was shaped by the industry’s shift to next-generation equipment using A2L refrigerants, the latest in a series of changes that followed COVID-era supply chain disruptions, SEER-related efficiency transitions, and refrigerant conversions. Nahmad said Watsco “grew our scale and market share” and completed 12 acquisitions representing more than $1.6 billion in sales.
Fourth-quarter performance: pricing gains, higher gross margin, and lower SG&A
In the fourth quarter, Nahmad said Watsco achieved “double-digit pricing gains” on new A2L products and increased gross margin by 40 basis points to 27.1%. He reiterated the company’s longer-term gross margin objective of reaching 30% and said Watsco has ongoing initiatives intended to support that trajectory.
Management said unit volumes declined in the quarter, which Nahmad framed as expected given a strong comparison in the prior year’s fourth quarter, when unit growth exceeded 20%.
On expenses, Nahmad said operating efficiency improved as SG&A decreased 2%, including the impact of newly acquired and new locations. During Q&A, management added that cost-reduction actions were implemented throughout the fourth quarter and that variable expenses such as commissions and bonuses could rise with higher volumes, which management said it would welcome if associated with stronger earnings.
Cash flow, inventory actions, and balance sheet position
Nahmad said Watsco was debt-free for all of 2025 and met a $500 million inventory reduction goal set at the end of the second quarter. He also reported record fourth-quarter cash flow of $400 million. Looking ahead, management said it is focused on improving inventory turns and generating incremental cash flow, with expectations that margins will “gradually improve as the transition matures” through 2026.
On inventory, executives said the company is largely through the R-410A transition, with some remaining product to move. Management described inventory as being in “great shape” compared with a year ago and provided additional context on longer-term goals. Executives said their “dream plan” is to reach five inventory turns, noting the business operated around four turns pre-pandemic before dropping into the low threes amid industry disruption. Management added that ending inventory was around 18%–19% of prior 12-month sales, which they said approximes a 10-year average.
Technology, digital adoption, and margin initiatives
Management highlighted continued investments in technology as a competitive differentiator. Nahmad said e-commerce represented 35% of sales and exceeded 60% in certain U.S. markets. Contractor engagement with Watsco’s mobile app increased 15% to 73,000 users. The company also reported that annual gross merchandise value on its OnCall Air digital platform rose 20% to a $1.8 billion run rate.
Executives also discussed initiatives aimed at supporting margin expansion and growth:
- Pricing optimization: Management said it is accelerating the use of pricing tools to make progress toward a 30%+ gross margin target and emphasized the approach is to match price to product, customer, and market dynamics rather than broadly raising prices.
- Non-equipment focus (“VCR” initiative): Leaders described an early-stage effort to be more strategic in purchasing and redistributing non-equipment products, alongside a broader push to grow parts and supplies, which Nahmad said represent roughly 30% of sales today.
- Institutional customers and AI: Nahmad said the company is developing technology to capture more sales with institutional customers and has begun to apply artificial intelligence to improve customer experience, operating efficiency, and data-driven growth strategies.
Market commentary: signs of normalization, early-year trends, and unit volume discussion
On channel conditions entering 2026, executives said the environment is more stable now that there is “one set of pricing” and one product line, rather than parallel old and new refrigerant equipment. Management said contractors have been trained on A2L products and are better positioned to sell and install the systems.
Barry Logan provided additional framing on unit declines, stating overall units were down 17% in 2025. He said new construction contributed to the decline, and that the fourth-quarter comparison (up more than 20% a year earlier) accounted for roughly 7% of the 17% decline. Logan also estimated the aftermarket add-on replacement market was down about 6% in 2025, attributing the decline to a mix of channel disruption, a weaker consumer, and contractor uncertainty during the transition.
Asked about the start to 2026, management said January and February were down in the mid-single digits, around 5%, and cautioned that severe weather closed some stores and that early-year results are not necessarily indicative of peak-season performance. Executives noted the company’s business typically becomes “a 40% larger business” over roughly 90 days as the summer season arrives.
On pricing, management said Watsco previously expected the new A2L product transition to raise pricing 8%–10%. Executives reported price benefit of 9% for 2025 and 11% in the fourth quarter, largely driven by mix shift to new products, and said the maturity of the transition continues into 2026.
Management declined to provide a specific industry unit volume forecast for 2026, with executives describing it as too early in the year for a “crystal ball” call. However, Logan said Watsco sells into contractor demand “in real time” rather than selling into inventory, and he suggested the impact of the conversion activity should begin clearing for Watsco by the second quarter. One executive also discussed an internal review comparing Watsco’s U.S. unit sales against an assumed 3% compounded growth rate from 2018 through 2025, saying the 2025 unit decline brought results back in line with that conservative growth path and suggested a “more conventional starting place” for 2026.
During Q&A on product mix, management said ducted and ductless unit declines were identical. On parts, executives said compressors and motors—representing the bulk of parts sales—were up double digits for the year, though flat to down in the fourth quarter, which management noted is a smaller portion of annual parts sales.
Executives also addressed the practical impact of the new refrigerants on replacement behavior. They said the transition requires replacing the entire system—outdoor unit and indoor coil—rather than just an outdoor unit in certain circumstances, particularly as R-410A product availability diminishes. Management emphasized that “units” in industry data are defined as compressor-bearing outdoor units and said the ability to sustain older systems will decline as R-410A equipment becomes unavailable.
About Watsco (NYSE:WSO)
Watsco, Inc is the largest distributor of heating, ventilation, air conditioning and refrigeration (HVAC/R) equipment, parts and supplies in the United States. Headquartered in Miami, Florida, the company operates a network of more than 600 branches across the continental U.S., Canada and Puerto Rico. Watsco serves residential and commercial contractors by providing essential components for climate control systems, including air conditioners, furnaces, heat pumps, coils, refrigerants, controls and electrical and piping supplies.
Founded in 1947, Watsco has grown from a single regional distributor into an industry leader through a combination of organic expansion, acquisitions and strategic partnerships with original equipment manufacturers such as Carrier, Trane, Goodman and Lennox.
