Q3 2026 Watsco, Inc. Earnings Conference Call - WATSCO INC

Good day, and welcome to the Wattsco third quarter of 2026 earnings call. All participants will be in a listen-only mode for the duration of the call. And should you need assistance today, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, you may push the star, and then two. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Albert Namid. Please go ahead. Good morning, everyone. Welcome to our third quarter earnings call. And this is Al Namid, Chairman and CEO. With me is A.J. Namid President, Paul Johnston, Barry Logan, and Rick Gomes. 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 Wattsco's third quarter results reflect improving demand and simpler operating conditions in our industry and in our business. The last six 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 ecosystem is producing measurable results in 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 are 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. It marks the fourth business acquired by Watsco that it serves both HVAC and plumbing contractors. Today, Watsgo has 112 locations that offer both HVEC 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 мы will support their leadership in any way we can. Wattsco is a more efficient company this year. We have made investments in technology, supply sink, VCR, 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 a granted transaction in October, we remain a positive net cash flow position and are committed to maintaining a pristine balance sheet enabling investments and growth opportunities as they arise. Turning to the third quarter results. Sales increased 7% to a record $2.22 billion and 4% on the 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. Naumann, who is our president, to provide an update on WatchGov's technology initiatives, and he will be joined by other leaders of WatchGof. AJ? 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 Wasco 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 and more than 73 73 000 active monthly users and on-call air continues its growth trajectory over the last year approximately 351 000 proposals were presented to homeowners generating 2 billion dollars 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. SupplySync.com, our newest platform to serve the growing segment of large institutional customers, launched earlier this year to great fanfare. We have launched a pilot program and are transacting with 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 Wasco 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. Hydros, which is our investment shared logistics and distribution has further matured and will continue to scale in 2027 to more locations and more vendors and the transformational use of ai continues to evolve throughout wasco 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 critical to growing our leadership position in the hvac industry and attracted to the entrepreneurs 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. Wasco 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 8,200 employees, rewards and incentivizes long-term performance. With that, let's turn to Q&A. We will now begin the question and answer session. Again, to ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing your keys. And to withdraw a question you may, press star, then two. At this time, we will take our first question, which will come from Tommy Moles-Stevens. Please go ahead. Good morning, and thank you for taking my question. Morning, Al. Thank you for asking my question and answering my questions. you for taking my questions of course so i want to start on gross margin which i suspect will dominate this call i'm gonna 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 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 on 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 Gomez deal with that because they're on top of the data better than I thank you thank you Tommy for the question yeah it's uh I I would have worried if it was the second question by the way so that's the first question yeah there's a measure of still kind of comparison reality going on that just should be accounted for it's not as simple I want it to be as simple as what you said but not quite its peak but it's becoming it is becoming more simple a A year ago, new construction-related equipment sales were down double digits. This year, they're up double digits, and so that's a mixed 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 where 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 in those customers. And as you might suspect, the larger the customer, there is a more moderate margin, but there's also a more modest 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 else in there that's important to discuss? We just had a couple of things, Tommy, first, and good morning. First is that 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 Wattsco's 27% range. And so, therefore, that weighed a little bit. So that will abate, obviously, and that's part of the comparison that Barry's describing. I think the other thing that's worth pointing out, though, is that this, you know, 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. Yeah, this is AJ. I'll add. I was just going to call you. But, yeah, you know, zoom out to the big picture, which is, I guess, where I like to live most of the time is, you know, there's a lot of noise. You have to look for the signal, especially since we're such a long-term focus company, right? Wasco and our arc of maturity, you know, we used to operate at 24, 25% gross margins. You know, that ran up to 29% gross margins with all the noise and Barry and Rick just described some of that. but we're 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 you know our job what our focus is is the the the long term the arc of maturity and getting from where we were 24 25 to where we are 27 ish to 30 ish is where we're heading thank you all and as a follow-up i wanted to ask about sgna uh if we just look at the same store it ran a little hot versus the sales growth this quarter maybe about a 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 um yeah but just help us parse the trends here. 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? Thank you. AJ, Barry, you can jump in. I'll take a shot at that. I like the phrase, Tommy, where you said how do you measure success? As a distributor, The most simple way to measure success is our fixed costs 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 costs because we couldn't make a whole lot of money and a lot more 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%, which is some measure of business units that are doing well, that are growing, that have growing earnings. They're paying commissions, they're accruing bonuses, and a little bit of freight and fuel and delivery costs, 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. Yeah, you used 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, fix costs, 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 I consider that a short-term thing. But it's a good question about how you measure success. And I would say this year is progress, not optimized, but good progress. Thank you. I'll turn it back. And our next question will come from David Manthe with Baird. Please go ahead. Please go, Ted. Morning, David. Hi. Yeah, good morning, Al. Good morning, everyone. 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 27s 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 and a half range. So 27 and half 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 from there? That's a pretty good list, Dave. It is a lot of those things. You know, we are certainly still early days in our pricing optimization efforts. I think there's a huge runway there. There is certainly the influence and the impact of the mix of equipment versus non-equipment, of 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 those things. But, you know, 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 more the 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 for them. We love Hydros, which is helping our business units carry more products on the parts and supplies side and expand their offering. And we love SupplySync, and Supply Sync 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 mehr sales of parts and supplies as it matures. So your list is good. We like what's in flight. When does it all show up in every quarter's financials? can't tell you. Yeah, just to be helpful, Dave, I think just doing the math, just being objective and just using data and 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. 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 options, certainly plays a role in the equation over, let's say, the next 12 months. And the expectation is that, you know, they'll come early and more conventional and, you know, kind of more ordinary, if you will, than what we've seen in the last four or five years, which is different amounts, different by vendor, different timing, with and without tariffs, with or without, you now, mega inflation. And that volatility is part of what we had to explain the last five 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. sorry oh it's rick yeah sorry yeah i was just going to add one item to that which is i i think um somewhat 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 incrementals, and this goes back to Tommy's question a little bit, if you are going to have incrementales that are good and healthy. If I step back in time, if we go to this call a year ago, same-store sales were down, now they are up. Add-on replacement was down, now it is 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 five. I know, by the way, we're a 10% bigger company having made two 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 three or four quarters. Okay. Okay. Yeah, that's helpful. Thank you. 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 those things we talked about, it's not enough customer mix being toward larger customers, that would not be enough to overwhelm all of the other goodness that you're working on. Is that correct? Now we say it this way. Go ahead. Go ahead No, just take a shot at it. I think the word affordability is in the 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 for my career, we've said for our careers, and people don't live without these things. So you have immense product change, you have a higher price tag, you have a trickier economy, you have a more, you know, a 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, year to date. So does that make sense? And I think, again, the larger customer, the one that is using technology that's affable and going to the home and selling, that wants to move on from the 410A product, that wants the opportunity, that's going to get their business marketing and financing and so on directed toward the opportunity. And 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 five that are considered large customers. So I think it's really part of the transition, part of the maturation in the VATL products is those customers have done a good job of it, and that our job is how do we help all 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, you think. Yeah, I'll double down on that, Barry, which is, you You know, just to be clear, you know, 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're 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 all the services that we provide. But we don't exclusively cater to that segment of customers either. I mean, the small guys with one truck or three trucks, we've got wonderful pricing and programs and technology and systems and processes for those guys as well, including helping them go from small to big because when they do, they drag us along in their growth and they're very loyal. So like Barry said, you know, 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 become, 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. That's great detail. Thanks a lot, guys. And our next question will come from Ryan Merkle with William Blair. Please go ahead. Hey, everyone. Hey, morning. Thanks for the question. 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. But, Angel, you want to share that? Yeah, I don't have the date in front of me, though, So, if Rick or Barry, you want to be more explicit. I mean, I'm going to buy October sales. Yeah, yeah. October is looking healthy to date and continuing the momentum that we've been alluding to, you know, 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? Yes. Total companies up double. This is the total company, yeah. I mean, it includes the acquisitions that we've made. Got it, yeah, I was just, yeah okay, so would you say that we're on base recovery? Yeah, just to say it this way, Ryan, I think, just 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, you know, in terms of progression and momentum. And October is no different. October is better than September. And if you add acquisitions on top of that, that's where you get into the, you now, 10% plus on acquired revenue on top of what we're seeing organically okay got it that's helpful and then I wanted to add 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 yeah the side discharge has been a good growth market for us over the last two years and what we're seeing is it's probably in the eight to ten percent 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 It's got a lot of efficiency, and the cost of the product is relative to the top discharge. So we feel like we're outperforming. We want to continue to outperform in the side discharge. Side discharge, we think, is going to be the future of our market, so it's important to us. Yeah, we are leaning into side discharge, and we are excited about innovation in the product. Yeah, and obviously the manufacturing community that supports us, it's as diverse as our typical ducted units. I mean, there are branded products, there more affordable products, private label products. In our case, as Wattsco, our job is to have the broadest diversity and spectrum of good, better, best across all the products we sell and 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 fun to sell a new project. And as Paul said, it's not necessarily new, So, 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 it well, Barry, but just I would Say that that segment of the market is maturing, where now it is evolved into a good, better, best offering, where it's not just the best anymore, it's not just a value line anymore, there is room and the market size for that stratification. And it's a proven product. You know, basically what you've done is you've taken the ductless product and you put ducts on it, you know, as opposed to just having a high wall or a cassette on the inside. So it's approved in product, and it's going to be a great product for us in the future. All right. Great color. Thanks. I'll pass it on. And our next question will come from Steve Folkman with Jefferies. Please go ahead. Good morning, Steve. Good morning guys. That's funny timing. I have two side discharge units and they're awesome. Good job, Steve! You're way in! See if we can sell you a third by the end of this call. I'll take it. 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. Now, we're seeing a lot to 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 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 um and then maybe just switching i'm curious how you're thinking about uh 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 yeah Yeah. Well, first, you're right. Our balance sheet in September this year includes Jackson, $60, $70 million inventory that was not in the prior year comparison. And, you know, last year at this time, we were, as Ross Perot once said, a giant sucking sound was going on in terms of unit declines. and this year we're seeing unit increases. So a year later, I think inventory is up. In sales. I'm sorry, in sales, yes. So as we close this quarter, inventory is reflective of that, is reflective OF an increasing demand environment. And as we – but as we closed 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 two 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. Thank you very much. And our next question will come from Mitch Moore with KeyBank. Please go ahead. Hi, everyone. Good morning. Thanks for taking my questions. Maybe just to build on some of the questions around customer mix, I guess my question is how much, you know, if any of the customer mix headwinds reflects existing contractors kind of consolidating into larger accounts, or is it just because the 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 on in the industry, and it's probably, you knows, probably 7% to 8% of the market right now. I'm almost done, yes. That's going to continue. So it's not the big guys who are already there. It's the growth of the medium-sized guys as they start growing with private equity. Can I just maybe attempt to, I think, reframe the narrative around this a little bit as others have tried? I, you know, 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 happened. And I also, I think we should ground ourselves in the fact that this is a $75 billion dollar 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, you know, is it an irritation in margin? Yes. Can we count it in basis points? Yes, not even full, nowhere near full percentage points, basis points. I think what's, and by the way we're we're you know doing this as supply sync 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 or you know gee 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. Yeah, 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? Absolutely. I just want to add a data point to the question because I don't want it to be abstract. we've said this in our investor day when we're developing the technology for SupplySync the consolidated community today is about a $400-500 million business for us and if that grows if 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 that comes 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 customer segments also, which means EBIT margin is not necessarily proportionally affected by it. So I just think we're getting 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. Thank you for that. And I guess just my next question, I think residential units were up 5 percent. Could you just help us parse out how much of that growth was replacement versus new construction? Yeah, we've seen 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, you know, 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%. Great. Thank you. And our next question will come from Jeffrey Sprigg with Vertical Research Partners. Please go ahead. Good morning everyone. 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 easier, but when 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, you know, based upon, you know, where in the marketplace the change is occurring. Yeah, I agree with that, Paul. And just a quick data point 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 trendline, but we're not quite at the trendline. Um, units are still call it 10 to 15% below where they were two years ago. Um, AHRI, which you should never anchor on in any given month, but you can look at longer, longer picture trends with AHRI. Um, those volumes today are where they Were around mid 2018. Um, that was a while ago. And so, and, and I think more importantly, we're still dealing with a consumer that's uncertain and unsure about the state of things and All of that points to we're closer to trendline, but not fully to Paul's point at some level of normality yet with replacement Thank you, and then just one make sure I'm dialed correctly on this inventory for your and I think Barry Davis the Jackson Inventory how much comes in for granite? Well, you know it's coming in in October and I Yeah, Rick, maybe handle that. There was about, Jeff, I'll say about $140, $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, to end September, which was not on our balance sheet. Okay. 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? Again, we've always – go ahead, Rick. I was going to say not necessarily. I think, you know, what's true in the plumbing space is, you Know, if you sell a lot of equipment there, you're going to have one 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 slightly less consolidation going on there. Those customers are slightly less technology-enabled today than as compared to the HVC 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 five 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 to 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 HEAC and plumbing well for decades. Grant's 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 20 of them, 20 of the 50 also sell HVac and are on the top 60 top 50 list of HVC 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 four 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 the better companies have the higher margin and have figured out how to coexist in those markets with those products. And I also just want to say, I've got to say publicly, Bill and Chris and Amir and the whole Granite team are just world class. And as good as it gets, we can't be more excited to have them finally part of this family. Like Barry said, we've known these families 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 fun begin. Great, thanks. And I would add to that on a big picture that Watsco is now taking and committed. Can you hear me? Yeah. Yes. I would say that the big picture for Watsgo that we should explain is that we're now committed to growing in the plumbing market, which means that we have enormous opportunities in that distribution business of plumbing as well as the HVAC market. So we've got two industries that we can play and play hard and get size. The plumbing one we're just beginning, and it's pretty healthy stuff. We have two 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 funding market where we just have a few hundred million dollars for the sales in a much larger market. Big opportunity is what I'm trying to say. All right. And our next question will come from Pratap Singh with UBS. Please go ahead. Good morning. Thank you, and good morning, everyone. So we continue to hear about customers trading down more towards lower efficiency levels, but it feels like the scope for further mixed down could be limited. So can you give your views on what you are seeing and 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 five or ten 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 discharges will be a breakthrough where customers will start going back to high efficiency once they see the opportunity. right and just that one one perspective i mean this is as 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 percent entry level today i think the thrust of your question is right which is it's 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 gets 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. But 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. Thank you. And just another 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 a potential for improvement in the medium term as you scale margins within those businesses? And can you also help size those impact? Again, I just be careful with this. So when we acquire a company like Granite or Jackson, we're keeping the people, we're keep the culture, we are keeping the infrastructure, we keeping the what's made them successful for 50 years and the question is how do we how do we help them build on that success and build on their networks and either it's adding capital or products or um you know technology whatever it might be so the word synergy does not exist in our like in our in our mindset how do you know how do We take costs out how do we tweak margins. You know, that's not a concept for Wattsco. We built a very successful company supporting great companies that became part of our family. And 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 Wattsco family? And the only scorecard I can show you is Jackson's up 16% in its first quarter as part of Wattsco. So I want to impute that in the future, of course. But just know that there's no 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 and the financial resources so they can grow faster? That's the opportunity and that's the only synergy we have. Another important aspect is that 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, their leaders, so that they act as owners and be very conscious of that. Thank you so much. And this concludes our question and answer session. I'd like to... Hey, did you have something? No, I'm out of that. Thank you. Okay. Thanks very much for your interest in Watsco. And we'll talk again in three months or sooner. Bye-bye.