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

Good morning, everyone. Welcome to our third quarter earnings call. And this is Al Nahmad, Chairman and CEO; and with me is A.J. President of Watsco; Paul Johnston; Barry Logan; and Rick Gomez. Before we start our normal cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially in the forward-looking statements. I'm pleased to report that Watsco generated healthy earnings and record cash flow despite a very challenging market environment. As you all know, 2025, a year of significant transition to next-generation equipment continue A2L refrigerants. The transition affected roughly 55% of products sold and influenced most every aspect of our business. Regulatory changes have historically been good for our business, and good for our customers. In the long term, we expect this transition to be no different. The transition is substantially complete, and we look forward to operating a far simpler business in 2026. Throughout all of the volatility, we are satisfied that our earnings are largely intact. Our balance sheet remains strong, and our technology advantages remain immense. We certainly expect the volatility is temporary and will ease as the transition concludes. We operate in a great industry with strong long-term fundamentals and how the industry's most accomplished leadership team, all with long-term focus to keep building on our success. Turning now to our third quarter results. Sales declined 4% in total and 3% in the U.S. While unit volumes remain subdued, we achieved double-digit pricing gains on the new products with growth in sales for both nonequipment and commercial refrigeration products. We again improved gross margins, which expanded 130 basis-points to 27.5%. As we have expressed before, we have several ongoing initiatives to…

[Operator Instructions] The first question comes from Tommy Moll of Stephens.

I want to start with a question on the repair versus replace dynamic. It's been a couple of quarters in a row now where your non-equipment business trends have been well ahead of the equipment trends. You've obviously been very disciplined on pricing for the new equipment. And so I'm curious is the simplest explanation here just that we're seeing some price elasticity among homeowners? Or is there something else you might call out?

I'm going to let Paul Johnston respond to that.

Yes. It's not a repair versus replace. It's a repair and replace. I think we said that on the last call. What we've seen is the larger dealers that have salespeople generally don't sell compressors and motors, they generally sell the equipment side. And what we see with the people that don't have an in-home salesperson is, they will repair the unit. So we see a dichotomy there amongst our customers. Also, there's a geographic spread where if you're in Illinois or excuse me Pennsylvania and you've got an 11-year-old unit in your house, you're generally going to repair it and not replace it. It's got a 20-year life. In Florida, Texas, where you've got a shorter life, I think, generally, you're going to replace it with a piece of equipment. So it's -- it's really difficult to put your finger exactly on where and who is creating a repair versus replace market.

And just some data behind that. When we say non-equipment, there are really 2 things that are not equipment parts and supplies. That's maybe be a more direct way of calling that category something parts and supplies. So parts basically is 8% of Watsco's revenues, parts. And supply is everything else is over 20% of Watsco's revenues. So just in the scope of the bandwidth of that discussion, parts will never substitute what's happening in the replacement market in that discussion. The data just doesn't -- isn't there to support that. So at the end of the day, it's the consumer that's spending $8,000, $10,000, $12,000 on a pair of new machines for their home. As Paul suggesting where we see in the Sunbelt, that's a more frequent purchase and a more ordinary purchase and a more necessity purchase, and we do see some differences as we go north of the Sunbelt. So we do like it that Watsco's 75% of the Sunbelt in that respect. But it's really, I think, more of the crux of the answer is built on what are consumers spending on their homes right now. And that's probably the bigger orientation to this than whether we're selling more compressors or not versus the replacement market.

As a follow-up, maybe we'll address the elephant in the room here, maybe just take it on directly. Yesterday, Carrier mentioned that their October distributor movement was down 30% and that they expect something like down mid-20s for November and December? Does all that sound reasonable enough in terms of what you have seen or expect to see for your equipment business this quarter? And should we think of that in terms of volumes or sales?

Well, that's a very good question. And I don't think we're out of the woods yet. So there's some merit to that. Who wants to add more to that? Is it you, Paul, A.J.?

I think it's pretty much in line. You got to remember that the shipment data that you're seeing was up last year as a lot of the OEMs were shipping all that 410 in. So the shipment data coming out of AHRI really isn't going to be indicative of what's going on in the market. But when you look at the actual unit sales without the price increase, I think they're pretty much in line with what the market is showing. Now that's going to vary from region to region. Once again, we're -- we're seeing some real strength in certain parts of the country, and we're seeing definite weaknesses in others. And so it's not across the board.

But in aggregate, we are not seeing increase in demand in the fourth quarter. In aggregate, it's still below this time last year. Now this time last year, it was an extraordinary quarter. But nevertheless, we're seeing that, and we're dealing with, we're getting more productive in our operations and more efficient given the lower volumes temporary or lower. And we are adjusting to the circumstances.

And Tommy just to clarify one -- Tommy, just to clarify one aspect of that is that the 20% to 30% is unit volumes, not sales dollars. I want to be clear about that.

Read my mind.

I mean, let me just now little bit of therapy about it, just to be, again, very direct about it. So we're clear a year ago, fourth quarter unit volumes -- unit volumes for Watsco were up almost 20%, right, between 15% and 20%. And a year later, the variance is going to be exposed to that comparable, right? And then after the fourth quarter is when things started to become, I would say, less extreme in that -- in that -- in that regard. So I think the fourth quarter a year ago is still in the context of the transition started. The 410A availability was at its peak, be it contractors, builders, national accounts. Remember, it was drawing on distribution for 410A because they could get it. And it's really the last of the cyclical things in this discussion, I think, about the transition is the fourth quarter. Now it's the smallest quarter of the year. It's off season and it will be -- there obviously is noise in the fourth quarter this year, but it really doesn't bear resemblance as we go forward into next year as a consequential trend, I would say. It's more about the comp a year ago than whether the market has changed any at all in the last 20 days.

Sure. I think that last one summarizes the barrier, our pacing and the industry pacing is roughly the same, the comp changes in Q4.

Rick, is there something you want to add with the work you've done?

Yes. I think -- I mean it's -- obviously, it's been a fluid market and one of the noisiest year -- years in our industry in some memory. And by the way, with all that noise, our earnings are largely intact and I think that says a lot about the resiliency of our business model and of distribution in general. But if we step back, let's -- and examine kind of the big macro factors. We don't have influence over interest rates. We can't influence consumer sentiment or new housing completions or existing home sales. These are all things that impact the unit movement numbers that everyone is focused on. But we have control and we have influence over many other things. We have control over how many customers we serve, and that's been growing steadily over time. We have influence over our margins, and that too has steadily improved with more upside to go, we think. We have control over our expenses, and we're taking steps to improve efficiencies with the product transition now largely behind us. We control our inventory. And as you can see, we made great progress to improve working capital and cash flow in the quarter. We have influence on how we partner with OEMs, and we're right now developing aggressive growth strategies with our key partners for next year. We control our balance sheet. It's -- and of course, it's never been stronger. And we control our technology, which is, I think, the most important competitive advantage we have and with more innovation being introduced right now in real time to help future growth. So even as we navigate this admittedly fluid industry dynamic, I think we've done a great job of acting on the things within our control, and we will continue to do so.

The next question comes from Ryan Merkel of William Blair.

I want to follow-up on the fourth quarter. Could you just comment on what you've seen quarter-to-date in terms of total sales?

It's soft.

Okay. Got you. So yes, it sounds like your biggest supplier is talking about units down 30%, it sounds like we don't totally disagree with that?

No, no, we're not in that arena of softness, not even close. It's a single digit, it's probably mid-single digit so far in revenue.

Okay. That's helpful. Okay. So mid-single-digit decline. And then...

In the single digit now and maybe a little bit higher in the start of the quarter. I would say, more accurately is it Barry, what is it 5%, 10% in that area?

Yes. I would give that a range it's October. It's not the rest of the year. But in that 5% to 10% range decline in dollars is how I'd characterize it.

Okay. All right. That's not too different than I think most of us were expecting. And then I'm curious, if you talk about the third quarter, the shape of the quarter, it sounded like July started off kind of flat, right, year-over-year. And then from what I heard, August was really rough, September was also tough. So 2-part question. Is that what you saw? And then what do you think the reason is that the unit volume just fell off so much in August and September?

Barry, Paul, do you want to deal with that?

I don't know, Barry, do you want to grab that one?

Because contractors installed fewer systems.

Yes. Yes. I mean, again, if we consider the number of units that did decline, put it in a unit number and then ask the question, what makes up -- what makes up the -- what are the components of the unit decline. New construction is the largest component of that discussion. We can see it in -- we can see our customers, we can see the special pricing we give. We can count the number of units we sell into new construction, and it was down -- as a percentage down the most in that overall discussion. And I don't know offhand if that got worse in August and September, that's a little granular for my brain this morning.

Right.

But that's the largest component of the discussion. So if interest rates or homebuilding activity or existing home sales get generated in the forward period over the next 12 months, that's an opportunity because that is the largest component of both the quarter and the year-to-date decline in units. And the -- in terms of the replacement market and everything else, there's always a measure of consumer discretion always when a contractor walks in and says, this thing will cost you $10,000, $12,000. And to the extent the consumer is either tighter or worried or credit crunched or more paralyzed in some way about spending $10,000, $12,000 or more on something, it's going to affect -- did that get worse in August and September? It looks like it. Is it permanent or temporary? Is it long term or short term, we'll see. At least in our industry's history, it's never long term. It's always a short-term dynamic. And -- but anyway, that's just some big picture thoughts on that.

Okay. I appreciate it. I know that's kind of a hard question to answer, so I appreciate you entertaining it. I'll pass it on.

The next question comes from David Manthey of Baird.

I feel like I'm in a parallel universe here in 25 years covering Watsco. This is the closest kind of come to hearing guidance. It's pretty amazing. But -- as long as we're talking about it, the minus 5% to 10% revenue declines in the fourth quarter. We're talking about equipment only there, correct?

No, we did not give guidance. We did not give guidance. We gave a percentage of what we see thus far in the quarter in October.

But in equipment, Barry, right?

No, that's overall. Yes.

Overall. Okay. Fair. Fair. Okay. All right. And then if you believe in this -- the normalization theme here, you have a lot of cash, no debt, a healthy dividend. You've always invested organically as needed. The stock seems to be on sale here. Is there a thought about allocating some of your cash forward to more aggressive share repurchase at these levels?

That's an excellent question, and I thought about it. We thought about it. But on the other hand, the softness in the industry creates perhaps opportunities for us to do more acquisitions, because, I would say, when we compare our financial strength to others, we're at the top of the heap. And there may be some distributors that finally want to venture with us, either a joint venture or sell to us altogether. We don't know, but we have to remain open to the possibility that we may be able to step up our acquisition activity. I don't know that it's going to happen, but we have to be ready to do that. And we will use our capital to acquire more distributors that we have that opportunity.

Yes. I appreciate that, Al.

The next question comes from Jeffrey Sprague of Vertical Research Partners.

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

Well, I would say that maybe a general reply as I think from a specific fourth quarter, we want to increase our inventory turns. And that effort will continue into the fourth quarter and in the future. So we're going to get better at inventory turns. And that's our goal. So I think I've answered your question. That is a focus, and we certainly have the capability with our technology and do something about it. And we're doing it, as you can tell, the inventory is coming down, and it's coming down again in the fourth quarter. And the turns are slightly increasing. Turns create more cash for us. So we like that.

And like more cash too.

There's really 2 curiosities and the one you're asking about is will our distribution channel at Watsco be in a more conventional position, right? That's your -- and that's really almost an OEM orientation that then asked the question, has the inventory been reset in line with some kind of -- so you understand what I'm saying. So -- and so yes, there's a lot of progress in the third quarter, more progress in the fourth. You could look analytically where are we today versus history and answer the question, and I can help you with that. But what Al was saying is how does inventory affect us looking forward. What if we had 5 inventory turns instead of 4? What would that do to our return on invested capital? What would that do to our real estate? What would that do to our cash flow? What would it do to the overall handling and load that we carry in our stores if we had less inventory and better turns? What if we had better technology with our OEMs to replenish our stock every day? Those are the bigger -- those are the things we are focused on, while trying to reduce inventory by the end of the year. And you can understand that it's a longer-term perspective from our point of view. And while we're just trying to get the year-end inventory in line to have a, frankly, a strong hand, a strong capital base to flow into next year. And so I think we said last quarter, we were targeting $500 million of reductions by year-end. And second quarter -- or third quarter was $350 million of that. I think we can improve on the $500 million target. It's a slower time of year to say that, but by the end of the year, I think inventories will be near historical levels versus the size of our company.

Let me say, again, yes, when we say inventory turns, we are presently at about 3.6, 3.7. We want to be a lot better than that, Barry used some numbers, but he was just throwing numbers out there. I'm giving you more specific numbers. So we have an opportunity to significantly improve inventory turns, which also significantly increases our cash flow, and becomes a more productive part of our business with higher inventory turns. And we have the ability to get our contract -- manufacturers to participate in that because generally, we're the largest customer, and we have the largest impact on the unmet market. And that's what we're doing with them and with our own technology to do better with what we have to achieve the higher returns. But I like it. I like higher returns, and I like higher cash flow. I mean we're at $600 million in cash flow right now in the bank. I'd like to see that number get larger because I'd like to have the ability to do almost any transaction that comes our way. And I don't like going into debt for it. I'd like to have the capacity to do what we need to do with the cash we have.

Our next question comes from Chris Snyder of Morgan Stanley.

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

Well, that's an interesting question, and I can only say that we're trying to get better in the management of our inventory. So history is not dependent what we're going to do as we go forward this year. I think whatever we've done in the past, we'll do better. Go ahead, Paul.

Yes. Think about the last 5, 6 years in our industry. We've had -- we had the change in industry standards on efficiency then we had the change in refrigerant come at us. Then we had the pandemic. It hasn't been normal on a lead time basis with our OEMs for the last 4, 5, 6 years. So for us to get back to normal again, as Barry was talking about, means that we order something and we get it within 4 to 6 weeks. And we don't have lead times that extend out beyond that and that the manufacturers can go ahead and supply us in a timely manner, and that's how you adapt your inventory to get to a 5 turn.

And we're trying to get cooperation from the manufacturer to do better in deliveries. Whatever they have to do to deliver much quicker with less lead time. And that's part of the effort. And because of who we are in our size, they listen to us. I hope -- I'm hoping, but I think they will.

I appreciate that. Maybe to follow-up on price. The OEMs that have reported so far talked about an expectation of incremental price in '26. Maybe a bit of a surprise, given what seems like affordability challenges and just overall headwinds facing the consumer, I guess what is your thoughts on that? And do you feel like just given the balance sheet and maybe the absorption headwinds that they're facing, do you feel like that gives you guys better ability to push back or negotiate than years past?

Well, I couldn't know how to answer that question...

That's a tough question.

We're a good customer of our manufacturers and I like to think that we can -- we're listening and we will listen to them, and we'd like to get along with our manufacturers and I don't know, I don't answer that any better than that.

Yes. Bottom line, though, when you look at the average transaction out there, our value content to the contractor is generally about 30% to 40%. So if it's a $12,000 installation, the amount of product that we're selling is going to be in the, let's say, $3,000 to $4,000 range. So a price increase at that point is going to increase, let's say, they go up pick a number. If they go up $100, it's not going to be a major transaction halt to the consumer. So I really don't know what we're facing from the OEMs yet. And until we do, we can't react to it.

The next question from Mitch Moore of KeyBanc Capital Markets.

I know most of the industry is already in those entry-level baseline SEER products. But just wondering if you could talk about mix in the quarter. Just maybe if you could flesh out if you're seeing consumers trade down to lower tier products?

Yes, that's been occurring all year long. Any time you have a change in product. Everything always has migrated to the base model. The base model today is 15.3 SEER in the South. That's a very efficient thesis of equipment that I wouldn't call base anymore. I'd call it almost high efficiency. So it's been pretty steady. The data we have only covers 2 quarters on the industry. So first and second quarter, we're fairly flat as far as the SEER ratings. It's always higher on heat pumps than it is on straight cool.

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

Well said A.J., can you explain OnCallAir? There may be some new people on this call.

Sure. OnCallAir is a technology initiative. It's actually a business we created in our Watsco venture subsidiary and has created [indiscernible] software that's really a sales engine for our contractors or our customers. So a customer like AJ's heating and cooling would be OnCallAir customer and use our software to sell in the kitchen house. And it's loaded up with all of our data about all the products we sell, our customers' pricing, our inventory everything you could ever want in terms of creating a world-class professional sophisticated proposal or proposals for homeowners as a contractor or building owners of contractors attempt to sell their wares. Our customers that use it are winning more jobs, they're higher-ticket jobs, they're higher-margin jobs. And like I just said, they're more often than not selling higher efficiency systems than the base tier as well. So it's growing, it's growing fast, and it's just a win-win-win for everybody in the channel.

Great. That's super helpful. And then obviously, record gross margins here in the third quarter. Just wondering if you could unpack the moving pieces within that. Maybe just how much was mix benefits from the other HVAC products versus some carryover OEM pricing?

This is Rick. I can -- yes, this is Rick. I can help you with that answer a little bit. There's 2 or 3 contributors there that help and that feel good and sustainable. The first is we had growth in non-equipment, and as a category as a basket, that nonequipment business has higher gross margins. So that is a mix benefit in our gross margin. There was some carryover benefit from springtime OEM pricing actions. And then the third most structural most interesting aspect of it is that, we've talked about the pricing optimization tools that are maturing and getting better every day in the field. AI is making that even better today and transactional margins were very resilient in a down market and actually slightly up. So we take some comfort in that and feeling and being somewhat -- or to us feel somewhat permanent and structural whatever word you want to use. And those are the large contributors to the margin expansion.

And then just by the way...

Let me just say this. We don't want to provide information to our competitors that can use for. So be careful with how much detail we answer these things. Go ahead, A.J.

I was just going to say, the way you said that, Rick, and what you said earlier about controlling what we can control, it's important to reiterate that we're a long-term company. I mean I know this is the third quarter call. But our job is to invest and to steer the business for the long-term health and continuous improvement of this business. You heard us talk about that in our inventory, right? We talked a little bit about what it means in this quarter and next quarter, but really, we're talking about how do we get to 5 turns. What does that mean for our business in the medium and long term. There's pricing, there's noise, there's OEM changes and so forth, but what are we doing to improve our paradigm as a selling organization to structurally increase our margins over the long term. It's true of our technology initiatives, helping our customers digitize their businesses so they can be more efficient as well as we can be more efficient and we can all move the efficient frontier out into the right. So I understand these questions are very much focused on this quarter and next quarter, but our business is focused on the long term as well as the short term.

Our next question comes from Steve Tusa of JPMorgan.

As I say, Miami [ commerce ]staff.

[indiscernible] I don't know. I was in Italy this summer. So just...

I can tell. I can tell.

Yes. Never real language guy, unfortunately. .

You did good.

But I do talk HVAC. I talk the HVAC language. So I'm just curious, when you survey your contractors, what are they saying about like what their volumes are down? Or are they -- I mean I would assume they're down if this is what kind of like what you guys are seeing, but like what is the actual like I don't know what you call it, like of activity for the contractors like at the ground level?

I'm not sure I understand your question.

Well, are your contractor customer sales down? Or are they -- like, is it -- because Lennox mentioned something about contractors having inventory. I think Carrier kind of reinforced that yesterday. So there's this kind of narrative that there was -- there was some inventory sitting at contractors? Or should we assume that your sales are kind of in line with what they're seeing on the ground level?

I think some contractors may have inventory, but that's going to be a very large contractor. It's got a warehouse. We sell to almost 100,000 different contractors across the country. So it's -- if you're talking to large contractors, yes, they could have inventory, but I don't think it's ever going to be a meaningful amount of inventory.

I mean, Steve I've talked to contractors in the Northeast that are of size and they're doing great. I've talked to small ones in Texas that are closing up shop. I mean it is all over the map, which as you imagine, since like Paul said, we're at such scale with 100,000 customers across the company. It's not -- there's not one story. There's thousands.

And as far as...

The industry overall is down, right.

As far as this institutional channel, which is, I think, the large contractors, how big is that now as a percentage of the market, if like housing and homebuilders are like 20%-ish, like is that institutional channel? How big is that now the consolidators on the contractor side?

It would be guess on our part. Yes.

Barry, what do you have there? I think you estimated that for me once.

Yes, I mean it's 2 separate conversations, Steve. There's the contractors that do work for the builder community and that is not necessarily a consolidator or some kind of what we're targeting as institutional. And if housing is 10%, 15% of the market, I believe those contractors are 10%, 15% of the market. But the focus of what we're talking about is mega contractors that are primarily replacement driven that have a multitude of locations throughout the U.S. and their fragmentation of who they buy from is extreme. So we're trying to develop the thought of how to bring productivity and scale to that relationship. And I certainly think that segment is under 10% of the market, but it is growing, and this isn't just cooked up in a lab. This is customers coming to us and asking if we can help them with this.

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

Got it. And then just one last one for you on pricing. Anything on the in the environment that you're seeing, where maybe there's an OEM that's trying to get rid of some inventory or something, any kind of like late season rebate activity that -- or discounting activity you're seeing on a like-for-like basis price-wise?

Whatever we're seeing is not material.

The next question comes from Nigel Coe of Wolfe Research.

By the way, I think this is the first time you guys have done a formal investor event. So this is one we can't miss. So look forward to that guys.

Where are you coming from, Nigel?

New York. Yes. So don't [ depot ] by the accents. It's a...

You had [ depot ] you did have [ depot ] I was going -- I'm going to guess -- I was going to guess Ireland.

Ireland. Well, yes, I'm actually Wash, but close enough.

Okay.

So I want to go back -- I really love to get your perspective on the customer behavior and why it changed so dramatically. And it seems to be a coincidence, so maybe not coincidence that it's happening at the time that we've seen this A2L transition. And I'm just wondering if the kind of the cost of a full replacement system versus a partial is a factor that contractors are highlighting to you. And within that question, I'm just wondering if you're seeing the same sort of trends for the R-32 products, Ductless or Goodman. Are those kind of sell-through dynamics better than what we're seeing for R-454B?

Yes, this is Paul. Yes, you are seeing a difference as far as performance. The A2L product, you've got to replace the coil inside as well as the outdoor unit. You can't just replace the outdoor unit because you have to have the sniffing device to be able to tell if there's a leak and then you have to have the switch to turn on the blower fan. So that brought the price up, but it also increases the cost of the consumer to replace an entire system. When you look at Ductless products, Ductless products continue to grow. There's some new products out there that are side discharge. And they have a tendency to get into the higher efficiency levels with the coil inside and they're ducted. So yes, we've seen some changes in the duct free market, which have enhanced our sales there.

But Nigel, I guess, the price of the A2L machines or equipment or solutions are higher, but I don't believe that's the full reason that there's a slowdown in the industry, I think that's much more about the all record or, I believe, close to record lows and consumer confidence, record lows in the trading of homes and building of new homes, the tariffs creating I would say, uncertainty for many homeowners of what their cost of living is going to be. So I just think there's less activity in terms of people investing in their homes, HVAC included, especially coming off a period where they invested a lot in their homes, when they were living at home all day long during the COVID times. So while yes, it's true that there is more price than machines. I just don't believe it's that clear of elasticity conversation, I think, much more macro influences or having an impact.

Okay. Okay. That's great color.

I just want to add something for everyone's sake in this because I think part of this discussion is where is the contractor in this and how are their businesses doing? Someone asked, is there a correlation between what a contractor would feel and what we're feeling and so on. And I said this many quarters through my career, no one ever asks about credit. We give contractors $800 million in accounts receivable, and we know the credit quality every second of the day. In the recession, for example, we had 10% of that portfolio over 90 days past due. Today, it's 1.2%. Last year, at this time, it was 1.2%. Credit quality has not changed at all. It's not -- that 1.2% is as low as any year in the last 10 years. So if I look at the pure credit quality of our customer as maybe a leading indicator of some kind, the quality is very high.

Okay. That's great color. And then my follow-up, and I know we're running out of time here. But my follow-up is everyone tracks the HARDI data intra-quarter. And it just seems very disconnected from -- well, it doesn't seem it is very disconnected from what we're seeing from you and obviously, your OEM partners. Any perspective on that would be helpful.

Yes. I think there's a great deal of difference there. Yes, one, if you take a look at the OEMs themselves who don't report to HARDI, you've got, what, 50% of train sales goes through their company-owned stores, 70% of Lennox, 70% of Goodman. Carrier pushes, what, over 40%, 45% of their sales through Watsco, we don't report to that. So it's a different reporting group. I think it's going to be a little bit more commercial refrigeration. I think it's going to be a little bit more on the repair side, perhaps. And it tends to be generally more of a northern-based report than the south. So geographically, I don't know how it's -- and I don't know if they have a consistency every month or quarter as far as who is reporting to it. So on the index that weekly can use is the HRI data.

Paul, why don't you comment also, which we generally do not comment but the weather this season.

Yes, the weather was -- yes, it was hot in Florida like it always is. It was hot in Texas, like it generally is. But we had the recooling days that were not really on target for the entire year, especially the peak part of the year, which is May and June when people are thinking about putting in a new air conditioner. But if the weather doesn't get hot, they don't. So it's been just an odd year. I just wish I could put both arms around it and explain it better, but it's a very difficult situation to explain.

Barry said on last quarter's call. We look forward to getting back to some harmony hopefully, in 2026.

And the word was serenity, by the way.

Serenity, yes. Thank you, better, better word. Serenity, now.

But in the meantime, we're getting stronger. Our balance sheet is getting stronger, technology capabilities are getting better. We're not feeling sorry for ourselves that the industry has slowed down. We're doing something about it. We're getting stronger.

Our next question comes from Steve Tusa of JPMorgan.

We're very proud.

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

Do we think this year has been unusual, Yes. Demand is unusual. Do we think we'll get normal next year? I would like to think so, but who might have predicted what the weather is going to do and the other circumstances that create demand. So that's an unknown. But are we stronger now? And will we be stronger next year? Yes. All I can do is control what we do. We're going to get stronger and better no matter what's going on with demand, because that's who we are. We're going to get -- we're going to build up our capabilities to do much more things that our competitors can do, innovating in technology and building our cash position to perhaps do more M&A. I'd like to do more M&A. So whenever it comes, comes, we'll be ready for you.

Yes, control the control.

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

Well, let's just fine today. I enjoyed it. We have a great team here in Watsco in Miami, and I certainly hope as many of you can come to Miami in December, please do. We'll welcome you with open arms. And any of it, thanks to your interest in Watsco. Bye-bye now.

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