Watsco, Inc. Class B Q2 2026 Earnings Call

Good day, and welcome to the Watsco, Inc. second quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, 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 a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Al Nahmad, Chairman. Please go ahead. Good morning, everyone.

Welcome to our second quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is AJ Nahmad, President, also Paul Johnston and Barry Logan and Rick Gomez. Before we start, our cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. I am happy to report that our second quarter results reflect stabilizing markets under far more conventional operating conditions. The last five years brought a pandemic, supply chain disruptions, regulatory transitions, and tariff volatility. Through it all, we stayed the course and invested in our business. Now the operating environment is normalizing, revenue is growing, and a digital ecosystem is producing measurable results.

Our largest and most impacted product segment, residential HVAC equipment, grew 5% during the quarter, with gains in both unit volume and pricing. We closed on Jackson Supply on June 1st, and we are thrilled to welcome their team to the Watsco family. Jackson is a legend in our industry, with $230 million in annual sales, operating from 25 Sunbelt locations. As in our culture, the Jackson team will continue to operate and grow their business with our full support. They have big ambitions, and we will gladly support their leadership team in any way we can. Turning to the second quarter results. Sales increased 2% to $2.1 billion. Gross profit was $579 million, with a gross margin of 27.5% versus 29.3% last year. SG&A increased 2%, excluding acquisitions. Operating income was $238 million and had an operating margin of 11.3%. Earnings per share came in at $4 per share.

My earlier comment regarding volatility and disruption had the greatest short-term impact on the gross margins. Let me say that again. My earlier comment regarding volatility and disruption had the greatest short-term impact on our gross margins in 2026 versus 2025. During 2025, OEMs instituted aggressive pricing action in response to inflation and tariffs, benefiting gross margin in 2025. By comparison, 2026 OEM pricing actions were more moderate and consistent with historical levels. Looking beyond the one-time impact from a year ago, gross margins over the last month has been in a narrow range and more consistent with historical gross margins. Now, this is important. Having said that, we remain focused on reaching our long-term goal of 30% in gross profit margin. As for SG&A, we have become a more efficient company as business conditions have simplified.

The modest increase in SG&A reflects continued technology investments along with the addition of Jackson Supply. Moving on to our balance sheet. We ended the quarter with $464 million in cash and no debt. No surprise. We remain committed to maintaining a pristine balance sheet, enabling investment and growth opportunities as they come up. Operating cash flow for the six-month period improved by $168 million, reflecting a lower ramp-up of seasonal inventory. We expect to achieve further inventory efficiency as lead times normalize and the A2L product transition moves behind us. In April, we increased our annual dividend by 10% to $13.20 per share. Interesting, 2026 marks our 52nd consecutive year of paying dividends. Finally, I'm going to hand the call over to AJ, our President, to provide an update on Watsco's technology initiatives. AJ? Thank you, and good morning, everyone.

With the complexity of the last few years largely behind us, we believe our technology investments have made us a stronger company with higher growth prospects and a widening competitive moat. Our goals have been ambitious and straightforward. First, build the industry's largest repository of data, products, market, customer, competitor, pricing, you name it. This underpins and empowers the industry's most advanced technology platforms. Second, through widespread adoption and use of our technologies, revolutionize our customer experience so that contractors, installers, and technicians love doing business and only want to do business with the Watsco companies. Next, transform our supply chain and store-level operations through digital platforms to better serve those customers and gain operating efficiencies along the way. Finally, develop and launch technologies that help our customers grow their own businesses so they can drag us along with their growth.

Big picture, we see contractor behavior evolving in ways that benefit the technology-enabled distributor in the long term. In terms of 2026 first half highlights, our core technology platforms continue to scale and add value. E-commerce sales have grown 13% while outpacing overall growth. In terms of penetration, e-commerce reached 37% of total sales over the last 12 months, with certain markets at 60%-70% penetration. Digital engagement with our mobile apps is strong as well, at more than 70,000 active monthly users. Our OnCall Air platform continues its growth trajectory. Over the last year, more than 340,000 proposals were presented to homeowners using the tool, generating $1.9 billion of gross merchandise value, a 15% increase over the comparable period. Simply put, the contractors we serve digitally are growing faster, attrit less, and we believe we can lower our cost to serve at scale over time.

At our Investor Day last year, we communicated several new initiatives that leverage our technology advantage and represent new growth opportunities that will materialize in the years ahead. SupplySync.com, our newest platform to serve the growing segment of large institutional customers, launched in the second quarter to great fanfare. Our plan is to scale it to more and more customers in the coming months and years. This is a new and growing channel with different customer needs. We see an incremental growth opportunity beyond our day-to-day business while leveraging our existing scale and infrastructure. VCR, which stands for Vendor Consolidation and Rationalization, has expanded across many of our non-equipment product categories. Relationships with our strategic vendor partners continues to strengthen. Hydros, which is our investment in shared logistics and distribution among our business units, has further matured and will become more important over time.

The transformational use of AI continues to evolve throughout Watsco. I could spend the next few hours just on that subject. These investments, along with our scale, entrepreneurial culture, and capacity to invest, are unmatched in our industry. In closing, a reminder of our fundamentals. Watsco is the market leader and the technology leader in what remains a highly fragmented HVAC distribution market. The products we sell are a necessity, and the installed base continues to expand. We have deep and collaborative relationships with industry-leading manufacturers and industry partners. We offer the broadest variety of products and operate a large and growing network to serve more and more customers. Our unique ownership culture, shared by more than 7,000 employees, rewards and incentivizes long-term performance. With that, let's turn to Q&A.

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Stephen Volkmann with Jefferies. Please go ahead. Morning, Steve.

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

Well, I'm going to have Barry Logan, my expert, on that. If I can jump in real quick. I heard that. The prepared remark was actually last 12 months. I think there was just a skip in the words there. A misreading. Yeah. A normalization the last 12 months. Go ahead, Barry. Yeah, Steve, again, this is the trend line kind of discussion we're talking about versus last year, which was not a trend line in terms of where things have been.

Three, four years ago, when margins achieved 27% plus, the question was: Will they retreat back to something less than that over time? I emphatically said, "No, at 27 is the baseline that we expect looking forward, going forward." I think we said that prior to all the challenges of the last few years, going through product change and regulatory change and everything else. If you look at the trend line over that two or three, four-year period now, 27 and change has kind of been where we are. Last year is the anomaly at 29 plus in the second quarter.

What we were conveying in Al's remarks as well as the press release, it's there in the press release as well, is let's look at things over the last 12 months, which is kind of almost the period of time where you can look back and say, "When did some of these volatile items begin to recede or at least lapse?" Look back the last 12 months, I think the margin's 27.5. The first quarter, second quarter is in that narrow range as well. It's just a way to show and identify analytically that last year is something that stands out on its own, and I can't say ignore it, but I could say discount it in the analysis of looking forward over the next several quarters.

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

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

Paul, you want to take that? Yeah. We're seeing definitely a slowdown in new construction in the South, predominantly in Florida and in Texas. Those are the two big new construction states, and they are slower right now. It's a very unusual scenario out there where you're seeing strength in the North and weakness in the South right now. That's the way the market shakes out.

Great. Thank you, guys. I'll pass it on.

The next question comes from Brett Linzey with Mizuho. Please go ahead. Hello, Brett.

Hey, how you doing, guys? It's Ryan on here for Brett today.

Hello, Ryan. Hey, how you doing, guys?

All right. I'm curious on pricing.

You said OEM pricing in 2026 has normalized to historical trends. Does that mean roughly 2%-3% annual increases from your primary OEM partners? And how does that compare to your own realized ASP growth in the quarter?

Barry. Again, there's aspirational prices that are announced, there's real life as it plays out and the various segments of customers and even market. Pricing is specific even by market. Within brands, it has different attributes, right?

Okay. The composite that we reported in this quarter, in this press release that you read, is a 2% price increase on units.

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

Got it. That's super helpful. Thank you. One more on gross margins here. On the gross margin bridge, you sized the 2025 pricing and A2L comparison at roughly 130 basis points of the 175 or so decline. Can you walk through the remaining 50 basis points and then maybe just a little bit more color on how we should be thinking about gross margins for the remainder of the year, Q3 and Q4? Thank you. Sure. First, if you notice also in the data, the equipment business outgrew the non-equipment business.

There is a margin differential, gross margin differential on the two populations of products. That accounts for a chunk of the remaining difference. We're also owning less inventory all year long, which also means purchases are less, which also means some of the attributes we gain in either purchase discounts or rebates, things like that, can moderate down. That's okay. That goes hand in hand with how inventory should be managed in this environment over time. Other puts and takes in there that aren't material, that would be the view of what's in the numbers today.

Again, I need to stress to you, if you look back to the last 12 months, look back to the last two or three years, we're in the range that what we've been in at this point in the year, at this point year to date. Looking forward, again, we're not ones that give guidance and give projections. You've heard my comments, you've heard our comments about the last 12 months and where things sit today. Time will tell what the rest of the year will be, that's how I would look at it is looking at trends over the last 12 months.

The next question comes from Chris Snyder with Morgan Stanley. Please go ahead. Morning, Chris.

Thank you. Good morning. I guess you guys built more inventory than you normally would in the first half of the year. I think it was up maybe since the end of last year, like 35, 36%. I guess how much of that was intentional versus maybe just a demand shortfall that caused you guys to exit June with more inventory? Any reads from that on what it means for your pace of inventory purchase into the back half, but also price cost into the back half, just because you guys did buy a little bit earlier this year. Thank you. Barry? Yeah, I can give the answer.

I think we're probably about $100 million ahead of what we might have thought. That's seven days worth of inventory. Which is a remarkable statement, actually. I don't think there's any strategic or tactical thing that I went into a June 30th inventory balance. Our field stock is down almost $200 million. You need to account for the Jackson Supply acquisition, and your analysis that we bought about $60 million inventory June 1st as part of Jackson Supply, so you need to consider that. As far as the last half and next half, the idea is to continue to grind on keeping inventory ready for customers while owning less over the rest of the year than we did a year ago. We've done that for six months, and we intend to do that over the next six months.

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

Thank you. I appreciate that. Just maybe a higher level one on just kind of end demand. It seems like from a lot of the sell-through numbers, that end demand is not getting better. It seems like it might be getting worse. If we look at sell-through volume declines on negative comps at this point. I guess my question for you guys is there any plan or strategy or anything that Watsco can do to help improve affordability in the industry? Whether that's carrying lower cost brands that are out there? Just anything else, because it seems like a challenge, and it doesn't seem like it's getting better. Thank you. Well, first, let me say we do carry various brands.

I think we have 26 different brands, so we can compete at any level. Also, peak in the next quarter shows growth for us anyhow, in the mid-single figures, in the low, about 4% or 5%. Maybe things have turned around.

No, go ahead. Go ahead, Paul. It's okay. No, the market's stabilized. I don't think it's getting worse. I think that's an overstatement on your part. When I look at the market out there right now, it's stable. It's continuing to grow. I think we've hit bottom, and we're coming back out of it again. I feel very good that the market is not going to go down further. I think there's still going to be some regional differences that occur as we look out. As I mentioned earlier, the West Coast and the South have been fairly weak to start the year. The Northern tier states have been very, very strong. I don't Thank you. Yeah.

I was going to say, thank you. I appreciate the perspective. My point was just more that the sell-through volumes are seemingly negative if we look at the industry data, and we are comping at this point now, negative volume. That's why I said that, I do appreciate that perspective. Thank you. Yeah. We realize that the industry numbers are pretty similar.

Yeah. Go ahead, Barry. No, I have to say this because it's very critical and really understanding it. Yes, units were down 17% in the calendar year last year. Why were they down 17%? Why? What components? What's inside of that number? Obviously, I need about a half an hour to give you all the analytical pieces I could give you in that analysis. The question is, was the market really down 17% last year just on some kind of holistic basis, or is there something longer term that went on that caused it? My view, our view in the data, looking at our data is, the COVID period clearly borrowed replacement volume from the future.

If units were up 10, 15% for two years, that borrowed some measure of replacement volumes from the period that followed. Our analysis would show that last year's correction in volume, down 17%, fixed much of the overhang from that dynamic. Time will tell. The data is pretty sound in our view, but time will tell. As we look at this year and replacing systems and consumers rolling out of bed and calling contractors and doing business with us, clearly, the consumer is the one that has to pay for this stuff. Clearly, the consumer is still a little heavy in terms of that dynamic economically. When the systems break, they're going to have to be repaired or replaced.

If we're right about our data and the trend line that we see, this is the baseline, this is the foundation from over the next few years. Looking back a year ago and feeling like there's an easy comp, I don't think is a good way of looking at it. Question is this a foundation that has momentum or at least stability? That's why we use the word stability. Is this foundation something that is going to grow in a conventional way over the next several years? I feel better about that. I don't do it because I look back a year and say, "Look what happened a year ago." I think at some point, you've got to only look forward in this discussion.

Yeah. No, I appreciate it, Barry. I remember that cumulative growth analysis that you talked about last quarter, and I thought it was a really thoughtful way to frame it up. Thank you. The next question comes from Ryan Merkel with William Blair.

Please go ahead. Morning, Ryan.

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

Go ahead. Barry, Paul, both of you.

Yeah. Anybody jump into that.

Yeah, I think Al said earlier.

We predict the future, guys.

I know I asked a guidance question. I appreciate you may not answer a lot of it.

It's like you know us, Ryan.

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

Okay. I appreciate that. Then price- Jackson obviously adds something to that.

Right. Okay. My follow-up is just on price. Only 2% for equipment is a little bit lower than I was thinking, right? Because we had the price increase in March. You had another one kind of May-ish. I know it got pulled back a little. Isn't there some A2L mix also still year-over-year helping? Help us frame that. Is there anything going on with competitive conditions, or why isn't price a little bit higher than 2%?

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

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

Right. The other thing that matters there would be your customer mix.

Really, at the end of the day, you yield what your weighted customer mix tells you you should yield. If we're 100% R&C, you yield one thing, if you're 100% AOR, you yield another thing. Again, you sometimes, oftentimes blend into something that's right in the middle. I would say that blended cost for us was up pretty close to what price was up and whatever got passed through based on your customer mix is what we ended up passing through.

I think part of the issue that we had was I think the larger customers clearly dominated. Those that advertise and promote on the add-on replacement. They dominate, and they did not get full. We had a lot of the smaller contractors and the non-advertising contractors, the business didn't flow down to them as quickly as it has historically. It was a difference in customer mix also that probably drove that price down.

Got it. Okay. That makes sense. I appreciate the comments, guys. Passing on. The next question comes from David Manthey with Baird.

Please go ahead. Hi, David.

Yeah, thank you. Good morning, guys. I know it's a small segment, but on commercial refrigeration, maybe, A, what happened there, but B, are there any gross or operating margin implications for that very strong outgrowth in that segment?

No idea. Yeah, David, Rick, I'll take a stab at that.

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

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

Yes. Yeah. Yes. Sure do.

Yes. Yes. Keep going, Rick.

You're on a roll. Well, AJ talked about SupplySync, VCR, Hydros, and those all directly influence future other HVAC product growth.

I'll start with SupplySync, and AJ chime in here anytime. The basket of customers to which we think that segment applies to is even more weighted towards equipment than is the total Watsco mix of, call it, 70/30. There is absolutely incremental non-equipment opportunity as we scale SupplySync. VCR is not just about consolidating vendors. VCR is about being more relevant, having a broader array, and having better replenishment of non-equipment products throughout our system. Thirdly, Hydros is the logistics and the replenishment that enables that to a local branch. A branch in Tulsa, Oklahoma, doesn't need to have X amount of stuff of non-equipment to be relevant in the market sitting on the shelf in that branch.

Hydros can resupply that within 24 hours and enable 650 domestic locations to be in the non-equipment business. Everything we touched on at our Investor Day and all the core technology platforms, whether it's e-commerce, whether it's the digital adoption, I'll remind you that there's extra lines when we transact digitally with customers, and those extra lines are usually some accessory that's accompanying the order, which is accretive and enhancing to the margin of that order. Non-equipment growth and non-equipment excitement is really embedded through every initiative we've got going on, both technology and otherwise.

Yeah. I'll add one more to the mix, which is our pricing optimization efforts, and there's a lot going on there. Part of it is making sure that every customer has complete pricing profiles for every product that's available to them to purchase, which sounds obvious and easy, but because of the complexity of the SKU count and the markets and you name it, there's a lot of complexity there. The tools that we now are employing allow us to do that at a scale that we couldn't do before. The pricing optimization effort is not just about maximizing margin, it's making sure that we're competitive for all products in all markets to all customers.

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

Please go ahead. Hey, good morning, guys.

Morning, Jeff. Morning. Lot covered.

I just had some cleanup items. One, I think HVAC equipment up three, resi up five. Can you just walk through the other pieces like commercial and, I don't know if the international markets are still a drag.

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

Okay. International still has I mean, domestic outperformed international, less of a gap.

I think international's down single digits. Given its overall percentage of our total business, not a big drag.

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

Yeah, I think analytically we showed that same store sales was up one, overall was up two. If you do the math, it's about a $20 million contribution for one month in June we closed June 1st. The more important analysis is where are they going, what's their growth plan? I don't have to guess, I can look back over the last five, 10 years, and they've doubled the business. They've opened up locations, they've added states, they've added markets, a complete blend of parts and supplies and equipment. When we use the word entrepreneurial, maybe it's used often, but this time, this is the most definitive kinds of entrepreneurs we can possibly partner with and hang our wagon to over time.

They have a very aggressive plan to do more of what they've been doing with our capital, our relationships, our technology, and a team that's been together as a family and is staying together as a family moving forward. The profitability, I think, is consistent with the overall Watsco kind of profile at a profitability line. To double that is their goal, not our goal for them. It's their goal. The question is, how long does it take? It didn't take them too long to go from $100 million to $230 million in recent years. It's something very exciting for us.

Yeah. I would say just to double down on that, Barry, to know Jim and Jennifer and their team is to love Jim and Jennifer and their team because they are growth-hungry entrepreneurs that are scrappy and competitive and like to win and grow. That's why we love them so much, and I think part of why they love us so much is because we give them a home base with a lot more weaponry, a lot more tools, a lot more capital, a lot more everything to go do that with and do it in their way and use anything and everything we've got to help.

Great. Appreciate it, guys. The next question comes from Aidan Harmon with Wolfe Research.

Please go ahead. Morning, Aidan.

Aiden, your line may be muted.

Hello, can you hear me?

Yep, we can. Now we can, yeah.

Oh, okay. Yeah, this is actually Nigel on for Aidan here. Not sure what happened there.

Is that a British accent? There's some British accent I hear.

It's a British accent, yeah. Aidan definitely does not have a British accent. Thanks for the question. We got there eventually. I'd be curious, how are the economics of a replace versus repair evolving, and what I'm most curious on is, how is the price of, 410A refrigerant, R22, if you can still get it. How is that changing the economics of a replace versus repair? Just a quick one on the other equipment. I know we addressed that earlier on in the call, but I thought commodity prices might've been a bit of a tail to that business this quarter. Just maybe double-click on the decline and why you saw the declines there.

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

Yeah. Well, the difference between R-410A and the A2L product is with the R-410A product, you can just remove the outdoor unit and replace it. You don't have to replace anything on the inside. Obviously, with the A2L product, you've got to do a replacement of the coil, be it a fan coil or a regular coil, because you have to have a sensing device in case it springs a leak because it is slightly flammable, the refrigerant. Then the second piece of it is you have to have a switch that will switch on the air blower and dissipate the gas in the event of a leak. That's the big difference between A2L and R-410A.

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

Well, yeah. The refrigerant pricing is higher than R-410A. R-410A is a very inexpensive refrigerant. This one, because you've got 1234YF in it, will have a higher refrigerant value to it. Refrigerant is a very small portion of our business as far as what we sell. Right now, refrigerant sales are slightly down.

Okay. That's helpful. I think just to make it clear, because you said something about I didn't hear you, Nigel, you said you expected commodities to have what impact this quarter?

I just think, within that segment, there's a bit more commodity related products there. I'd have thought that with the high commodity prices, ex PVC perhaps, but I'd have thought that that would've been a tailwind to revenues. Maybe I'm wrong there. I just want to be precise about it.

Commodities in our mind is refrigerant, steel products.

Copper to steel. copper, right?

Three things. steel, yeah. That's our commodities.

That's where we see inflation, deflation in ordinary times. It's $35 million of revenue in the second quarter. Okay? Okay. There was refrigerant headwinds in the quarter because a year ago we were launching A2L refrigerant, this year everyone has it, the price has come down.

Even if I tap dance about that, it's $35 million of business in a $2 billion quarter, just to put things in context.

Okay, understood. Okay, I think I got my two questions in there, so I'll leave it there. Thanks. This concludes our question and answer session.

I would like to turn the conference back over to Mr. Nahmad for any closing remarks.

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

Thank you for attending today's presentation.