Watsco Q2 Earnings Call Highlights

Key Points

• Q2 sales increased 2% to $2.1 billion, with residential HVAC equipment up 5% on stronger volume and pricing. Gross margin fell to 27.5% from 29.3% due to an unusually favorable prior-year comparison, product mix and lower purchasing discounts.
• Watsco completed its acquisition of Jackson Supply, which contributed approximately $20 million in June revenue and adds about $230 million in annual sales across 25 Sunbelt locations. Management described the broader market as stable, with organic growth of 4% to 5% through July 28.
• Digital initiatives continued to expand: e-commerce sales rose 13% in the first half and represented 37% of trailing 12-month sales, while OnCall Air generated $1.9 billion in gross merchandise value. The company also remains debt-free, ended the quarter with $464 million in cash and raised its annual dividend 10% to $13.20 per share.

Watsco NYSE: WSO reported second-quarter sales growth as residential HVAC equipment demand improved, while gross margin declined from an unusually strong prior-year comparison tied to earlier manufacturer pricing actions and product-transition effects.

Chairman and Chief Executive Officer Al Nahmad said the company’s operating environment is becoming more conventional after several years marked by pandemic disruptions, supply-chain issues, regulatory transitions and tariff volatility. “Revenue is growing, and a digital ecosystem is producing measurable results,” he said.

Second-quarter sales rose 2% to $2.1 billion. Residential HVAC equipment, Watsco’s largest product segment, increased 5%, supported by gains in both unit volume and pricing. Operating income was $238 million, producing an operating margin of 11.3%, while earnings were $4.00 per share.

Gross profit totaled $579 million, and gross margin was 27.5%, compared with 29.3% in the prior-year quarter. Nahmad said 2025 margins benefited from aggressive original equipment manufacturer pricing actions in response to inflation and tariffs. Pricing actions in 2026 have been more moderate and closer to historical patterns.

Margin comparison and inventory trends

Senior Vice President Barry Logan characterized the prior-year margin result as an anomaly rather than a new baseline. He said gross margin has been in a relatively narrow range over the past 12 months, with 27%-plus representing the company’s expected baseline based on longer-term trends.

Logan said equipment sales grew faster than non-equipment sales during the quarter, affecting margin because the categories carry different gross-margin profiles. Lower inventory levels also reduced certain purchasing discounts and rebates, he said, though the company views lower inventory ownership as appropriate as supply conditions normalize.

Management reiterated its longer-term objective of reaching a 30% gross margin. President A.J. Nahmad said the company is investing in technology, operations and pricing capabilities to support that goal.

Watsco ended the quarter with $464 million in cash and no debt. Operating cash flow improved by $168 million during the first six months, which the company attributed to a lower seasonal inventory build. Logan said inventory was about $100 million above what management may have anticipated, equivalent to roughly seven days of inventory, while field inventory was down nearly $200 million. The June 1 acquisition of Jackson Supply added about $60 million of inventory.

Nahmad said the company expects inventory turns to gradually improve as manufacturer supply chains become healthier and the A2L product transition moves further into the past.

Jackson Supply acquisition and market conditions

Watsco completed its acquisition of Jackson Supply on June 1. Jackson has approximately $230 million in annual sales and operates from 25 Sunbelt locations. The acquisition contributed roughly $20 million of revenue in June, according to Logan’s calculation during the call.

Management described Jackson as an entrepreneurial business with a history of expansion. Logan said the company had doubled from roughly $100 million to $230 million of sales in recent years and has its own goal of doubling again over time. Watsco plans to support Jackson with capital, supplier relationships and technology while allowing its leadership team to continue operating the business.

On broader demand, Executive Vice President Paul Johnston said new construction activity has slowed in Florida and Texas, two major Southern markets. He contrasted that weakness with stronger demand in Northern states. Watsco said commercial HVAC was down 8%, driven primarily by a decline in variable refrigerant flow, or VRF, activity during its own A2L transition. Unitary commercial and applied commercial activity were relatively flat, while international business declined by a single-digit percentage.

Management said it views the overall market as stable rather than worsening. Logan said the company was seeing 4% to 5% organic growth through July 28, including unit growth. He cautioned that Watsco does not provide formal earnings guidance.

Digital platforms expand

A.J. Nahmad said Watsco’s technology investments are intended to improve customer service, increase operational efficiency and help contractors expand their businesses. E-commerce sales rose 13% in the first half and represented 37% of sales over the past 12 months. In some markets, e-commerce penetration reached 60% to 70%.

The company’s mobile applications had more than 70,000 monthly active users. Its OnCall Air platform generated more than 340,000 homeowner proposals over the past year, representing $1.9 billion of gross merchandise value, up 15% from the comparable period.

Watsco also launched SupplySync.com during the second quarter for larger institutional customers. The company plans to expand the platform over time. Other initiatives include Vendor Consolidation and Rationalization, or VCR, which is focused on strengthening supplier relationships and broadening non-equipment product availability, and Hydros, a shared logistics and distribution program among Watsco business units.

Management said digital transactions can increase order line items, often adding accessory products that support margins. The company is also using pricing optimization tools to improve product pricing profiles across markets and customers.

Watsco increased its annual dividend by 10% in April to $13.20 per share. Nahmad noted that 2026 marks the company’s 52nd consecutive year of paying dividends.

About Watsco (NYSE:WSO)

Watsco, Inc is the largest distributor of heating, ventilation, air conditioning and refrigeration (HVAC/R) equipment, parts and supplies in the United States. Headquartered in Miami, Florida, the company operates a network of more than 600 branches across the continental U.S., Canada and Puerto Rico. Watsco serves residential and commercial contractors by providing essential components for climate control systems, including air conditioners, furnaces, heat pumps, coils, refrigerants, controls and electrical and piping supplies.

Founded in 1947, Watsco has grown from a single regional distributor into an industry leader through a combination of organic expansion, acquisitions and strategic partnerships with original equipment manufacturers such as Carrier, Trane, Goodman and Lennox.

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