Watsco Q2 Earnings Call Highlights

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. 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. Watsco completed its acquisition of Jackson Supply on June 1. Jackson has approximately $230 million in annual sales and operat...