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Watsco (WSO) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Industrials· Jul 29, 2026

Source: earnings call transcript

Executive summary

Watsco Q2 FY26 — Stabilizing Markets Drive Revenue Growth and Digital Adoption

Watsco navigated a normalizing operating environment in Q2 FY26, with stabilizing markets and strong digital ecosystem performance driving revenue growth. The company's strategic investments in technology and acquisitions are yielding results, despite some gross margin compression from moderating OEM pricing and regional construction slowdowns. Management remains focused on long-term margin goals and continued operational efficiency.

Highlights

5

  • Residential HVAC equipment grew 5% with gains in both unit volume and pricing.

  • E-commerce sales grew 13%, reaching 37% of total sales over the last 12 months.

  • Operating cash flow for the 6-month period improved by $168 million.

  • Acquired Jackson Supply, adding $230 million in annual sales and 25 Sunbelt locations.

  • Increased annual dividend by 10% to $13.20 per share, marking 52 consecutive years of dividends.

Concerns

4

  • Gross margin declined to 27.5% from 29.3% last year, primarily due to more moderate OEM pricing actions in 2026 compared to aggressive actions in 2025.

  • New construction in Southern states (Florida, Texas) is experiencing a slowdown.

  • Field inventory was about $100 million ahead of what was anticipated, though overall field stock is down $200 million.

  • Commercial HVAC (VRF segment) was down 8% due to A2L transition disruptions.

Guidance & targets

CategoryTargetConfidence
Gross profit margin
30%
high materiality
High
Inventory efficiency
Achieve further efficiency
medium materiality
Medium
SupplySync.com scaling
Scale to more and more customers
medium materiality
High
Organic growth
Mid-single figure, low about 4%, 5%
high materiality
High
Inventory management
Owning less over the rest of the year than a year ago
medium materiality
High
Inventory turns
Slowly creep back up
medium materiality
Medium

Segment performance

SegmentRevenueYoYQoQMargin
Residential HVAC equipment
Gains in both unit volume and pricing.
—5%——
Commercial HVAC
Most of the decline was in VRF segment due to A2L transition disruptions. Unitary commercial and applied segments were relatively flat.
—-8%——
International
Outperformed by domestic, but not a significant drag on total business.
—single digits decline——
Commercial Refrigeration
Attributed to a couple of nice customer wins in one business unit. Larger refrigeration equipment jobs generally carry a lower margin.
—strong outgrowth——

Product announcements

ProductTypeDetails
SupplySync.comlaunch

Deals & partnerships

Jackson Supply Acquisition of a leading HVAC distributor in the Sunbelt.

Closed on June 1, 2026. Jackson Supply operates from 25 Sunbelt locations. The Jackson team will continue to operate and grow their business with Watsco's support, leveraging capital, relationships, and technology.

Risks & headwinds

Gross margin compression Q2 FY26

27.5% in Q2 FY26 vs 29.3% in Q2 FY25

Mitigation:Focus on long-term goal of 30% gross profit margin through investments; normalizing OEM pricing actions are now more consistent with historical levels.

Slowdown in new construction Current

Explicitly noted in Florida and Texas

Mitigation:Market is stabilizing, with strength in Northern states offsetting weakness in the South; company carries diverse brands to compete at any level.

Higher-than-anticipated inventory Q2 FY26

Approximately $100 million ahead of plan (June 30)

Mitigation:Expect to achieve further inventory efficiency as lead times normalize and A2L product transition concludes; field stock is already down $200 million; inventory turns expected to slowly creep back up.

Commercial HVAC (VRF) segment decline Q2 FY26

Down 8% overall commercial, most in VRF

Mitigation:Disruption due to A2L transition over the last 12 months; unitary commercial and applied segments were relatively flat.

Refrigerant headwinds Q2 FY26

Refrigerant sales slightly down; A2L price higher than 410A but price has come down since last year's launch

Mitigation:Refrigerant is a very small portion of the business ($35M in Q2 commodities revenue).

What to watch in Q3 FY26

Gross margin trajectory

Next quarter
Current 27.5%
Target Movement towards 30% long-term goal

Why it matters

Gross margin is a key profitability driver and management has a stated long-term target.

Having said that, we remain focused on reaching our long-term goal of 30% in gross profit margin.

Find out whether WSO delivers this. Inve re-checks your case every morning.

Q&A highlights

Clarification on the meaning of 'normalized' gross margins, given the Q2 level.

Management clarified that 27% and change is the expected baseline, with last year's 29%+ being an anomaly due to aggressive OEM pricing. They reiterated a long-term goal of 30% gross margin.

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

asked by Steve Volkmann · answered by Aaron Nahmad

2 min read 6 chapters

Detailed narrative

Market Normalization and Strategic Investments

Watsco reports stabilizing markets after five years of volatility, including a pandemic, supply chain disruptions, regulatory transitions, and tariff volatility. The company's sustained investments in its business, particularly its digital ecosystem, are now producing measurable results, positioning it for continued growth in a normalized operating environment.

Digital Ecosystem and Customer Engagement

Watsco's technology platforms are scaling, with e-commerce sales growing 13% and reaching 37% of total sales over the last 12 months. Mobile apps have over 70,000 active monthly users, and the OnCallAir platform generated $1.9 billion in gross merchandise value from 340,000 proposals, a 15% increase. These digital tools are enabling contractors to grow faster and are expected to lower the cost to serve at scale.

New Growth Initiatives

The company launched SupplySync.com, a new platform targeting large institutional customers, with plans for future scaling. Other initiatives like Vendor Consolidation and Rationalization (VCR) and Hydros (shared logistics) are maturing, enhancing product availability and operational efficiency, particularly for non-equipment categories. AI is also being integrated across the business.

Gross Margin Dynamics

Gross profit margin decreased to 27.5% from 29.3% in the prior year, primarily due to a normalization of OEM pricing actions. While 2025 benefited from aggressive OEM pricing in response to inflation and tariffs, 2026 saw more moderate, historically consistent pricing. The company maintains a long-term goal of 30% gross profit margin, supported by ongoing investments.

Inventory Management and Supply Chain

Operating cash flow improved by $168 million for the six-month period, driven by a lower ramp-up of seasonal inventory. The company anticipates further inventory efficiency as lead times normalize and the A2L product transition concludes. Despite some overstocking in the first half, field stock is down, and inventory turns are expected to improve.

Jackson Supply Acquisition

Watsco successfully closed the acquisition of Jackson Supply on June 1, adding $230 million in annual sales and 25 Sunbelt locations. The Jackson team will continue to operate autonomously with Watsco's support, leveraging Watsco's capital, relationships, and technology to pursue aggressive growth plans, having previously doubled their business in recent years.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.