Watsco, Inc. (WSO) Earnings

Management highlights

• Overall Market & Financial Position - Management reports that operating conditions are stabilizing after five years of pandemic-related disruptions, supply chain volatility, regulatory transitions, and tariff shifts - The company ended the quarter with a strong balance sheet: $464 million in cash and no outstanding debt, maintaining a liquidity position to pursue future growth and investment opportunities - Operating cash flow for the first half of 2026 improved by $168 million year-over-year, driven by lower seasonal inventory build - The company increased its 2026 annual dividend by 10% to $13.20 per share, marking 52 consecutive years of dividend payments - The A2L refrigerant product transition is progressing, with further inventory efficiency expected as the transition is completed and supply chain lead times normalize • Acquisitions - The company closed the acquisition of Jackson Supply on June 1, 2026, a leading HVAC distributor with 25 locations in the U.S. Sunbelt region - Jackson Supply will retain its existing leadership and operational independence under Waxco, with an aggressive internal growth plan to double its business over time, supported by Waxco's capital, technology, and manufacturer relationships - Jackson's profitability profile is consistent with Waxco's overall corporate profitability • Technology & Growth Initiatives - Waxco has prioritized four core technology investment goals: build the industry's largest data repository for all market and product categories, deliver a best-in-class digital customer experience to drive contractor loyalty, digitalize supply chain and store operations to improve efficiency, and launch tools that help customers grow their own businesses to drive incremental Waxco growth - E-commerce sales grew 13% year-over-year, outpacing overall company growth; e-commerce penetration reached 37% of total sales over the last 12 months, with some regional markets hitting 60-70% penetration - Waxco's mobile app has over 70,000 active monthly users; the company's on-call air contractor proposal tool generated 340,000 homeowner proposals and $1.9 billion in gross merchandise value over the last year, a 15% year-over-year increase, and digitally engaged contractors grow faster than non-digital customers - New strategic initiatives launched or scaled in H1 2026 include: SupplySync.com, a new digital platform for large institutional customers that will leverage existing Waxco infrastructure for incremental growth; DCR (vendor consolidation and rationalization) expanded across non-equipment product categories, strengthening strategic vendor partnerships; Pydros, a shared logistics and distribution network, has matured to enable faster inventory replenishment across branch locations; and AI integration across business operations continues to evolve - Management notes that the HVAC distribution market remains highly fragmented, and Waxco's scale, technology investments, and employee ownership culture create a durable competitive advantage

Guidance

• Management does not provide explicit quarterly or full-year financial guidance, but confirms that over the last 12 months, gross margins have stabilized at ~27.5%, which aligns with the historical baseline and is a more accurate indicator of forward performance than the 2025 Q2 anomalous high margin of 29.3% - The long-term target of 30% gross margin is reaffirmed, with management noting current technology and operational investments are intended to deliver this target over time - Management expects inventory levels to decline through the second half of 2026, continuing the efficiency improvement trend seen in the first half of the year, supported by healthier OEM supply chains compared to recent years - Through July 28, 2026, Waxco is seeing 4-5% organic revenue growth with positive unit volume growth, leading management to expect stable positive performance for the start of Q3 2026, after the 2025 volume correction that absorbed the COVID-related demand overhang

Segment performance

Total company revenue increased 2% year-over-year to $2.1 billion in Q2 2026. Gross profit was $579 million with a gross margin of 27.5% (down from 29.3% in Q2 2025), and operating income was $238 million with an 11.2% operating margin. Earnings per share was $4. The largest segment, residential HVAC equipment, grew 5% year-over-year in Q2 2026, with growth in both unit volume and pricing. Overall commercial HVAC was down 8% year-over-year, driven by an 8% decline in the VRF commercial sub-segment that was impacted by the ongoing A2L product transition; unitary commercial and other commercial sub-segments were relatively flat. International operations were down single digits year-over-year, but make up a small share of total revenue and do not create a material drag on overall results. Commercial refrigeration saw strong outgrowth in the quarter driven by large customer project wins, with larger projects carrying lower gross margins that had a minor weighting impact on overall margins. Non-equipment product categories grew slower than equipment in the quarter, and carry a higher gross margin than equipment, which contributed to overall year-over-year gross margin decline. Newly acquired Jackson Supply contributed approximately $20 million in revenue to the quarter (acquired June 1, 2026), with $230 million in annual revenue pre-acquisition.

Risks & headwinds

• Regional demand imbalances: New construction demand has slowed sharply in major Sunbelt states (Florida, Texas), while demand is stronger in northern U.S. tier states, creating uneven performance across regions - Consumer affordability pressure: Persistent economic pressure on consumers has created some headwinds for HVAC replacement demand, as replacement is a discretionary large expense when systems do not fail - A2L product transition costs and complexity: The ongoing mandatory transition to A2L refrigerant requires additional product and installation changes that have created near-term disruption and margin pressure - Lower-margin growth mix: Growth in larger commercial refrigeration projects and faster growth in lower-margin equipment compared to higher-margin non-equipment products creates near-term downward pressure on overall gross margins - Post-COVID demand normalization: The 2020-2021 COVID period borrowed future replacement demand, leading to a 17% unit volume decline in 2025, and while management expects this correction to have absorbed the overhang, market stability could take longer to materialize

Analyst Q&A

• Q: Management noted gross margins have normalized to historical levels over the recent period; how should this be interpreted, and are you seeing a new construction slowdown in southern U.S. markets? /

  A: Management clarified that the 27.5% gross margin over the last 12 months, which is in line with the 27%+ pre-disruption baseline, should be used for forward analysis, as Q2 2025's 29.3% margin was an anomaly driven by aggressive 2025 OEM pricing to offset inflation and tariffs. Management confirmed that a meaningful new construction slowdown is underway in Florida and Texas, with strength in northern markets offsetting some of this weakness. (427 characters)

• Q: If 2026 OEM pricing has normalized to historical levels, does that mean 2-3% annual increases, what is your realized average selling price growth, and what explains the remaining 45 bps of gross margin decline beyond the 130 bps from 2025 lapping? /

  A: Management reported that composite realized ASP growth for Q2 2026 was 2%, which aligns with long-term historical average pricing increases. The remaining margin decline is largely driven by mix: higher-margin non-equipment grew slower than lower-margin equipment, and lower overall inventory levels reduced purchase discounts and rebates that boosted margins in prior periods. Management reaffirmed that current margins are in the expected historical range and declined to give explicit forward margin guidance. (521 characters)

• Q: Industry-wide sell-through volumes are negative year-over-year, and end demand appears to be weakening; what is your strategy to address consumer affordability challenges in this market? /

  A: Management explained that 2025's 17% unit decline was driven by a correction after COVID borrowed future replacement demand in 2020-2021, and this correction has largely absorbed the demand overhang, creating a stable baseline for 2026 growth. Waxco already carries 26 different brands to compete at all price points to address affordability, and management notes Waxco saw 4-5% organic growth in Q2 2026 and July 2026, suggesting demand is stabilizing rather than worsening. (419 characters)

• Q: What are your initiatives to drive non-equipment growth in other HVAC segments, and will commercial refrigeration growth impact overall margins? /

  A: Management confirmed that large commercial refrigeration projects carry lower margins and created a minor drag on overall gross margin, but the company welcomes this incremental volume growth. All of Waxco's current core initiatives support non-equipment growth: SupplySync targets large institutional customers that buy more non-equipment, DCR vendor consolidation expands non-equipment SKU availability, Pydros logistics enables 24-hour replenishment so branches do not need to hold large non-equipment inventory, digital sales increase add-on accessory purchases, and new pricing tools enable competitive pricing for all SKUs across all markets. (513 characters)