Title

Presentation

Watsco, Inc. beats earnings expectations. Reported EPS is $1.87, expectations were $1.73.

Operator: Good day, and welcome to the Watsco, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in a 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, please press star and then one on your touchtone phone. To withdraw your question, you may press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Albert H. Nahmad. Thank you, and over to you.

Albert H. Nahmad: Welcome to our first quarter earnings call. This is Al Nahmad, Chairman and CEO. With me are Aaron J. Nahmad, our President, Paul W. Johnston, Barry S. 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. First quarter results point to improving stability now that the transition to A2L products has matured. We expect a more simplified business environment this year. It is still early in our summer season, but so far, so good. We are also excited to announce our agreement to acquire Jackson Supply, a legendary, market-leading Sunbelt distributor with $230 million in annual sales.

We are fortunate to know many great entrepreneurs in our industry. Jim Duret, Jackson’s owner, and his talented group of leaders, all of whom will remain with the company, certainly meet the definition of great entrepreneur. Our relationship with Jackson dates back more than 20 years, and we are grateful to Jim for entrusting us with this company’s next chapter. Jackson will expand our Sunbelt presence by 25 locations and provide diversification of brand and products, given their strong presence in parts and supplies. As I mentioned, and consistent with our culture, the Jackson team will continue to operate and grow the company with our full support. In addition, our community of leaders, along with Jackson, will collaborate and learn from each other, as is also our culture.

We expect to close the transaction sometime in the second quarter. Within our existing business, we continue to build and expand our technology platform, which provides us an immense long-term competitive advantage. E-commerce sales increased 16% during the quarter while outpacing overall growth rates. OnCallAir, our digital platform that helps contractors present and sell solutions to homeowners, increased customer sales by 20%, reflecting a rich sales mix of high-efficiency systems. We expect the gross merchandise value for OnCallAir to exceed $2 billion this year. Let me say that again: we expect sales on OnCallAir to exceed $2 billion this year. We feel like this is a good start and expect more progress as adoption by contractors gains momentum in years ahead.

Turning now to our first quarter results. Sales increased 2% in the U.S. markets, reflecting a mature mix of A2L products as well as an improved mix of high-efficiency systems, offset by lower unit sales. Unit volumes stabilized as the first quarter progressed. Gross margins remained largely intact, reflecting good execution by our leadership team to sustain price and competitiveness. We continue to execute on several ongoing initiatives to enhance gross margins with the long-term goal of achieving 30%. SG&A remained flat as improved operating efficiency offset incremental technology investments and new locations. We expect overall operating efficiency to further improve, and our technology can now show its mettle in a simpler operating environment.

Our balance sheet continues to be strong, and we remain debt free. Let me repeat that: we remain debt free. As I mentioned, we continue to invest in innovation and technology to separate us from our competitors, and we are making incremental investments to enhance our competitive position and add to our long-term growth and margin profile. For example, we are developing new innovations aimed at capturing more sales to large institutional customers, which is set to launch during the second quarter. We are accelerating the use of our pricing optimization tools to make further progress towards our long-term target. We have launched a new initiative to compete and grow sales in a highly fragmented parts and supplies segment, which comprises almost 50% of the industry’s market share.

And we have begun to harness the power of artificial intelligence, offering the potential to further transform the customer experience, improve operating efficiency, and create new data-driven growth strategies. These investments, along with our scale, entrepreneurial culture, and capacity to invest, are unmatched in our industry. With that, we will now open the call for questions.

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Operator: We will now begin the question-and-answer session. To ask a question, please press star and then one on your touchtone telephone. If you are 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 and then two. At this time, we will pause momentarily to assemble our roster. We have the first question from the line of Ryan James Merkel from William Blair. Please go ahead.

Albert H. Nahmad: Good morning, Ryan.

Operator: Can you hear us?

Ryan James Merkel: Yes, can you hear me? Yes, sir. Now I can. Yes. Okay. Hey, everyone. Congrats on the deal and a good start to the year. I wanted to start high level. Al, can you just unpack your comments about improved stability as we head into the summer? What is changing? And are you seeing April positive in terms of year-over-year growth at this point?

Albert H. Nahmad: Let me turn to our expert on that sort of thing, Barry S. Logan. Oh—he just dropped off the call. Please let the operator know we are trying to reconnect him.

Operator: Yes. Okay.

Aaron J. Nahmad: Rick, do you want to jump in there?

Rick Gomez: Sure. I will take a stab, and then Barry can backfill and enhance it. Ryan, good morning. If we just look at the first quarter in isolation, and then I will turn to April: we saw the full maturity of the A2L product transition, with units still weighing a little bit, which means the market is not yet fully healed. There is no inflection point here, but things did get incrementally better as the quarter progressed, and we exited the quarter nicely, with March up high single digits on a same-day basis. So far, three weeks into April, that momentum has sustained itself, and we are seeing incrementally more stability in April than we did to start the year. April has begun nicely. All of that said, we are still not yet in what is the thick of the selling season, so we will be a little cautious in our tone and our optimism, but this is incrementally more stable, more positive, and less complex. We will take that in a first quarter.

Barry S. Logan: If you zoom out even further, the history of this industry for 30, 40, 50 years has been a pretty mature, slow-growth, steady-as-you-go industry. Then COVID hit, and it seems like all chaos broke loose over the last five years. We had extreme demand as people were investing in their homes. We had extreme supply chain challenges, which constrained the products that we could sell. We had multiple regulatory changes that changed the products that sold—almost 100% of the equipment we sold—twice in that period. We have had tariffs. We have had inflation. We have had different tariffs. We have had constraints or limitations on refrigerant canisters. It has just been one thing after the other for five years, and it seems like, coming into 2026, most of that is behind us—certainly the items being driven by the industry in terms of regulatory changes and so forth.

So we look forward to a more normalized 2026 as we started the year, and I think we have gotten at least most of the way there. Obviously, there are still some things changing with tariffs and some dynamics, but we are looking forward to a more normalized environment and getting back to business, hitting the streets, taking care of our customers, and growing the business. I think that is materializing. It is also interesting that we saw e-commerce sales bloom this quarter. That tells us the contractors’ daily life has reset into a good place to start this year. I always mention contractor credit as a critical measurement of how the market looks, and that is in very good shape. Also, now that the product line is the product line, we saw an increase in higher-efficiency systems being sold.

As Rick said, it is early, but those are good indicators and what we have been looking for.

Ryan James Merkel: Alright. Very helpful. I will leave it there and pass it to others. Thanks.

Operator: Thank you. We have our next question from the line of David John Manthey from Baird. Please go ahead.

Albert H. Nahmad: Morning, David.

David John Manthey: Morning, Al. Thanks for taking my question. My question is primarily on the Jackson Supply acquisition. Correct me if I am wrong, this looks like a Goodman distributor primarily, and as far as I can tell, it looks like a great fit within the CE, GEMA, and Baker footprint that you currently have. Is there anything else you can share with us about mix, margins, growth? What made this an attractive acquisition for Watsco, Inc.?

Albert H. Nahmad: This is a relationship we have had for a very long time, and we have seen them succeed in our markets over years. We know they have the right leadership and the right strategy, and all we want to do is support it so they can continue to expand. If they need more capital, we will provide that. If they need more technology, we will provide that. If they need more equity for their leadership, we will provide that. It is just a wonderful business to become part of Watsco in every respect. Texas is where they are from mostly, and that is always a very good HVAC market. It resonates on all the points that are important.

David John Manthey: Sounds good. And then as it relates to the stabilization or normalization theme, when we look at your numbers through the year, the volume comps get easier, the price comps get more difficult. I do not want to slice this too thin, but thinking about normalization through 2026, would we expect a natural handoff based on year-to-year comps—if we are going to have a normal, stable year—that equipment would grow whereas price tails off toward the end of the year? Is that how you are thinking about it?

Albert H. Nahmad: We are hopeful that we are going to grow, and it seems like we will. But it is too early. We are not going to make a call on market conditions that far out. We are seeing improvements, and we are pretty sure we are on the right path, but let us wait and see. Regardless of what the markets do, we will do well, and we have a competitive edge over other distributors that we tell you about over and over again.

David John Manthey: Sounds good. Thanks a lot, Al.

Albert H. Nahmad: You bet.

Operator: Thank you. We have the next question from the line of Thomas Allen Moll from Stephens. Please go ahead.

Albert H. Nahmad: Good morning, Tommy.

Thomas Allen Moll: Good morning, Al, and thanks for taking my questions. To start, I wanted to expand a bit on the year-to-date comments that Rick made. If March exited the quarter in high single-digit growth and April has continued that momentum, is it fair to infer that your residential equipment volumes are now flat or maybe a little bit better than flat in those two months? And how long has it been since that was the case?

Albert H. Nahmad: All yours, Rick.

Rick Gomez: Yeah, Tommy, we are not going to slice it that thinly for three weeks in April. Again, we are not yet in the full selling season. The prior question got at it a little bit: this time last year, we saw volumes begin to degrade a bit, so mathematically it stands to reason that looks better now. Price-wise, we had pricing actions that took effect last year. I will remind everyone that our mix of A2L products in the first quarter of last year was about 25%, and like-for-like, the new equipment is at a double-digit price point above where it was last year. It was about 60% of our mix in the second quarter of last year. The ultimate comparison is versus two years ago or three years ago, and we will be in a smarter position to answer that after the second quarter. So far, so good is how I would describe the start in April.

Thomas Allen Moll: Fair enough. Al, a question for you on inventory. There have been some big moves in recent quarters and years. As you enter the selling season for 2026, how would you characterize the inventory position?

Albert H. Nahmad: We expect, given the market conditions, to reduce our investment in inventory, which affects our cash flow because we will improve the inventory turn. So many changes were occurring recently that it can only get better. We expect our inventory turns to increase and contribute to cash flow for the rest of the year.

Paul W. Johnston: Plus, our supply chain is a lot more solid than it was in the past. Aaron mentioned COVID and all these changes in models and products. Finally, our manufacturers have an opportunity to make a single line of products continuously throughout the year, and I think that is going to help inventory turns.

Thomas Allen Moll: Thank you both. I will turn it back.

Paul W. Johnston: Thank you.

Operator: We have the next question from the line of Jeffrey David Hammond from KeyBanc Capital Markets. Please go ahead.

Jeffrey David Hammond: Hey, good morning, everyone. Maybe just to start, the Section 232 update seemed to bring about questions about follow-on pricing. Have you seen any pricing from your OEMs in the near term outside of normal course that would suggest more upward movement in pricing?

Albert H. Nahmad: I do expect it because of the duties that are being paid now by some of the manufacturers. I cannot quantify it yet, but yes, the pressure is on the manufacturer, and I believe they will raise their prices. We have had a number of price increases to date from several manufacturers which have already become public, so they are well known. I believe we will have a price increase pretty much across the board, but we will have to wait—probably in the second quarter we will know for sure exactly what those price increases look like.

Jeffrey David Hammond: Okay, great. On that, there has been increasing questions about price elasticity. Unit costs are getting up, and there was debate last year about repair versus replace. Was that the A2L transition, or was that the consumer being tight? I noticed your non-equipment or other products were up. What are you seeing, and how are you thinking about repair versus replace as we go into the selling season?

Paul W. Johnston: We are happy with both. We are seeing a definite uptick in our compressor sales, which are not going to offset, by any material stretch of the imagination, the equipment sales, but we are also seeing a rebound in equipment sales. I think it is going to be a dual market for a while where we have an increase in parts and, at the same time, an increase—hopefully—in equipment. I do not think it is either-or anymore.

Rick Gomez: Just to expand on that for a second, remember that non-equipment for us means a lot of things. It is a very broad basket of goods. Parts are actually the minority of what is non-equipment. Yes, parts grew, but so did virtually everything else in non-equipment, including supplies, our small and growing plumbing business, and commercial refrigeration (which we report separately). So there is broad-based growth there, and it is not necessarily a read on repair versus replace all the time.

Paul W. Johnston: To say it analytically, replacement parts—parts sales—are less than 10% of Watsco, Inc. So when we say 30% is non-equipment, that means roughly 20% is everything else from an analytical point of view.

Jeffrey David Hammond: Thank you.

Operator: Again, if you have a question, please press star and then one. We have the next question from the line of Nigel Edward Coe from Wolfe Research. Please go ahead.

Albert H. Nahmad: Good morning.

Nigel Edward Coe: Hi, Al. I wanted to go back to your comments on inventory turns continuing to increase. The 1Q inventory build was a little bit higher than what we expected; it looked quite normal. My initial reaction was that the destocking is behind us—it sounds like that is the case. I just wanted to clarify that comment. And I am wondering if the inventory build is getting ahead of price increases or slightly better demand. Anything more there?

Albert H. Nahmad: There has been a shift in product innovation. When products innovate, we have to carry the existing inventory to support what has been out there, and then we have to take inventory in for the new changes in the product. That does inflate inventory, but that does not bother us. It is part of the normal course. We run a very conservative balance sheet. We have no debt, so we can afford to have swings in inventory perhaps better than our competition can.

Aaron J. Nahmad: I would not call our expected inventory turns enhancement and burn-through of inventory “structural destocking.” That is not what we are talking about. As Paul mentioned, the supply chain, our OEMs, and the whole process are more stable and reliable than they have been. We bought inventory for the summer selling season to make sure that we have the right amount of product in the right places to support expected customer demand, and we expect to turn inventory better than we have been able to because there is less noise in the system.

Nigel Edward Coe: Another way to ask it: do you expect sell-in and sell-through to equalize now, going forward? And with these price increases—which do not sound like they have been formalized—you had a big uptick in gross margin last year in 2Q versus 1Q on the price increases. Do you expect that to happen this year with the pricing coming through?

Albert H. Nahmad: Let me refresh our discussion on that. We have a target of 30% gross profit margin, and a lot of things go into that. We are not going to get there overnight. We have a plan to get there, and that involves pricing technology, which we are getting really good at. I am sure the sophistication of our pricing system is superior to anything else on the market; that will help gross profit margins. Our ability to consolidate purchases across the whole company from vendors and manufacturers will also help improve gross profit margin.

Barry S. Logan: I want to go back to the inventory discussion to be educational about it. This is not a structural further reduction in inventory—that is not the goal. The goal is to own less inventory on average throughout a given year. That is the equation of inventory turns: cost of sales divided by average inventory. We want less load in the branches over time while keeping our customers happy every single minute of the day. As lead times and on-time delivery metrics with manufacturers improve, it lets us moderate the amount of inventory we carry. It is much more subtle than the big stick we took to inventory last year. This is the subtlety of improving inventory turns over time and going back to where they should be and where they had been for many years before all these changes.

Aaron J. Nahmad: I will add one more note: with our new Hydros system, which we discussed at our investor day, we can increase product assortment at each branch while still carrying less inventory because we can turn that inventory faster.

Operator: Do we move on to the next question?

Albert H. Nahmad: Yes. Go ahead.

Operator: Thank you. We have the next question from the line of Steven Volkmann from Jefferies. Please go ahead.

Albert H. Nahmad: Good morning, Steven.

Steven Volkmann: Good morning. Most of mine have been answered, but I have a bigger-picture one. Back in the pre-COVID times, there was often a meaningful difference between announced price increases and what was actually realized in the market. How are you viewing that these days? We have seen a number of announced increases year-to-date and whispers about more coming, yet the demand environment is still not great. How does that play out as the year progresses?

Paul W. Johnston: One thing to realize is we have a very diverse market—both geographically and by type of customer. An announced price increase does not always apply completely to certain segments, for example, people with longer-term contracts. We end up with an announced price increase and then a realized price increase, and it is generally less than what was announced.

Aaron J. Nahmad: I would add that the software we have brought online to help our businesses—not only with analytics and pricing and making sure we have the right price for the right customer—but also to administer those increases, is important. Every time there is a price increase from an OEM, it touches thousands of SKUs for thousands of customers, and the number of permutations and the administrative work associated with that—which used to be done essentially by hand—was overwhelming. With our tooling, one of the benefits is that we can appropriately adjust pricing for all customers for all SKUs that have new pricing very quickly so that we do not have the risk of a lag in implementing price increases where we otherwise did have that risk, sometimes missing changes that needed to be made.

Steven Volkmann: Appreciate that. Almost a segue, AJ: it feels like you are talking as if there is an inflection in your e-commerce platform. Assuming growth in that platform is accelerating, does that impact your gross margin target? Is that a tailwind, or is it just more sales?

Aaron J. Nahmad: All of the above. We realize a higher gross margin with our online sales than our offline sales, and e-commerce sales are increasing. We expect that trend to continue. Our cost to serve is lower with online sales, and customers are using that tooling because it helps them organize their businesses and how they procure products. It is a win for all of us, especially the customers. We very much expect to continue investing in our e-commerce technologies and tooling for our customers, and we expect adoption to continue. To give you a sense of what is possible, we have markets—like the state of Florida for one of our subsidiaries, an $800 million business—where almost 70% of their sales go through e-commerce tools.

Barry S. Logan: Looking even more long term, this is one of the most underappreciated aspects we write about every quarter. The future attrition benefits we get when we have active e-commerce users create an incredible moat and stickiness to future revenues and customer relationships. That really matters when you look out three, five, seven years.

Aaron J. Nahmad: While we are on the subject, we also sell more line items per invoice when we sell online versus offline. It is a winning formula to sell more products online, and we are focused on it.

Steven Volkmann: Thank you all.

Albert H. Nahmad: Thank you.

Operator: We have the next question from the line of Christopher M. Snyder from Morgan Stanley. Please go ahead.

Christopher M. Snyder: Thank you. I wanted to ask about Q1 inventory. It was up about 25% quarter-on-quarter, which matches what we saw in the last five to six years, but in those years OEM inventory was tight and lead times were long. This year, it feels like the opposite. I was surprised at how much your inventory came up in that construct. Is this because you feel that demand is turning, or are there well-appreciated April price increases coming even before the Section 232 changes and there was some building to get ahead of that?

Paul W. Johnston: First, remember that the composite inventory today is all A2L product. A year ago, it was a mixture of old and new product. If you look at the inventory increase for equipment, it is in the mix of price, not units. We actually own fewer units at March-end than we did a year ago. Also, when you sell an A2L product today, you have to sell an indoor unit and an outdoor unit. We had to increase our inventory of indoor units to accommodate the new A2L refrigerant, and that could be part of what you are seeing.

Christopher M. Snyder: Interesting. Following up on inventory: over the last year, it seemed difficult for the industry—both distributors and OEMs—to have a sense of how much product customers were holding. Now it feels like there is another round of OEM price increases coming. I imagine here in early Q2, distributors and contractors may look to get ahead of that. How do you think about those channel dynamics? Have you done anything versus a year ago to have better visibility or confidence in how much inventory customers are holding?

Aaron J. Nahmad: We did not buy ahead of the expected price increases coming from the Section 232 tariffs. Some of our customers hold some inventory, and we do not have visibility into those numbers, but I do not think it is particularly material. There were some customers that bought ahead of the price increases coming now from the Section 232 tariffs, but by the end of the quarter or end of the season, that will be noise—it will smooth out.

Paul W. Johnston: Most of our contractors are not carrying a lot of inventory. They do not have mega warehouses where they put inventory in.

Aaron J. Nahmad: The reason we have all the convenient locations with as much product variety as they need is because most customers do not carry inventory. They do not know what they are going to sell that day until they go to someone’s house, figure out the problem and the solution, and then they work with our teams to get the right product out of our stores to go install it in that home or building. Across brands and OEMs, there are different business models. Our model with our brands and customers is that we carry it for them, with over 100 locations in Florida to take the pressure off them having to stock anything. There are other models—including some factory-operated models—that have under 30 branches in Florida and need their customers to stock product to get it into the channel. That is a business model choice. It is not right or wrong; it is just a different model.

Christopher M. Snyder: Good point. Appreciate that distinction. Thank you.

Operator: We have the next question from the line of Patrick Michael Baumann from JPMorgan. Please go ahead.

Paul W. Johnston: Good morning.

Albert H. Nahmad: Morning.

Patrick Michael Baumann: I know it is early in the season, but do you have a view on what you think unit sell-through will be this year?

Rick Gomez: Better than last year.

Albert H. Nahmad: I have no idea.

Rick Gomez: We are obviously shy to answer that question in April. If I ask it back: do we feel better or worse today? I feel better today for sure. The other equations in the answer—existing home sales, new home sales, consumer spending, consumer confidence, and contractor confidence (who ultimately sells the product in someone’s home)—seem like a better situation, but time will tell.

Patrick Michael Baumann: Did you see any regional disparity in performance in March and April? Asking in the context of a really hot start to the year from a weather perspective in certain areas.

Paul W. Johnston: In the northern markets, you had some severe winter, closed locations, and lost business. We rarely blame or complement the weather, but the northern markets had a bit of disruption in the quarter. That resolves as time goes on too. The Sunbelt outperformed the North for those reasons. That is just the first quarter and not something to draw an inference from over the longer term.

Aaron J. Nahmad: Part of why we are geographically diverse is so that all of that becomes normalized over time.

Patrick Michael Baumann: Of course. My final question: could you opine on Home Depot’s acquisition of Mingledorff’s and how you see that impacting acquisition opportunities for you? Are you seeing valuation multiples go up in the industry after that deal, or anything else to point out on how it might impact the competitive landscape?

Albert H. Nahmad: We have been competing with the business they bought for a long time. We are not threatened by it at all. I am not going to say what I really think because it would not be nice, but no—it is not something that we worry about.

Aaron J. Nahmad: We have known the Mingledorff family for a long time. We wish them well and that business well. It takes two to tango, especially in our business model and formula, which our Chairman started 50 years ago. The family needs to want to join our family, be here, run their business, and use our tools, technology, and capital to do what they do—do more of it and continue to grow. If that is not in their interest, then it is not a good fit. If it is, and there is mutual trust and respect, then it is a wonderful fit. We will keep doing what we do. We have done it successfully for a long time, and I do not think we are short of opportunities in the future.

Patrick Michael Baumann: Makes sense. Thanks a lot, guys. Best of luck.

Albert H. Nahmad: Thank you.

Patrick Michael Baumann: Thank you.

Operator: We have the next question from the line of Jeffrey David Hammond from KeyBanc Capital Markets. Please go ahead.

Jeffrey David Hammond: Hey, guys. Just a couple follow-ups. On gross margins, you held the line pretty well, and I know you got some price benefit in 1Q last year—that was good to see. How do you think gross margins trend, given you have a particularly tough comp in February? And separately, can you give us what commercial HVAC equipment was in the quarter? I am not sure if I missed that.

Rick Gomez: On the commercial side, we did not see a whole lot of divergence between residential and commercial. The biggest divergence was domestic versus international, but residential and commercial traveled very close together. On margins, if you go back 10 years and take second quarter and third quarter together, there is usually a modest retreat in margins only because historically those quarters have some OEM pricing actions, and the cooling season plus R&C mix typically influences second and third quarter margins versus off-season margins. Last year did not follow that trajectory because of the price increases. We will see what this year brings; in the absence of new information, we will see what the OEMs begin to talk about in the next few days.

Historically, there is a different profile to margin during season versus out of season. Offsetting that, supply sync is now launching, and we expect that to be helpful as it scales. Aaron mentioned Hydros and DCR—its companion initiative around purchasing in non-equipment—that is gaining momentum and scaling. There are puts and takes. We will share more when we know more, but historically there is always a little difference between seasonal and off-season margins.

Jeffrey David Hammond: Okay. Thanks.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Albert H. Nahmad for closing comments.

Albert H. Nahmad: Thanks for listening, and thanks for your interest in our business. We are very excited about the future. As I said, we are uniquely capable of investing in the industry through acquisitions and post-acquisition initiatives. We are in it for the long term, and we are happy you are with us. Bye-bye.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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