What Watsco (WSO) Said on Its Q3 Earnings Call

Watsco (NYSE:WSO) reported third-quarter sales growth and record revenue as demand conditions improved and the company expanded its presence in both HVAC and plumbing distribution through acquisitions.

Chairman and Chief Executive Officer Albert Nahmad said the company has navigated several years of disruption from the pandemic, supply-chain constraints, regulatory transitions and tariff volatility while continuing to invest in its operations and technology. “Demand trends are now normalizing, organic growth is improving, and our digital ecosystem is producing measurable results in driving growth,” Nahmad said.

Third-quarter sales rose 7% to a record $2.22 billion, including 4% same-store growth. Gross profit reached a record $586 million, while gross margin was 26.4%. Operating income totaled $225 million, representing a 10.1% operating margin, and earnings per share were $3.77. Year-to-date operating cash flow increased 79% to $304 million.

Residential HVAC demand and acquisitions

Residential HVAC equipment, Watsco’s largest product category, grew 7% in the quarter, driven by gains in both unit volume and pricing. Nahmad said the company expects the effects of the industry’s A2L refrigerant transition to be “largely over” by the end of 2026.

The company’s results included Jackson Supply, acquired June 1. Jackson Supply has approximately $230 million in annual sales and operates 25 locations in the Sunbelt. Nahmad said the business grew 16% during the quarter.

Watsco also completed its acquisition of The Granite Group in October. Granite has approximately $500 million in annual sales, serves more than 11,000 customers and operates 82 Northeast locations. The acquisition is Watsco’s fourth involving a distributor that serves both HVAC and plumbing contractors, bringing its total number of locations offering both categories to 112.

Management said Granite will continue operating independently while receiving Watsco’s support. The company views plumbing as a significant additional growth opportunity. Nahmad said Watsco is now committed to expanding in plumbing distribution, where it currently has only a few hundred million dollars in sales in what he characterized as a much larger market.

During the question-and-answer session, executives said plumbing does not necessarily carry a fundamentally different margin profile than HVAC, since margins depend in part on the mix between equipment and non-equipment products. Rick Gomez, vice president of corporate development, said plumbing customers appear less consolidated and less technology-enabled than HVAC contractors, creating an opportunity to apply Watsco’s digital capabilities over time.

Margin and cost trends

Gross margin drew substantial analyst attention. Executive Vice President and Secretary Barry Logan cited multiple factors affecting comparisons, including a recovery in residential new construction equipment sales, a prior-year refrigerant shortage that benefited margins, and Jackson Supply’s inclusion in the quarterly revenue mix.

Logan said larger customers generally carry more moderate gross margins but also lower costs to serve. He added that Watsco works with manufacturers and customers on the overall economics of serving that segment. Management described the effect of several individual margin factors as generally in the range of 10 to 20 basis points rather than full percentage points.

President A.J. Nahmad said Watsco’s long-term gross-margin target remains 30%, compared with historical levels around 24% to 25% and approximately 27% currently. He said progress toward that goal will not necessarily occur in a straight line from quarter to quarter.

Same-store SG&A expenses increased 2% year-to-date. Logan said fixed costs increased 1% year-to-date, excluding technology investments, while variable costs rose 6% as business units grew and incurred higher commissions, bonus accruals, freight and delivery-related expenses. Technology spending increased about 13%, or $6 million, year-to-date.

Management characterized those technology expenditures as investments intended to support future growth and efficiency. “This year is progress. Not optimized, but good progress,” Logan said.

Technology platforms gain adoption

Watsco said its e-commerce sales increased 12% year-to-date and represented 37% of sales over the past 12 months. In certain markets, e-commerce penetration has reached 60% to 70%, according to A.J. Nahmad. The company’s mobile application had more than 73,000 monthly active users.

OnCallAir, the company’s contractor platform for generating homeowner proposals, processed about 351,000 proposals during the past year, representing $2 billion in gross merchandise value and a 14% increase from the comparable period.

The company also discussed newer initiatives, including SupplySync.com, a platform aimed at large institutional customers. SupplySync launched earlier in 2026, has begun transacting with pilot customers and is planned to expand in coming months. Watsco also cited progress with Vendor Consolidation and Rationalization, or VCR, and Hydros, its shared logistics and distribution initiative that is expected to scale to more locations and vendors in 2027.

Outlook on market conditions

Executives said sales momentum continued into October. Albert Nahmad said total company revenue was up more than 10% quarter-to-date, including acquired revenue. Logan said organic trends had improved month by month since May and that October was stronger than September.

Gomez said add-on and replacement sales were roughly flat in the second quarter and increased by low single digits in the third quarter. Residential new construction and multifamily sales rose by low double digits during the third quarter, helping drive a 5% increase in residential equipment units.

Management said replacement demand is improving but has not fully returned to historical trend levels. Gomez said unit volumes remain about 10% to 15% below where they stood two years ago, while Paul Johnston, executive vice president, said regional replacement trends vary and the market has room to grow following pandemic-era demand pull-forwards.

Watsco ended the quarter with $649 million in cash and no debt. Management said it remained in a positive net cash-flow position after funding the Granite transaction. Inventory included Jackson Supply’s approximately $79 million balance at quarter-end, while Granite added approximately $140 million to $150 million of inventory following its October acquisition. The company said the fourth quarter is historically a period for reducing inventory and generating cash flow.

About Watsco (NYSE:WSO)

Watsco, Inc (NYSE: WSO) is a distributor of heating, ventilation, air conditioning and refrigeration (HVAC/R) equipment and related products. The company supplies residential and light commercial air-conditioning and heating systems, refrigeration equipment, replacement parts, and other supplies used by contractors and service professionals.

Watsco distributes products from leading HVAC/R manufacturers, including equipment and components such as air conditioners, heat pumps, furnaces, air handlers, thermostats, controls, motors and indoor air-quality products.