Watsco Earnings Call: Digital Push Drives Cautious Optimism

Watsco Inc ((WSO)) has held its Q1 earnings call. Read on for the main highlights of the call.

Watsco’s latest earnings call struck a cautiously upbeat note as management framed the quarter as a transition toward renewed stability. Modest sales growth, robust digital gains and a debt‑free balance sheet underpinned confidence, even as lingering unit‑volume pressure, elevated inventories and pricing uncertainty kept expectations measured.

Modest Sales Growth in Q1

U.S. sales in the first quarter rose 2%, reflecting a healthier mix shift toward higher‑efficiency systems rather than pure volume growth. Unit sales were still lower year over year, but management stressed that the maturing A2L product mix is helping support revenue despite softer volumes.

E-commerce Acceleration

Digital adoption continues to reshape Watsco’s model, with e‑commerce sales up 16% in the quarter and online orders delivering higher gross margins and lower cost‑to‑serve than offline channels. In one standout Florida business, roughly 70% of sales already flow through e‑commerce tools, showcasing the potential for further margin leverage.

OnCallAir Momentum

The company’s OnCallAir platform posted a 20% increase in customer sales, reinforcing Watsco’s push deeper into software‑driven selling tools for contractors. Management expects the platform’s gross merchandise value to surpass $2 billion in 2026, positioning it as a growing digital engine within the broader distribution network.

Acquisition Expands Sunbelt Footprint

Watsco moved to strengthen its Sunbelt presence with an agreement to acquire Jackson Supply, a distributor generating about $230 million in annual sales. The deal, targeted to close in the second quarter, will add 25 locations and broaden the company’s exposure to parts and supplies across high‑growth southern markets.

Margins and Operating Discipline

Gross margins were described as “largely intact” in the face of product transitions, indicating that pricing and mix have held up reasonably well. Selling, general and administrative expenses were flat as operating efficiencies offset higher technology investments, and management reiterated its long‑term ambition for a 30% gross‑margin profile.

Unit Momentum and Seasonal Stabilization

After a choppy period tied to the A2L transition, unit volumes showed signs of stabilization as the quarter progressed, with March exiting in high single‑digit growth on a same‑day basis. Early April trends remained supportive, suggesting that demand may be normalizing ahead of the key cooling season.

Strong Balance Sheet and Tech Investment

The company emphasized its debt‑free balance sheet as a strategic asset, allowing continued investment through cycles. Capital is being directed toward pricing optimization, Hydros and DCR purchasing initiatives and AI‑driven tools aimed at boosting margins, improving inventory turns and cementing long‑term competitive advantages.

Broad-Based Non-Equipment Growth

Non‑equipment categories, which account for roughly 30% of total sales, delivered broad‑based growth, spanning parts, supplies, plumbing and commercial refrigeration. Management also pointed to rising compressor demand, a positive indicator for underlying replacement activity across the installed base.

Persistent Unit Volume Pressure

Despite the improvement late in the quarter, unit volumes remained below prior levels, underscoring that the market has not fully recovered from recent disruptions. Management framed this as a work in progress, noting that the impact of the A2L transition and macro uncertainties has yet to fully wash through.

Inventory Increase in Q1

Inventory climbed meaningfully in the first quarter, a move analysts estimated at roughly a 25% sequential increase that weighed on near‑term cash flow. Watsco attributed the build to stocking both A2L indoor and outdoor equipment and preparing for summer demand, while signaling intentions to drive better inventory turns.

Uncertainty from OEM Price Actions and Tariffs

Management cautioned that further OEM price increases tied to duties and other cost factors are likely, though the timing and magnitude remain unknown. These adjustments could influence both demand and margins once implemented, adding a layer of near‑term uncertainty to an otherwise improving backdrop.

Challenging Comps and Seasonal Dynamics

The company flagged complex year‑over‑year comparisons as price gains moderate while volume trends gradually improve, complicating interpretation of quarterly results. Seasonal patterns also matter, as margins typically ease modestly in the second and third quarters, making short‑term margin trajectories inherently variable.

Regional Weather Disruption

Performance was uneven across the footprint, with harsh winter weather in northern markets disrupting operations and depressing first‑quarter activity. By contrast, the Sunbelt produced relatively stronger results, reinforcing the strategic logic of deepening exposure to those faster‑growing regions.

Limited Visibility on Channel Inventories

Watsco acknowledged limited visibility into contractor and downstream customer inventory levels, making it harder to parse sell‑in versus true end‑market demand. While management does not view channel inventory as a major risk today, this opacity adds complexity ahead of possible OEM price moves.

Forward-Looking Guidance and Outlook

Management framed 2026 as a return to a simpler, more stable operating environment, with current trends pointing in that direction as units stabilize and digital platforms scale. They plan to improve inventory turns, reduce working‑capital intensity, integrate Jackson Supply and navigate upcoming OEM price actions, all while defending margins and leveraging a strong balance sheet.

Watsco’s call painted a picture of a distributor leaning on digital strength, operational discipline and balance‑sheet flexibility to manage through a still‑healing market. For investors, the mix of steady margin performance, accelerating tech platforms and targeted M&A looks encouraging, even as inventory, pricing and volume normalization remain key watchpoints into peak season.