Watsco, Inc.

Thank you for joining us today and welcome to the Waxco, Inc., second quarter 2026 earnings conference call. All participants will be in 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, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Al Nahmad, Chairman. Please go ahead.

Good morning, everyone. Welcome to our second quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President, and also Paul Johnston, and Barry 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. I am happy to report that our second quarter results reflect stabilizing markets under far more conventional operating conditions. The last five years brought a pandemic, supply chain disruptions, regulatory transitions, and tariff volatility. Through it all, we stayed the course and invested in our business. Now the operating environment is normalizing, revenue is growing, and a digital ecosystem is producing measurable results. Our largest and most impacted product segment, residential HVAC equipment, grew 5% during the quarter, with gains in both unit volume and pricing. We closed on Jackson Supply on June 1st and we are thrilled to welcome their team to the Wasco family. Jackson is a legend in our industry with $230 million in annual sales operating from 25 Sunbelt locations. As in our culture, the Jackson team will continue to operate and grow their business with our full support. They have Big Ambitions, and we will gladly support their leadership team in any way we can. Turning to the second quarter results. Sales increased 2% to $2.1 billion. Gross profit was $579 million with gross margin of 27.5% versus 29.3% last year. SG&A increased 2%, excluding acquisitions. Operating income was $238 million and had an operating margin of 11.2%. Earnings per share came in at $4 per share. My earlier comment regarding volatility and disruption had the greatest short-term impact. on the gross margins. Let me say that again. My earlier comment regarding volatility and destruction had the greatest short-term impact on our gross margins in 26 versus 25. During 2025, OEMs instituted aggressive pricing action in response to inflation and tariffs benefiting gross margin in 2025. By comparison, 2026 OEM pricing actions were more moderate and consistent with historical levels. Looking beyond the one-time impact from a year ago, gross margins over the last month has been in the narrow range and more consistent with historical gross margins. Now, this is important. Having said that, we remain focused on reaching our long-term goal of 30% in gross profit margins. As for SG&A, we have become a more efficient company as business conditions have simplified. The modest increase in SG&A reflects continued technology investments along with the addition of Jackson Supply. Moving on to our balance sheet, we ended the quarter with $464 million in cash and no debt. No surprise, we remain committed to maintaining a pristine balance sheet enabling investment and growth opportunities as they come up. Operating cash flow for the six-month period improved by $168 million, affecting a lower ramp of seasonal inventory. We expect to achieve further inventory efficiency as lead times normalize and the A2L product transition moves behind us. In April, we increased our annual dividend by 10% to $13.20 per share. Interesting, 2026 marks our 52nd consecutive year of paying dividends. Finally, I'm going to hand the call over to AJ. the president, our president, to provide an update on Wattsco's technology initiatives.

DJ? Thank you, and good morning, everyone. With the complexity of the last few years largely behind us, we believe our technology investments have made us a stronger company with higher growth prospects and a widening competitive moat. Our goals have been ambitious and straightforward. First, build the industry's largest repository of data. products, market, customer, competitor, pricing, you name it. This underpins and empowers the industry's most advanced technology platforms. Second, through widespread adoption and use of our technologies, revolutionize our customer experience so that contractors, installers, and technicians love doing business and only want to do business with the Wasco companies. Next, transform our supply chain and store-level operations through digital platforms to better serve those customers and gain operating efficiencies along the way. And finally, develop and launch technologies that help our customers grow their own businesses so they can drag us along with their growth. Big picture, we see contractor behavior evolving in ways that benefit the technology-enabled distributor in the long term. In terms of 2026 first half highlights, our core technology platforms continue to scale and add value. e-commerce sales have grown 13% while outpacing overall growth. In terms of penetration, e-commerce reached 37% of total sales over the last 12 months with certain markets at 60 to 70% penetration. Digital engagement with our mobile apps is strong as well at more than 70,000 active monthly users and our on-call air platform continues this growth trajectory. Over the last year, More than 340,000 proposals were presented to homeowners using the tool, generating $1.9 billion of gross merchandise value, a 15% increase over the comparable period. Simply put, the contractors we serve digitally are growing faster, a trip less, and we believe we can lower our cost to serve at scale over time. At our investor day last year, we communicated several new initiatives that leverage our technology advantage. and represent new growth opportunities that will materialize in the years ahead. SupplySync.com, our newest platform to serve the growing segment of large institutional customers launched in the second quarter is a great fanfare. Our plan is to scale it to more and more customers in the coming months and years. This is a new and growing channel with different customer needs. We see an incremental growth opportunity beyond our day-to-day business while leveraging our existing scale and infrastructure. DCR, which stands for vendor consolidation and rationalization, has expanded across many of our non-equipment product categories. Relationships with our strategic vendor partners continues to strengthen. Pydros, which is our investment in shared logistics and distribution among our business units, has further matured and will become more important over time. And the transformational use of AI continues to evolve throughout Wasco. I could spend the next few hours just on that subject. These investments along with our scale, entrepreneurial culture, and capacity to invest are unmatched in our industry. In closing, a reminder of our fundamentals. Wasco is the market leader and the technology leader in what remains a highly fragmented HVAC distribution market. The products we sell are a necessity and the installed base continues to expand. We have deep and collaborative relationships with industry leading manufacturers and industry partners. We offer the broadest variety of products and operate a large and growing network to serve more and more customers. And our unique ownership culture, shared by more than 7,000 employees, rewards and incentivizes long-term performance. With that, let's turn to Q&A.