Oct 27, 2026 earnings call — Technology, M&A and margin focus
Sales rose to a record $2.22 billion and gross margins were 26.4%.
Revenue $2.2B (est $2.2B) · EPS $3.77 (est $4.10)
Key quotes
"E-commerce sales have grown 12% year-to-date, while outpacing overall growth and broader industry metrics."
"Granite has annual sales of approximately $500 million and serves over 11,000 customers from 82 locations in the Northeast."
Analyst Q&A 8
Gross margin drivers
Q (Tommy Moll · Stephens): Analyst asked if taking share in new home construction meant dealing with larger, lower-margin equipment customers and if that explained the gross margin move.
A: Management said it is not that simple. New construction equipment sales are up double digits versus last year, larger customers use more technology and e-commerce, and some product and comparison factors (like last year's refrigerant shortage) affected margins. They reiterated long-term goal of improving gross margin toward 30%.
"We're at 27% + now year-to-date, and our goal is 30%." — A.J. Nahmad (PRESIDENT)
What moves gross margin
Q (David Manthey · Baird): Analyst asked which levers (customer mix, equipment vs non-equipment, pricing, price optimization) matter most to move gross margin next year.
A: Management said many levers matter and they are early in pricing optimization. They highlighted technology, initiatives like VCR, Hydros and SupplySync as ways to sell more parts and improve margins, while OEM pricing timing and product transitions also matter. They noted seasonality can help in Q4 and that industry volumes are stabilizing, which supports healthier incrementals.
"We are certainly still early days in our pricing optimization efforts." — A.J. Nahmad (PRESIDENT)
October sales and side discharge
Q (Ryan Merkel · William Blair): Analyst asked about October quarter-to-date trends: is new construction, commercial, or aftermarket replacing picking up? Also asked about side discharge product progress and ASPs.
A: Management said October is looking healthy and total company revenues are up double digits so far, which includes recent acquisitions; momentum has improved month-to-month since May. On side discharge, they said it is a growing product (about 8%-10% of the market), offers variable speed and efficiency benefits, and they expect it to continue growing with Watsco leading in that segment.
"design discharge has been a big growth market for us over the last two years." — Paul Johnston
OEM pricing and inventory levels
Q (Steve Volkmann · Jefferies): Analyst asked about directional expectations for OEM pricing into 2027 and how to think about inventory after recent statements that inventory had peaked.
A: Management said they are seeing metal and steel cost pressure and expect some price increases, but OEMs have not given clear direction yet. On inventory, they said September balances include Jackson's inventory and that the fourth quarter is historically when they reap cash flow and reduce inventory, so there is an opportunity to reduce levels by year-end excluding acquisitions.
"As we close the year, this is usually and historically our season of reaping cash flow and reducing inventory." — Barry Logan
Customer consolidation impact
Q (Mitch Moore · KeyBanc): Analyst asked whether customer mix headwinds came from existing contractors consolidating into larger accounts or larger customers simply outgrowing smaller peers.
A: Management said yes, consolidation is occurring and is natural, affecting roughly 7%-8% of the market today. They cautioned consolidation is both a margin irritation and an opportunity for market-share pickup, and they believe Watsco is well positioned to benefit as the industry consolidates.
"It is probably 7%-8% of the market right now." — Paul Johnston
Residential replacement vs new
Q (Mitch Moore · KeyBanc): Analyst asked how much of the 5% residential unit growth was replacement versus new construction.
A: Management said they do not disclose a precise split, but gave color: add-on/replacement was up low single digits in Q3, while residential new construction (multi-family) was up low double digits, which together produced the reported 5% growth. They indicated volatility is more likely in the new construction segment.
"It was up low single digits in the third quarter, what we consider to be the add-on/replacement universe." — Rick Gomez
Replacement, Granite inventory, plumbing margins
Q (Jeffrey Sprague · Vertical Research Partners): Analyst asked if replacement versus repair is back to normal, how much Granite inventory comes in, and whether plumbing has a different margin profile than HVAC.
A: Management said replacement has room to grow and units remain below levels from two years ago. They reported Granite inventory at about $140 million-$150 million as of end of September. On plumbing, they said margin profile is not structurally different; margins depend on equipment versus non-equipment mix and plumbing customers are generally earlier in the technology-adoption curve, which is an opportunity.
"I will say about $140 million-$150 million of inventory." — Rick Gomez
Efficiency mix and acquisition effects
Q (Pratap Singh · UBS): Analyst asked about customers trading down to lower efficiency products and the portfolio impact, and whether recent large acquisitions should be a near-term margin headwind but medium-term improvement.
A: Management said trading down to baseline efficiency is occurring, but side discharge can help customers return to higher efficiency over time and broaden the market. On acquisitions, they said they keep the acquired companies' people and culture, do not expect short-term risk, and aim to help those businesses grow; they cited Jackson Supply being up 16% in its first quarter as part of Watsco.
"Jackson Supply is up 16% in its first quarter as part of Watsco." — Barry Logan