Specialist
Executive at HVACR equipment distributor
Agenda
- HVAC (heating, ventilation and air conditioning) distribution companies' 2023 volume and pricing expectations
- Competitive landscape update and potential for market share shifts
- M&A analysis and industry consolidation
- HVAC and plumbing distribution network channel analysis
Questions
1.
Could you outline the HVACR [heating, ventilation, air conditioning and refrigeration] distributor business model for us? What are the most attractive assets of the business?
2.
Could you elaborate on the relationship between distributors and OEMs such as Carrier and Daikin?
3.
Roughly how many HVAC companies are larger independents or mom-and-pops vs more national or regional players? How fragmented is this landscape?
4.
What might distinguish a Watsco from a Winsupply? Could you give us a walk-through of the differentiating factors between national and regional players?
5.
How do you estimate the type of pricing advantage a larger distributor would have vs a smaller player?
6.
Would we refer to the mechanism of inventory availability determining the sale and distributor that wins the sale as a cyclical trend? Or is it because of the lead time crunch we’ve seen from the OEMs coming out of the pandemic?
7.
Customers, particularly in the summer, will need on-time service if something is needs repairing or breaks. Are there any geographic areas that are under-represented or lesser-penetrated by larger distributors that we could see acquisitions or some movement into?
8.
What might be the difference between a Watsco buying an independent distributor and a PE consolidator acquiring a distributor? Could you walk us through the dynamics of when each would make sense?
9.
If we are to say that an acquisition target is going to be acquired by a PE consolidator, is there any way to measure or quantitatively assess the operational efficiencies that could be achieved through that acquisition, maybe using some PE strategies to streamline the business? Is there any way to assess that?
10.
What trends might be driving HVAC distributor industry consolidation? Is there anything, such as a market condition, that’s driving this industry consolidation?
11.
Is there anything that we haven’t touched on already that would make an independent or smaller distributor particularly attractive to a Watsco or even a PE consolidator? Could you give us some sense of if any companies are being acquisitive or if there are typical multiples in the industry?
12.
How long do you think profitability will stay higher, as it has been in the past couple of years? What might happen when inflation starts to subside?
13.
Could you estimate the amount of margin compression we could see, or give a framework of leading indicators that we can monitor to assess that number?
14.
Is there any risk of higher prices causing demand destruction with customers, or, as you’ve outlined, is this such an essential service that customers will continue to take increases?
15.
With the pricing environment being higher, are there any notable companies that could come in and take market share by undercutting the higher prices? Or do you expect the pricing environment to be fairly static?
16.
What type of pricing environment do you expect in H2 2023? How would you assess inventory levels?
17.
Is there a way to assess the difference in financial results for a company such as Watsco when looking at a strong vs soft year in terms of volumes?
18.
Are there any challenges when it comes to buying an HVAC distributor, for a PE consolidator vs Watsco? Is there anything that might be a bit harder to integrate or that we should take note of when it comes to buying a distributor?
19.
What are the characteristics of a healthy HVAC distributor?
20.
What are typical margins on the low-service, low-margin side of the coin vs the higher-service, higher-margin side? Is there any historical number that we can use there?
21.
Are there still high-quality USD 100m-plus revenue distributors and are there high-quality distributors of that characteristic to acquire? You’ve noted that consolidation has been going on for years. How many extra distributors with those characteristics are there in your mind?
22.
Are there any market conditions that would make industry consolidation slow down, or is there a timeline for that in the future?
23.
You noted that HVAC contractor sides, or maybe the services side, might be selling at higher multiples than distributors. Could you elaborate on that a bit and maybe why that is?
24.
Is the HVAC services side at a similar point in industry consolidation relative to distributors?
25.
Is there any way for us to assess if this upcoming investment cycle will be any different or more robust than the past cycles of investment and de-investment of PE coming in and then contractors leaving? Is there any way for us to assess that?
26.
Would there be any differences in characteristics of PE companies coming in to hold longer-term vs the ones doing roll-ups and operating on the 3-5-years, get-in-and-get-out type of time frame? Are there any characteristics between those two companies, or is it just holding on to them longer?
27.
I know Daikin is notably buying up US distributors as well to increase its sales channel and further penetrate the US. Will we see other OEMs be acquisitive in the distribution industry? Why or why not?
28.
Could you go over the specific upsides and downsides to the distinct approaches you mentioned? For example, being a company such as Lennox and owning the majority of your distribution channel vs being a company such as Carrier and sourcing most of your distribution through Watsco vs even being a company such as Daikin and Trane, straddling the middle. What are the upsides and downsides that we should be monitoring? Do you expect those OEMs to stay the course or should we expect any changes in terms of their strategy and distribution?
29.
Do you see any notable market share shifts in H2 2023 or 2024 either at the OEM level or even at the distributor level? Is there anything that might drive some significant share shifts?
30.
How might the upcoming refrigerant change, R454B, impact the distribution industry in H2 2023 or 2024?
31.
Do companies that own their own distribution tend to have higher sales volume but lower margins due to the ability to offload product at higher prices, D2C?
32.
I know Watsco reports strong e-commerce sales numbers. Do you think e-commerce will continue to grow, in terms of HVACR distribution?
33.
If e-commerce sales make up 10% of sales, how will growth in e-commerce sales over the next couple of years impact top-line growth for HVAC distributors?
34.
What would you note as the key differences between a Watsco and a Ferguson?
35.
What are you expectations for Watsco’s financial performance in H2 2023 and 2024? I know the stock is up over 40% over the past six months. How much of the company’s success in implementing an e-commerce channel is impacting its overall performance?
36.
What type of industry-wide volume expectations do you have for H2 2023? Will 2024 look any different vs 2022?
37.
Is there anything a typical analyst might not know about the HVACR distribution industry that we should know, that we should monitor for the rest of H2 2023?
