Specialist
Former executive at Carrier Enterprise
Agenda
- Relationship between Watsco (NYSE: WSO) and Carrier Enterprise’s (NYSE: CARR) performance
- Macroeconomic uncertainty and impact on HVAC (heating, ventilation and air conditioning) distributors
- Regional trends in parts distribution and market share
- Industry consolidation trends and Watsco’s M&A strategy
Questions
1.
How is electrification impacting the HVAC [heating, ventilation and air conditioning] industry? What trends should we be watching for in the coming years that could positively or negatively impact the HVAC industry in terms of volume?
2.
Are there any particular OEMs that are well-positioned to address increasing heat pump demand?
3.
How is the transition to heat pumps impacting the HVAC distributor landscape? For companies such as Watsco, Carrier Enterprise or Ferguson, what is the difference in pricing and installation costs when it comes to heat pumps impacting those distributors?
4.
Could you give us an overview of Carrier Enterprise specifically, noting its primary end markets, products and revenue streams?
5.
Does Carrier Enterprise have exclusive distribution contracts with specific OEMs? If so, what are the pros and cons of having those contracts?
6.
Why might it make sense for both Carrier and Watsco to actually have and be invested in this JV, Carrier Enterprise? What’s the work doing for both?
7.
What type of pricing environment should we expect throughout H2 2023? What was the pricing environment like in 2022 and how pricing has evolved throughout the pandemic?
8.
As you noted, pricing will normalise, but as supply chains heal and supply chain constraints are overcome, does that mean margins will inherently get enhanced because they’ll keep that higher price but the input costs will slide down?
9.
If Carrier wanted to move more into the HVAC aftermarket space and get more revenue there, what would that mean for Watsco, who traditionally has taken some share of the aftermarket business?
10.
Are there any other key facts or qualities that we should know about Carrier Enterprise that could give context to its role in the US HVAC industry?
11.
Are Watsco’s technology investments driving any specific efficiency gains relative to productivity associated with competitors? How many more installs or calls can a contractor equipped with the company’s tech do relative to other contractors? Is there a way to estimate that difference?
12.
Who are Watsco’s primary competitors, noting tech differences?
13.
Would the main differences between Watsco and Munch group be just size, with the latter looking to grow?
14.
What would happen if the Carrier and Watsco relationship were to end? Is there a likelihood of that happening?
15.
You noted it’s a fragmented space in terms of the distributing. Is it feasible for Watsco to think that it would take on another big-name brand that isn’t Carrier over the long term, or do you think it’ll stick with potentially just Carrier?
16.
Can you outline the history and bare bones of Watsco’s M&A strategy? What size of business does it typically look to acquire? What are the characteristics of a strong potential business to acquire?
17.
I’ve heard that Watsco is geographically the least dense in the Pacific Northwest and the Southwest. Is that where we should potentially expect acquisitions to drive strategic growth?
18.
When should we expect Watsco to have a bigger presence in Sigler? You noted it’s a family member.
19.
Watsco has a stronger presence in bigger-volume markets such as Florida and Texas. Does it make sense to get even more dense in those markets?
20.
What makes the HVAC distributing industry attractive to PE companies and consolidators? I’ve noticed increased PE interest in the industry over the last few years.
21.
What are the primary factors driving the gains in industry profitability over the last couple of years? Should we expect profitability to continue sustainably increasing?
22.
How is industry consolidation figuring into the profitability and gross margin picture? Has PE interest in the industry made it more difficult or competitive for Watsco to acquire companies in the space?
23.
When Watsco does buy a distributor, what typically happens in the integration process and how long is it?
24.
How much longer do you expect industry consolidation to continue at its current pace? You noted that profitability has likely touched its peak, just because of what’s been driving it.
25.
You mentioned the contracting part of the HVAC consolidation. Is it possible to estimate the potential cost reduction of consolidating several contractors, as is happening via PE? How much cost can actually be cut out by using one central back office?
26.
What would the dynamics be if a PE consolidator was trying to combine the operations of an HVAC distributor as opposed to the contracting and servicing side of things?
27.
What is a feasible amount of market share Watsco could grow into through acquisitions on an annual basis? We’re halfway through 2023, and the summer months are upon us. That’s when a lot of the revenue is generated. What should we expect for H2 2023 and into 2024 in terms of share gain through acquisitions for the company?
28.
Who are Watsco’s primary competitors, including by region?
29.
Watsco has a strong e-commerce channel, and that’s something that differentiates it from competitors. What is the amount of revenue that comes from e-commerce into the company or Carrier Enterprise? What are the avenues of growth for its e-commerce channel in the future?
30.
Do any competitors come close to what Watsco has in terms of e-commerce, perhaps Ferguson?
31.
How would you assess HVAC distributor inventory levels in 2023? What might we learn from analysing current inventory levels? What are your volume expectations for H2 2023 and 2024?
32.
What are your expectations for Watsco’s financial performance in 2023?
33.
Should we expect sales to bounce back and increase? You noted it’s a bit of a softer year in 2023, but do you expect a bounceback in 2024? What market conditions might have to come about to reverse that softening?
34.
Is there enough manufacturing capacity to support the transition over to heat pumps? We talked about the potential for heat pumps to drive top-line growth because they’re more expensive than the traditional unit, but are there any negative financial impacts for OEMs or distributors that might come about through electrification or the higher demand for heat pumps?
35.
Are there any other regulatory updates that could potentially drive increased demand or volumes? We touched on the SEER [Seasonal Energy Efficiency Ratio] change from January 2023. One that comes to my mind is the historically high heat we’re seeing, and we’re seeing a lot of pushback from Texas penitentiary systems in terms of not having enough AC units. If there was ever a point in time where it was mandated to retrofit or put in AC units in a lot of these penal systems, who would be best-positioned to address that demand?
36.
Is there anything a typical analyst might not know about Carrier Enterprise, Watsco or the broader HVAC distributor industry that we should monitor throughout H2 2023?
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