Specialist
Executive at HVAC distributor
Agenda
- HVAC (heating, ventilation and air conditioning) distributors industry update and competitive landscape assessment
- Watsco’s (NYSE: WSO) product portfolio – key strengths and weaknesses
- Key partnerships and end market analysis
- Organic vs inorganic growth in the HVAC industry
Questions
1.
Are there any macroeconomic factors that are impacting Watsco or the HVAC [heating, ventilation and air conditioning] distributor market overall? Are there any trends, upcoming legislation or regulation that we should be monitoring?
2.
When do you think the SEER [Seasonal Energy Efficiency Rating] changes will start to affect the HVAC equipment demand? Could it be 2024 or 2025? When will we start to cycle out that old equipment?
3.
Are any OEMs better positioned to address the SEER2 change, or is it pretty spread and everyone is prepared for that regulation change?
4.
Could you give us a broad business overview of Watsco’s key products, markets and geographies?
5.
What leads to Watsco’s strategy of aggressive acquisitions? Are there any areas where you think the company’s product portfolio could be augmented by continued acquisitions, or are there any acquisitions that would make sense for it?
6.
Is the acquisition strategy typically behind trying to expand Watsco’s outreach and penetrate new geographies, or is it for specific brands as well?
7.
Is Watsco well-positioned in its heat pump products relative to competitors? Is the company well-equipped to address increasing demand of heat pumps?
8.
Could you elaborate on the product family you just described?
9.
Is there any product in Watsco’s portfolio that is more in demand now? This could be felt across the industry too. What is particularly in demand in 2023 vs 2022, or has it been relatively stable?
10.
Could you walk us through the typical cost breakdown of Watsco products vs those of its competitors? Do they have a premium provider relationship? As you mentioned, it provides Carrier. What does that relationship look like vs those of competitors?
11.
What’s the cost breakdown between a high- and low-SEER-efficiency type of equipment?
12.
What is the useful life of this new, higher-cost equipment vs what we could have found in 2008? Does it offer a similar useful life? You mentioned 12-15 years. Is that what we’ll find today too?
13.
Is the Carrier brand 12-15 years and a bit longer, or is that felt with the other not-so-premium brands that Watsco’s competitors distribute too?
14.
When it comes to cost breakdowns of premium HVAC OEMs – such as Lennox, Trane, Daikin and Carrier – is it all priced pretty comparably? How should we assess that for 2023? Do you expect higher pricing?
15.
What would have to happen for prices to start coming down? Are we seeing customer fatigue or flight because of pricing increases? You mentioned there’s been a fair amount over the last couple of years.
16.
You noted that the big four HVAC equipment OEMs – Trane, Lennox, Daikin and Carrier – offer a similar product with a similar lifespan and similar financing. How do customers choose between them and how does Watsco position itself to attract more customers through its Carrier relationship?
17.
Could you get into the competitive landscape around distribution? Who are Watsco’s key competitors and what differentiates the company from its competitors?
18.
Should we expect to see industry consolidation continue into 2023 and 2024? Is that just the way business is done in the HVAC distribution industry, or what would have to happen for us to see a slowdown of those acquisitions of geographic expansion? You mentioned that Watsco may be looking to move into the northwestern US. Is it really just about exhausting all the geographies before we would see acquisitions slow down?
19.
What would have to happen for HVAC OEMs to shift their strategy into more of the independent channel? Is that something that you would see, or is that just something they maintain around 20% and it’s stable?
20.
How should we think about the demand for parts in the current operating environment? Will see an increase in higher-margin parts during a recession? Could it be impacted by recessionary pressures on the demand, as you mentioned?
21.
Are there any other leading indicators we should be watching to monitor the parts and new equipment demand in 2023, but also historically across the HVAC distribution industry?
22.
What are the hurdles in getting from around 40-42% customer financing to the 60% range?
23.
How is Watsco positioned relative to Ferguson in market share and product portfolio? Obviously Watsco has the Carrier relationship. Which OEMs does Ferguson primarily work with?
24.
How do you typically take share in the distribution space? Are there any potential disruptors in the industry that you view as primed to take share from Watsco or even a company such as Ferguson?
25.
It sounds like a lot of what’s driving contractor patterns right now is availability. I think that there was a tornado in 2018 that wiped out a Lennox plant. Is that an example where, if there was no availability of Lennox product, customer or contractor patterns would shift?
26.
Is there any downside to committing to inorganic growth and being acquisitive as a strategy? Are there any challenges along the integration or upkeep, or is this all just the way it’s done in HVAC distribution?
27.
Have you viewed Watco’s acquisition strategy favourably? As you mentioned, many acquisitions don’t go as well as they were planned on paper. Do you view the company’s potential acquisitions and history of acquisitions favourably in terms of increasing revenue?
28.
Could you also outline the Watsco-Carrier relationship? Are there any other notable OEM partnerships Watsco could consider for distribution? What’s the strategy behind being OEM-exclusive for a distributor vs those such as Ferguson, who don’t have an exclusive OEM? Could you walk us through that strategy and the Carrier-Watsco relationship too?
29.
Are the other top 3 OEMs – Trane, Lennox and Daikin – interested in becoming an exclusive provider for Watsco or other distributors? Would that be on the table or a strategy for competitors to Carrier?
30.
Can you speak to the HVAC distribution space’s approach to e-commerce? Are there viable e-commerce offerings, or is the industry still focused primarily on bricks-and-mortar?
31.
Could you outline the supply and demand situation for HVAC distributors right now? For how much longer could the supply base be tight, and what do backlogs look like for 2023?
32.
What do you think are the greatest potential growth opportunities for Watsco in 2023? What are the greatest headwinds or potential challenges facing the company in 2023?
33.
What are Watsco’s channel inventory levels and how do they compare to pre-pandemic levels – 2018 vs 2022 vs 2023? Could you briefly expand on what you just mentioned? What types of product issues have historically been experienced with new SEER changes as well, and how would that affect inventory?
