Observations from Watsco Q1. Slow but Improving


With Q1 complete, Watsco shared their earnings report. We took a quick read-through to identify highlights and what some areas could mean and could mean for you.

The following is taken from a transcript of the call: (and italics are my commentary)

  • “Softer market conditions” with the caveat that Q1 is historically the slow season. Seeing “improved sales trends in April.”
  • Watsco believes it has share gains due to product / technology, breadth or brands, and “expansion of its network” (okay, if you “open” more channels / distribution you’re going to increase sales so, the question is, what is “same store sales”. Further, it suggests that they were under distributed and/or existing channels were not “selling” their products (creating demand) or customers are not swayed by the “technology / product / brand”.)
  • Resi equipment unit sales continue to be low (probably consistent with the market) but price realization (so, lack of discounting and/or price increases that have stuck or not eroded too much) and product mix (so selling more profitable items) and new locations (again, expanding selling points) led to record sales.
  • Commercial markets grew and the company has a “healthy” backlog. Ductless systems are supporting this growth.
  • Providing tools to business leaders to improve productivity (presumably data analytics with training on how to interpret the information and actions that can take. This also represents an area where the company could (perhaps are) deploying AI tools.)
  • Have made 3 acquisitions since beginning of the year which will add $200M in annual revenue (which contributes to the number of new locations and “record sales.) The company is seeking additional acquisitions as the industry continues to consolidate. (For independents, selling to a chain / consolidator is a viable exit strategy. Can also look to retain culture by selling to a contiguous distributor or, if you have a minimum of 20 people, a good balance sheet, more importantly, competent staff … or staff you can develop, and are thinking longer-term (so you have some time before needing to sell, an ESOP could be an alternative … and we have some resources I can refer you to.)

Additional information, and insights, from analyst questions:

  • The company had done an equity raise, an analyst asked “why?”. Watsco’s feedback was “an opportunity from an institution who wanted to invest.” (so, money was offered, let’s take the investment … and maybe they’ll eventually use the funds for future acquisitions.)
  • The “repair” market was slow in Q1 and weather was a factor during the quarter.
  • Early April is up high single digits, inclusive of the new branches. When looking at same-store, growth is mid-single digits.
  • SG&A grew faster on a same-store basis than sales. Watsco is doing some streamlining of branches and some headcount reduction at the beginning of the year.
  • According to AJ, and in positioning versus independent distributors, “One thing we will not do, which some other maybe smaller independent distributors may do, is speculate and take huge positions either way on the 410A product or the 454 product. Our job is to meet the market and meet the expectations of our customers. We’re not trying to speculate for some short-term giant swing over the others because we are long-term players.”
  • Overall, at least some analysts think their inventory is a little high, however, Watsco feels this valuation is driven by supplier price increases and copper. The number of outdoor units it is stocking is down vs last year. Overall, they feel that they are well positioned for the summer.
  • Expects only one price increase on the A2L programs from their OEMs.
  • The “value” space, where Watsco has their Oxbox offering, Watsco views as “crowded” (and Watsco sells at least a half dozen in this segment, per Barry Logan.)
  • Seeing increased heat pump sales. Think some may be due to the IRA program (Inflation Reduction Act) but that this will be state-specific.
  • Watsco has invested in some new pricing systems which they hope will help them be more responsive, nimbler, and enable for enhancing margins. A benefit should be greater efficiency in capturing supplier / OEM prince increases … pass them through quicker and not discount where not needed.
  • HVAC equipment sales were down 1% in Q1 on a same store basis. On the residential side it declined mid-single-digits. Commercial is up. April resi is trending up.
  • Commodities (refrigerant, copper tubing, and sheet metal) are 5-6% of Watsco total sales.
  • Seeing some early stage success with heat pumps and higher efficiency items. (While not determinative, it indicates that there are markets were these products can be sold … just need 1) the right environment, 2) promoting the benefits to the right customers / giving contractors the right tools and 3) marketing the benefits and potentially financial incentives (federal and local.)

Are you seeing in the market what Watco is seeing?  How are they to compete against locally?

Some things to think about …

  • Do their headcount reductions represent opportunities?
  • If they are enhancing their pricing tools, what are you doing? Are you winning / losing more from them? Could enhanced pricing tools help you?
  • If they are seeing success on heat pumps and higher efficiency units, are you? How could this impact your marketing? Your sales / customer training?
  • Watsco apparently wants to be a “one-stop shop”. How are you partnering with selected suppliers to drive more market share for them? How are you focusing more on the lines that are profitable, dollar-wise, for you?

Looking for more on Watsco? Check out our most recent article on them.

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