Watsco (WSO) investor relations material

Market trends and inventory dynamics

• Last year's inventory build-up was driven by the transition from 410A refrigerant, leading to a temporary spike in shipments and inventory levels, which have since normalized as the transition completed.

• Current demand is softer than anticipated, with unit sales down about 12% year-to-date, largely due to declines in new construction and multifamily housing, especially in key markets like Florida.

• Inventory levels are being adjusted downward to reflect lower demand, with a focus on maintaining safety stock and efficient lead times.

• Price increases on new products have held steady at around 12%, with margins protected, and no significant market share loss observed.

• The contractor's role in setting end-user prices is emphasized, with consumer spending on home improvements remaining subdued.

Strategic responses and forward outlook

• Inventory normalization is expected to be largely completed by year-end, with the intent to hold fewer units and less dollar value compared to last year.

• Collaboration with OEM partners is expected to intensify, leveraging buying power and market share to drive growth initiatives in the coming year.

• Aggressive growth plans are being developed with major partners, particularly Carrier, as the industry moves past the disruptive product transition period.

• The company is focusing on technology, incentives, and market share strategies to empower contractors and stimulate unit replacements.

• Dividend policy is driven by cash flow rather than EPS, with a strong history of increases and no debt, supporting continued dividend growth.

Industry and regulatory developments

• The transition from 410A to 454 refrigerant is nearly complete, with minimal 410A inventory left and little incentive for manufacturers to produce more.

• Potential EPA extensions on 410A installation deadlines would ease pressure on distributors but are not widely supported within the industry.

• Light commercial market remains consistent, with unit sales slightly down but pricing up, and restrained CapEx spending due to economic uncertainty.

• No significant price competition from R32-based products has emerged, with growth attributed to improved product availability and innovation.

• Downstream dealer inventory build-up is minimal due to the extensive branch network, reducing the need for dealers to hold excess stock.