Watsco Inc at Morgan Stanley Laguna Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Christopher Snyder - Morgan Stanley - Analyst : Maybe starting off high level and kind of open ended. We've had a lot of resi HVAC updates this week, both from the OEMs, some industry data. There's a lot of the cross currents going on in the market. Can you just kind of talk about what you see out there?

Question: Christopher Snyder - Morgan Stanley - Analyst : Probably both.

Question: Christopher Snyder - Morgan Stanley - Analyst : I appreciate that. I think coming into the year and in the early part of the year, I think you guys have been saying that the intention was to have extra inventory to accommodate the transition. But then it seemed like that inventory position continue to increase or even deteriorated from like a turns perspective. And is that just essentially a function of the demand got worse as the summer went on?

Question: Christopher Snyder - Morgan Stanley - Analyst : If I understood your earlier comments, it sounds like you were kind of saying -- I know you guys said on the conference call, July was flat. It sounds like it's been similar as Q3 progressed from a sales perspective. So we're kind of thinking about volumes maybe down in the 10-ish percent range or something. Is that a function -- like is that a function of consumers' uncertainty on the consumer? Is there a risk that the industry has just reached a price point that is just driving demand destruction? Like what -- is it weather? I mean no one wants to blame weather, but we know that does have an impact like?

Question: Christopher Snyder - Morgan Stanley - Analyst : Interesting.

Question: Christopher Snyder - Morgan Stanley - Analyst : I appreciate that perspective, maybe kind of turning from the market more towards Watsco. In the second quarter, you kind of talked about the inventory. I think inventory is up 24%, sales were down 4% or 5%, if I remember correct. I guess what's the time line for you guys getting that back? It's kind of a normalized level because with volumes still negative here, it's obviously a tougher job.

Question: Christopher Snyder - Morgan Stanley - Analyst : I appreciate that. If we -- the HVAC resi has a really strong track record of price from the OEMs, obviously, distribution as well. You guys have a great pricing track record. Is this market so unique in that the price action is so choppy, that people are on different footing. The demand the flow of activity is catering to a degree that is starting to change a little bit?

Question: Christopher Snyder - Morgan Stanley - Analyst : A lot of layers.

Question: Christopher Snyder - Morgan Stanley - Analyst : Yes.

Question: Christopher Snyder - Morgan Stanley - Analyst : Yes. No. Interesting perspective. The other kind of dynamic that's been going on in the market is obviously the 410 to 454. You guys pivoted over to 454 earlier than some others. It pressured your sales in the -- at least in the first half of the year. I don't know if you disagree.

Question: Christopher Snyder - Morgan Stanley - Analyst : Okay. And I guess, do you guys have any sense of how much 410A is left in the market? Is it gone at this point?

Question: Christopher Snyder - Morgan Stanley - Analyst : Kind of talking about that time line. The EPA has talked about a possible extensions of that 410A selling window. I guess do you guys have any perspective on that? And I guess if that were to happen, like what would it mean for you and the industry at large?

Question: Christopher Snyder - Morgan Stanley - Analyst : I appreciate that. Maybe going over to the light commercial side of the market, where the updates certainly more positive on the resi side. What are you guys seeing over there?

Question: Christopher Snyder - Morgan Stanley - Analyst : Appreciate that. And you think interest rates are kind of the tailwind to kickstart that more than anything?

Question: Christopher Snyder - Morgan Stanley - Analyst : I appreciate that. There's obviously a big focus this week on the resi sell-through and kind of some of the headwinds that's being faced there. Is it possible that there's more downstream inventory at the dealer installer level than everyone thought in that, okay, maybe end demand is actually better than we're seeing, but that's just kind of eating away at the sell-through data?

Question: Christopher Snyder - Morgan Stanley - Analyst : I appreciate that. We haven't talked about R-32. I guess you're kind of talking earlier about the price on the homeowner. R-32 from our understanding is cheaper than 454. Are you seeing that have an impact on that maybe the installers are looking to those products?

Question: Christopher Snyder - Morgan Stanley - Analyst : I appreciate that. One question that we've gotten on Watsco is that, obviously, with the industry headwinds, the pace of the company's earnings growth in '25, and I mean, I guess, we'll see about 26%, but 25%, obviously, under pressure. I guess anything that we should think about on the dividend. You guys have a really long history of steady and quite material increases. Like is that tied to EPS growth? Like how should we think about that?

Question: Christopher Snyder - Morgan Stanley - Analyst : No, really, really interesting point that it almost seems like distribution is a great business. I guess, only a minute left here, I guess kind of just to wrap, it seems like from our perspective that you guys feel like you're obviously taking a lot of inventory, maybe a little bit to go next year, but really the heavy lifting is done this year. And it seems like you think the industry could have a solid setup into next year, and you guys might be, I don't want to say aggressive, but in the market looking to build inventory into that next year?

Question: Christopher Snyder - Morgan Stanley - Analyst : Yes.

Question: Christopher Snyder - Morgan Stanley - Analyst : Well, we are up on time. I appreciate you sharing all your decades of knowledge with that. So thank you.