Watsco Inc at Stephens Investment Conference Transcript

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

Question: Thomas Moll - Stephens Inc. - Analyst : You bet. We always like to start with some very high-level questions. As you know, Rick, this conference attracts both a specialist and a generalist investor audience and so for the benefit more of the generalists in the audience, I want to give you an opportunity to introduce Watsco. There may be some folks in the audience who know your ticker, know the company name, but have really never stopped to read up on the company. So I want to make sure we just spend a few minutes talking about what it is the company does on a day-to-day. So let's just unpack that in a few different aspects here. First, on scale. So you're the largest distributor in the US of HVAC products, nearly 700 locations. Walk us through what that means in terms of your geographic footprint, what it means for your relevance to the OEM community, and in particular there, with respect to Carrier given your joint venture relationship.

Question: Thomas Moll - Stephens Inc. - Analyst : Rick, I also want to start with a conversation on culture, in particular, the ownership culture at Watsco. Just walk us through a few elements of that, starting with the Nahmad family's longtime involvement and ownership in the company, some of the unique employee incentive plans that you have, and then how a lot of that feeds into the approach to capital allocation, in particular, with a conservative balance sheet and a steadily growing dividend.

Question: Thomas Moll - Stephens Inc. - Analyst : Well, you mentioned some of those shorter-term impacts that were, I would say, obligated to discuss while we're on stage together today, Rick. In particular, the election results in the US What would you say is the biggest potential impact on Watsco's business as far as you can tell today?

Question: Thomas Moll - Stephens Inc. - Analyst : Only one follow-up from me for now there, Rick, is on tariffs. How much of your cost of goods is tied to China? And to the extent that a new tariff regime were imposed early next year, how quickly can you react in terms of pricing to pass through the increased expense?

Question: Thomas Moll - Stephens Inc. - Analyst : Let's move on Rick to some of the recent trends in the residential HVAC market. Year-to-date, the volumes sold into the channel have been solidly up. In fact, if we just look at Watsco specifically in terms of inventory dollars, there was a sequential increase in the third quarter, which bucks the typical trend where you would reduce your inventory a bit seasonally there. So how much of this that we're seeing is prebuy versus what other factors might be in play here?

Question: Thomas Moll - Stephens Inc. - Analyst : Let's talk about the A2L product, Rick. In particular, the price/mix impacts. Last quarter, Watsco indicated something in the high single-digit to low double-digit range, which is roughly consistent with what others in the industry have signaled recently. But not much volume, maybe not any material volume has actually moved through the channel at these higher prices yet. And so a lot of this is talking about what may happen into 2025. So that's really where my question is, how much risk is there that the yield actually ends up being substantially lower than what a lot of the industry participants expect or hope will happen currently?

Question: Thomas Moll - Stephens Inc. - Analyst : So let's talk about competition for a minute, Rick. Year-to-date, I think it's fair to say there have been some share shifts in favor of those such as yourselves who had more of the 410A product available during the peak selling season. There have been others in the market who have lost a little bit of share, largely because they didn't have that product available. They tried to bring the new A2L to the product to the market ahead of schedule and just the demand wasn't there. So if you scroll this forward into next year, how much competitive risk is there that some of those who maybe have more of this product on their balance sheet than they expected now and presumably will into next year, or perhaps less disciplined from a pricing standpoint?

Question: Thomas Moll - Stephens Inc. - Analyst : So I have some questions prepared on technology investment, which is important for Watsco, but I did want to pause just for a moment in case there's anyone in the audience who wants to shoot up a hand and ask a question. Feel free to now, or if something comes to mind in the next 15 minutes, just jump in. So let's talk about technology, Rick. Watsco has been at this for some time now with a pretty sizable annual spend there on the research and development side. So maybe just to start, for those who have not been introduced to the Watsco technology platform when you reference that, what is it?

Question: Thomas Moll - Stephens Inc. - Analyst : So Rick, we're now 40 minutes in. We haven't discussed gross margins. So we should be able to hammer this out in the remaining five. I'll go straight to it because I do want to at least touch on this topic. You know well by now that guessing the Watsco gross margin is among the great parlor games on Wall Street ahead of any earnings season. So I just want to unpack this a little bit, multipart question here. If you wanted to provide guidance on this line, would you even be able to? Second part of the question, for those of us on the outside, where we do every 90 days have to have something to underwrite, what should we be paying attention to? Even if just directionally, qualitatively, what are, I don't know, the top three factors that you would point us to just to consider?

Question: Thomas Moll - Stephens Inc. - Analyst : Rick will end it there, and I want to thank you again for your time, and thanks, all in the audience for your interest. We appreciate it.