Watsco, Inc. Morgan Stanley's 14th Annual Laguna Conference

Sure. Well, thank you, Christine. Thank you for being here, everybody. It's the last session of the day, which also means, I guess we can run a couple of hours if we want to, right? Just kidding. We are southern storytellers, so we'll try to contain it. Scale is the question. Scale historically for us has been very inquisitive in the markets to have the capital, to have the relationships with OEMs, to know who the big players are, to have the credibility to discuss acquiring their company, and most of the time, when we say acquiring a company, it's a family business that has been around 50, 60, 70 years. So the personal chemistry, the credibility to talk to them, manufacturers who have to permit who can buy one of their distributors.

Just the idea of having the scale to get things done at scale has been successful for us over almost 40 years now. That's old school, but still going on and still important to us. Scale also meant being a mega partner to the manufacturers that we represent. Manufacturers are not at your kitchen table when you buy these systems. We're not at the kitchen table. We are maybe through technology today, but the contractor who actually does the work, who gets paid, who pays us, who produces the unit volume, who gets things to happen at the homeowner and business level, our scale helps that. It helps with the number of brands we sell. It helps with the number of stores we operate. It helps with the complexion of all the goods we might sell in those stores.

It helps with the number of employees we have serving in market. Again, a bit old school, but that's part of what scale does. More recently, the word technology, which every company wants to describe as a moat around their business. Again, we're dealing with 100,000 contractors, 30,000 SKUs, 700 stores, infinite number of price points, infinite number of customer interactions, and all of which converges in the idea that everything everybody wants in our industry, they want an hour from now. Very much almost a retail trade business selling to contractors who order in real time, who want the product in real time, and tomorrow it becomes a different day.

The last 10 years, how do we bring an ecosystem of technology that does that, and operates in that fashion, and provides that value, provides that speed and convenience, accuracy, completeness, all the things that technology can do versus just relying on historically old school, kind of the grumpy old men in our stores answering the phone. How do we make it a 24-hour business, not an 8-hour business? The scale lets us spend about $60 million-$65 million a year on building out the technologies that help the contractor every day, that help the homeowners, how they source and buy products from our customer, how we can improve the operations of our daily life. I have 30 more minutes to answer the question, but you get the drift.

At the end of the day, it boils down to strong OEM relationships that are critical and material to them as part of the scale, the ability to innovate and deliver technology, and then the credibility to acquire some great businesses that have been around for decades that are interested in doing that with us.

Well, I think the first reaction to something like that is you worry, you assess, you have to try to figure things out. That's the near term reaction, and about a year or so ago, we said, "Wait a minute. On paper, we are tailor-made for this trend." We have the scale that we just talked about. We have the industry's most advanced technology platform to go help these growing contractors win. We have the industry's best digital selling platform to help them execute better in the home and close more, and higher price and higher margin orders in the home. We decided to embrace the trend, as they say, don't fight the tape. We're not fighting the tape on this one. We decided to embrace the trend, and we announced at our investor day in December the launch of something called SupplySync.com.

SupplySync.com is that single pane of glass that a large consolidating customer has to go procure and have the entirety of our PIM catalog at their disposal, the entirety of our business units resources at their disposal, again, our scale and our technology. We think it's a win-win. We think it's a trend that we can do well with, irrespective of what the near-term irritation of it might be. I think it's something that we can absolutely capitalize on. So it's core to what we're doing now, and the update is SupplySync.com is with its pilot customers, and we intend to scale that later this year and entering into 2027. There's both a volume and a margin opportunity that comes with that.

The volume opportunity is that today those existing customers, we feel like we have less than our fair share of share of wallet, and so that's where the incremental volume can come from, and it's a margin opportunity at the same time in the sense that what we sell to those customers today is largely equipment. Again, by exposing the full totality of Watsco's inventory and PIM catalog, we think we do well with non-equipment with that customer segment over long periods of time. So it's a trend. We're prepared for it to persist, and I think we have, again, the scale, the technology, and now the platform in SupplySync.com to make that successful.

First and foremost, it's the contractor relationships that we have. Again, that's who is actually defining the product to be sold in the home. It's who specifies the product. The contractor's the one there at the point of sale. Access to that contractor relationship is the critical element of how we compete. More contractors, more brands, more locations, more everything, and we think that's the first access point of an OEM when you make stuff in a factory is how do I get access to that local market, and that's through our relationships first and foremost. Secondly is, I think the last 10 years of when we use the word technology, is to drag our OEMs into that environment when none of the other distributors necessarily were asking for it. We had to get Honeywell to give us their product information.

We had to get Carrier to give us their bill of materials for everything they've made over the last 10 or 15 years. So now a Carrier dealer can sit in someone's backyard and know the right motor because we have the bill of materials sitting there on a mobile app that he can draw on to find the right motor. I think there's been a lot of value and continued value and more innovation to occur of how do we bring, and a manufacturer wanting to bring itself into the point of sale, into the contractor relationship at a point of, again, using the technologies that we've developed. The other is capital. Working capital in this industry as a distributor is roughly 90 days' worth.

If we were to grow a business from $200 million to $400 million, that requires that proportion amount of working capital to put into the market. If Carrier, Rheem, Daikin, one of our OEMs says, "How do we grow?" They need to invent it at the factory, then we need to invest the working capital it takes to deploy that into a market, support it with credit, support it with the inventory, support the knowhow. In our joint venture with Carrier, for example, this is certainly on our books, more than $1 billion of capital is sitting in our balance sheet trying to sell more Carrier products each year. Several hundred million dollars of Rheem working capital is sitting there on behalf of Rheem. Again, if their factory grows 10%, 15% a year, they've invested zero in that working capital. We've made that investment. It's a collaboration that is obviously very important.