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 Spotlight on sustainability: Watsco

Spotlight on sustainability: Watsco

Sashi Reddy discusses Watsco, the largest distributor of HVACR (heating, ventilation, air conditioning and refrigeration) products in North America.

As part of our Spotlight on sustainability series, Sashi Reddy introduces Watsco and discusses some of the things we like about the company.

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Company information as at 30 September 2022

More information available on our Portfolio Explorer tool.

Company Profile

The largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies in North America.

Stewardship

Entrepreneur. Founder chairman Alfred Nahmad is a controlling shareholder. The majority of the company is free float.

Areas for engagement
  • Succession.
  • Capital allocation.
What we like
  • The founder's long-term time horizon and company culture.
  • Their performance based long-term remuneration in restricted stock that only vests on retirement.
  • 70% of the demand for their products is from the replacement market, which is a key enabler of repair and maintenance.
Risks

We believe that the cyclical nature of their business and heavy working capital is a potential risk.

7. Affordable and clean energy


Sale of necessary and energy efficient products.

9. Industry Innovation and Infrastructure


Nearly half the energy used in a US home is for heating and cooling. By replacing older systems with more efficient Watsco HVAC systems, householders can reduce their CO2 emissions and pay less.

Refrigerant Management

Contribution Type
Enabling/Supporting Contribution

Alternative Refrigerants

Contribution Type
Enabling/Supporting Contribution

Description

Watsco is the largest distributor of air conditioning (AC), heating and refrigeration equipment in North America. There are an estimated 110m AC units installed in the US, 80% of which are over 10 years old and operating under old efficiency standards. Replacements of old units makes up 65-70% of Watsco's revenues (versus installing in a new build), and residential and commercial heating, ventilation, and air conditioning (HVAC) equipment account for 69% of Watsco's revenues. HVAC accounts for half of US household energy consumption. Sales of higher efficiency HVAC systems grew organically by 26% in 2021, outpacing overall growth of 17% for US residential HVAC. Roughly one-third of sales are now high-efficiency units.

In 2020 and 2021 over 10m metric tons of CO2e was averted through the sale of replacements. Watsco is transitioning it's HVAC equipment with alternative refrigerants in compliance with the Aim Act 2020. The act addresses the phasedown use of hydrochlorofluorocarbons (HFCs) and requires refrigerants to have less than 750 global warming potential, by January 2025. Watsco also offers a service whereby it recycles older air conditioners which contractors deposit for safe disposal.

Energy - Physical infrastructure

Contribution Type
Enabling/Supporting Contribution

Standard of living - Economic welfare

Contribution Type
Enabling/Supporting Contribution

Rationales

Heating, cooling and ventilation (HVAC) accounts for half of US household energy consumption. Watsco plays a leading role in enabling repair or replacement of HVAC equipment across the Americas. Watsco is the largest distributor of systems and parts in the US with c.65%-70% of revenues coming from replacements.

There are 110m units in the US which operate on older less efficient standards that will need replacing in the years ahead, providing cost savings for end users, along with lower energy and greenhouse gas emissions. Sales of higher efficiency HVAC systems grew organically by 26% in 2021, outpacing overall growth of 17% for US residential HVAC. Roughly one-third of sales are now high-efficiency units.

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For illustrative purposes only. Reference to the names of example company names mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors. Holdings are subject to change.

Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon Stewart Investors’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will last, and Stewart Investors undertakes no obligation to correct, revise or update information herein, whether as a result of new information, future events or otherwise.

Source: Stewart Investors investment team and company data. Securities mentioned are all holdings which have/have had a portfolio weight over 0.5% from representative Asia Pacific Sustainability Strategy, Asia Pacific & Japan Sustainability Strategy, Asia Pacific Leaders Sustainability Strategy, European Sustainability Strategy, European (ex UK) Sustainability Strategy, Global Emerging Markets Leaders Sustainability Strategy, Global Emerging Markets Sustainability Strategy, Indian Subcontinent Sustainability Strategy, Worldwide Sustainability Strategy and Worldwide Leaders Sustainability Strategy accounts up to 31 December 2022.

The Stewart Investors supports the Sustainable Development Goals (SDGs). The full list of SDGs can be found on the United Nations website.

Source for Climate Solutions and impact figures: © 2014–2023 Project Drawdown (drawdown.org). Source for Human Development Pillars: Stewart Investors investment team.

Source for climate solutions and human development analysis and mapping: Stewart Investors investment team. Contributions are defined by the team as demonstrable contributions to any solution, either direct (directly attributable to products, services or practices provided by that company), or enabling (supported or made possible by products or technologies provided by that company).