Fresh off a solid second quarter and still riding the momentum of two recent and successful acquisitions, Miami, Florida-based HVACR giant Watsco Inc. has a message for independent distributors whose owners might be looking to exit the industry.
“This is a time to sell,” Watsco CEO Albert Nahmad said on last week’s earnings call with analysts to discuss 2Q results.
Nahmad went on to say that Watsco could be the right home for distributors that mayb want to sell before what many fear is coming indeed happens — an increase in the capital gains tax. He added that the company prides itself on maintaining a seller’s legacy rather than simply turn it into a Watsco branch, which could make selling to Watsco attractive for many.
“Family businesses, especially, want to connect with a company that’s going to preserve their own names and culture,” Nahmad said. “And that’s what we specialize in.”
Watsco has gotten a lift from two recent deals, sparking the desire to grow acquisitively as well as organically, which it has been doing of late (see below).
In April, Watsco completed the $291 million acquisition of Temperature Equipment Corp., which was announced the previous month, and which expanded the distributor’s footprint into the Midwest. TEC posted 2020 sales of $291 million.
And in May, Watsco acquired Acme Refrigeration, a Baton Rouge, Louisiana-based HVACR distributor that’s led by third- and fourth-generation members of its founding family and generated revenues of $60 million in 2020.
Watsco’s M&A Approach
Both of those additions contributed to Watsco’s strong 2Q, Nahmad said. The company reported sales of $1.8 billion, up 36.5% year-over-year, while profit increased 66.4% to $144.1 million.
“They [TEC and Acme] performed very well, and we cannot be happier that they are now part of an important part of Watsco,” Nahmad said.
The deals further bolstered Watsco’s acquisition strategy, Nahmad added on the call. Both companies have a strong culture that Watsco said it plans to retain.
Also on the call, Barry Logan, executive vice president-planning and strategy, said the distributor is laser-focused on ensuring that when it enters into M&A discussions, Watsco focus is on the emotional side as much as how much it makes financial sense.
“These are families that have owned businesses for 70, 80 years, and are third- and fourth- generation,” Logan said. “I wish it was just a financial process, but it’s entirely, at times, an emotional process. So that’s the part where I feel like we’ve been successful — dealing with that emotion going forward for another generation or two. It’s why TEC and why Peirce-Phelps a year before, after 90 years, 80 years of owning their business, only talked to us.”
Still, the financial element is critical, and as Watsco grows its revenue and its reach, the company appears poised to use its size to grab more share acquisitively.
“Looking ahead, we are engaged in a very fragmented $50 billion North American market — again, this is a $50 billion North American market,” Nahmad said. “And we hope to find more great companies to join us. Greater scale in this industry provides more capital for us to fund our growth priorities. Our balance sheet remains in pristine condition with only a small amount of debt. We have plenty of capacity and even more ambitions to grow our company both organically and through acquisitions.
The company’s quarter was well-received by the analyst community. Dave Manthey of Baird noted that Watsco has been a savvy acquirer of late and that it should enjoy plenty of M&A opportunities, including potential joint ventures, in 2021 and beyond.
“Historically acquisitive, WSO had increasingly focused on larger transactions (i.e. companies with $100+ million in sales) in the Sunbelt this decade, but has more recently targeted companies that are both relatively smaller and outside of the Sunbelt,” he wrote in a research note to clients. “WSO is a disciplined acquirer, rarely paying above 7x EBITDA, with additional JV opportunities with other HVAC OEMs always a possibility for step-function growth as well.”
Watsco’s shares (NYSE: WSO) were down 2.4% to $288 at market close on Monday, but the company’s stock is up significantly for the year, including more than 30% growth since last December.