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Watsco on Pent-Up Demand: ‘Band-Aids’ Will Fall Off

Customers were more likely to repair than replace during the recession, but the pendulum is swinging the other way now.
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For HVACR distributor Watsco, Coconut Grove, FL, (NYSE: WSO) 80 percent of whose business is residential replacement units, business has slowly ramped up over the past couple of years.

Watsco CFO Barry Logan said recently at the JP Morgan Annual Diversified Industries Conference that in tough times, customers have to decide between replacing or trying to repair their air conditioning units.

When money is tight, they are more likely to repair, which is what the industry saw during the recession. But that pendulum is swinging back. “The growth rates of replacement are greater than that of fixing,” he said.

Eventually, units have to be replaced, he said, and air conditioning units – the distributor’s primary business – do not know whether the economy is bad or good. They are not a luxury item, especially in the region where Watsco sees the most sales – the Sunbelt in the Southeastern U.S.

“People were putting on Band-Aids over the past few years,” Logan said. They were getting by fixing leaks and other issues that arose; but Band-Aids don’t last forever. And when they do come off, combined with other factors such as warranty expiration and energy mandates, the HVACR industry is likely to benefit from what Logan called “pent-up spending” in the next year or two.

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