Watsco Inc (WSO.B) 2003 Q2 法說會逐字稿

Good morning, my name is Chastity and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Watsco Second Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Nahmad, you may begin your conference.

Good morning, everyone. this is Al Nahmad, CEO. With me, as always, is Barry Logan, our CFO. Let me start the conference call by reading this cautionary statement. Please remember that this conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. Now, let me start off by saying that Watsco is achieving record levels of performance this year. Our great first quarter has been followed by another record breaking second quarter and indications are that this level of performance will continue and that 2003 will be our best year.

Now let's look at the numbers. During the quarter, diluted earnings per share was up 13% to a record breaking 52 cents. Net income was up 8% also to a record breaking $13.4 million. Profitability continues to improve with operating margins expanding 20 basis points to 6.7% and more importantly, our core distribution segment margins are up 40 basis points to 7.9%. That is also a new record. We are, however, still managing through soft markets in manufactured housing and staffing and that cost us 4 cents for the quarter when compared to last year. Sales for the quarter were up 3% to $341 million and looking at that number closer, we see same store sales in our core HVAC/R operations were up 4%, sales of manufactured housing products, which is 4% of sales and staffing revenues which is 2% of sales, continued to experience double digit declines. However, the good news is that revenues in manufactured housing and staffing seem to have flattened on a month to month comparison.

Also, let me add that we have 52 new locations that were acquired during the quarter from Pameco and that contributed to $10 million revenues for the quarter but did not contribute to second quarter earnings. These branches are located in excellent markets and will contribute to our growth in the future. Selling margins increased to 24.8% from 24.5% last year. That is setting a new record, as we continue our policy of competing with service at every opportunity. Our operating expenses were down 1% compared to prior year on the same basis and interest expense was down 18% on lower borrowings. Those are the numbers for the second quarter and all in all, we're very pleased with that performance.

Year to date, our comps versus last year are very favorable. EPS is up 18% to a record 67 cents. Gross profit margin increased 30 basis points to a 24.5%, that's also a new record. Operating margins overall expanded 30 basis points to 5.1% and at our core business distribution, operating margins increased 50 basis points to 6.4%, also setting a new record. Net income increased 18% to a new record of $17.2 million. Year to date performance includes 8 cents less in contributions from staffing and manufactured housing when compared to the six months last year. Cash flow remains strong and has enabled the repurchase of 230,000 shares for $3 million this year. This brings total repurchases since 1999 to 5.2 million shares for $63 million.

Let me comment on the outlook. We expect that margins will continue to get better during the rest of the year. Also, we are experiencing an increase in the rate of revenue growth in July, which is the start of our third quarter. And the Whirlpool initiative which began late during the second quarter should be another factor adding to Watsco's long term growth. Let me state once again, our overall strategy is to continue building a national network of services centers serving our contractor customers. We believe we are the best at what we do and that we have exciting opportunities to build market share substantially beyond our present 6% of the $20 billion U.S. market. From our performance to date and from what we can see at the start of the third quarter, Watsco should enjoy its best year ever. That's a short briefing of our performance for the quarter and year to date. And with that, Barry Logan, our CFO, and I will be pleased to take your questions.

At this time, I would like to remind everyone in order to ask a questions, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Michael Reegan.

Good morning. Thanks. I'm just trying to get some sense - - as I look at industry shipments from the manufacturers. They were down year over year. You guys had a good same store sales number, yet your inventory was up a little bit bigger than same stores. I think year over the year the change in inventory was maybe 7, 7.5 and I think your same store was up 3. Are you building inventory in anticipation of a stronger third quarter or did you just end up with more inventory expecting the weather to be normal or better and it ended up being colder?

Well, we try not to be influenced too much by the weather, but the answer to your question is that we are building inventory to meet expected rising demand in the third quarter and are experiencing it at the start of July, increased demand. Our rate of growth is increasing.

Okay, so same store in July is accelerating?

Yes.

Great. Thank you.

Your next question comes from Dave Manthey.

This is actually Adam Drake for Dave Manthey. What was Pameco's EPS contribution in the second quarter?

There was none. $10 million revenue contribution and no income for the quarter and as I had mentioned earlier, not on this particular conference call, but prior to this, that Pameco branches were starved for inventory and revenues of those branches were substantially down. And so we rebuilt that and are in the process of rebuilding those inventory levels and service levels and are doing so at a cost. So there was no income in the second quarter. But there will be income, substantial income, in those branches in the future.

Okay, just a couple more. Through the quarter towards the end of June, what was the trend or the momentum near the end?

Strong.

Can you give us a little bit more of a Whirlpool update?

Whirlpool was introduced late in the quarter slowly and gradually. Our policy is not to impair the growth rate of brands that we are presently marketing, so we're introducing Whirlpool as an incremental sales product line and contributing small amounts of revenues during the second quarter. It's not large enough even to calculate into earnings for that small revenue contribution.

Okay, just one final question. Could you comment on the trend in manufacturing housing impact on the quarter?

Yes. Compared to last year, we're experiencing double digits declines, but compared to, I would say, month to month for the last 5 or 6 months, revenues are flat. That's the good news. I think we've hit the bottom.

Okay, thanks very much.

Your next question comes from Martin Sankey .

Hi. Going back to the inventory, could you sort of break it out between how much of that inventory contribution was the addition of the Pameco branches versus your core branches?

Barry, if you can answer that question quickly, fine. If not, we can call Martin back with that information.

Sure, Martin, it's about $7 or $8 million of the increase year over year belongs to Pameco.

$7 - 8 million?

Yes.

Okay. Then the rest would be building inventory in branches?

Right.

Let's see - - in going through, in looking at your current sales momentum, could you sort of break it out by regions and sort of plug it into the weather? Because we're seeing the northeast not having particularly good weather and then the southeast, I guess Florida, turned cool in the last few weeks.

Well, I don't know that we have revenue breakdown by regions, but I can give you a sense of it. And if you want more details, we can follow up after the call. The southeast is very strong for us. We're experiencing in one of our largest subsidiaries, a double digit increase and they primarily do business in Florida, Martin, the state that you just mentioned. So I would say that either the weather reports aren't accurate or we're gaining share and I'd like to think the latter. We're enjoying significant growth and if you look at our growth rate in July which is just being, I understand, it is improving over anything we've seen all year compared to the prior year. So I don't know what to say about that data from the ARI. We don't have the regional breakdown yet in terms of distributor shipments by regions for the second quarter. I know what they're reporting nationally, but I think that's a very difficult thing to do compare national data with individual distributor data.

Right. I guess another thing, too, is a lot of us are trying to make sense of what we're hearing in terms of the ARI numbers versus what the individual companies have been reporting. I think Mike pointed out that some 75% of the industry is reported now with 3-5% unitary sales gains, which I think echoes what you're seeing, whereas the ARI data is down 3% or so for the quarter. Can you - - what's your take on all of this?

It's hard to comment on industry. I can't paint a better picture than the one you already have. I guess I just have to go back to what we're doing in our 300 plus locations. We are experiencing growth and during the first 6 months, we were experiencing the same growth rates you speak about that the industry is. But, by the way, those are manufactured shipments whereas ours are sales to contractors and ours are probably more - - adjust out to any inventory changes that manufacturers have with distributors. So I think ours is a more accurate gauge of what's actually going on in the marketplace. And now at the start of the third quarter, we're experiencing an acceleration. So I don't know how to reconcile that with the ARI information, but what we can do, when they publish the second quarter by region, we can have more in-depth look at distributor's' sales by the industry by region compared to our sales and then give you some information on market share gains or whatever we're doing in the market share area.

And Martin, about 85% of our business is still on the sunbelt, so that's why that regional information is important for us to look at.

Okay, thank you.

Once again, I would like to remind everyone to ask a question, please press star then the number one on your telephone keypad. You now have a follow up from Michael Reegan.

Thanks. I was wondering if you could just expand on your comment that sort of June ended up very strong and if for the quarter your same store sales were up 4%, can you give us some sense of kind of what it was April, May and June?

No, we don't break that into those months, Michael.

Did you get to double digits in June?

We don't break those out by months.

Thank you.

Your next question comes from David Mitchell.

Good morning, guys. Let's talk a little bit about staffing and manufactured housing for a second. I recognize you're seeing a flattish trend over the last 5 or 6 months, but we've been holding on to these, particular the staffing business, for an awful long time and I was wondering when we're going to draw a line in the sand and making a hard decision about either shutting it down or getting a new management team or something along those lines.

Well, we don't consider either one of those options good options. This is a very valuable business. It's experiencing a cyclical downturn. We're managing to that reality and we're getting better at it. It is not a core business. We've stated that over and over again, but I don't think that we'd go into an excess like you've described. We manage to the situation and try to make the business profitable and when it's profitable and then we'll examine much better options than the ones you described. And I think that's what we should do. This is not a - - Dunhill is an excellent business and has been in the past and it's getting better and will be performing in the future. And when it does perform, we'll have some pretty exciting options of what to do with it. Manufactured housing is part of our core business.

Right. Okay.

You now have a follow up from Martin Sankey.

You've been repurchasing shares. Is there any intent to accelerate the program given where you are in your balance sheet?

To accelerate the program?

Yeah.

Well, it's an interesting question, Martin, and I think we should be engaged in stock repurchase but I think that we also have a very positive cash flow that gives us an option, not only to repurchase shares but to have increasing cash dividends to our stockholders. So I think that our present thinking is that we'll do both. We'll continue to increase stock repurchase and we do that opportunistically when we see the values come, we just can't help ourselves, they're so inexpensive. And then I think that year after year we hope to be able to substantially be increasing cash dividends. And, of course, I think all of that said, the cash flow is enough to fund either our future acquisitions or to fund our internal growth.

Okay. Going back to Dunhill for a minute, what does that business need to have to happen to get back into profitability?

Yeah, that's a fair question. It's revenues are flat now for the last 5 or 6 months to between $2 and $2.5 million a month. It's not a very large number given our overall $1.2 billion in revenues. But now we're managing to that revenue base by reducing costs and we've closed branches and we've reduced payroll costs and now we're in the process of completing the move from headquarters which was a very high cost center in the northeast part of the United States, to the Midwest in Indianapolis, and combine it with branch operations there to save substantial costs in our back office operations. So we know what our revenue base seems to be at and now we're trying to reduce costs to the point where it is a profitable business and that's what will occur the rest of this year. We think that it will be running at a profitable rate by the end of the year as the move takes place.

Okay, will that be on quarter or a month?

My expectation is that we'll be profitable by the end of the year. And maybe we'll have a surprise and get profitable before the end of the year.

Okay, now - - and that would assume the current revenue run rate?

That is correct.

Thank you.

Thank you. At this time there are no further questions. Mr. Nahmad, are there any closing remarks?

Well, thanks, we enjoy these conference calls and look forward to the next one.

Thank you for participating in today's conference. You may now disconnect.