Watsco Inc (WSO.B) 2003 Q3 法說會逐字稿

Good morning. My name is Jody and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Watsco third quarter earnings release conference call. All lines have been played on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. (Operator Instructions). Thank you. Mr. Nahmad, you may begin your conference.

Good morning, everyone. I hope everyone is having a good day. We're going to review our third quarter performance. We're very pleased with it and very excited about it. But first, let me start with a reminder that this conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements.

As I started to Say, I am very pleased to report that Watsco continues to perform at record levels, and indications are that 2003 will be our best year. We are doing the things we should do to continue our growth in this very attractive industry.

How did we do during the third quarter? Well first, we increased diluted earnings-per-share 13 percent to a record 51 cents per share, which compares to 45 cents last year. During the period, net income also increased 12 percent to a record $13.2 million from $11.8 million last year.

As important as our import performance is, our company's profitability also continues to improve with operating margins up 20 basis points to 6.4 percent. Sales for the quarter were up 7 percent to $349 million and a more detailed look at the sales shows that the same-store sales from residential and like commercial markets were up 5 percent. That is our highest level of growth rate for the same-store sales in this market segment in the last 11 quarters, so we are feeling pretty good about topline growth coming back.

As we've reported in the past, we're still managing through a very soft market in manufactured housing, although our sales to that market seems to have flattened on a month-to-month basis. This often has (ph) cost us 2 cents per share for the quarter when compared to last year. Let me explain that a little bit better. We are flat at about $4 to $4.5 million a month, and have been flat at that revenue level for most of this year. So I think perhaps the bottom has been reached. Of course, when you compare that to last year, the declines are much sharper.

Also in sales, we've added 52 locations that were acquired earlier in the year and they contributed $16 million of revenue during the quarter, were mildly accretive to earnings. The performance for these newly acquired branches is expected to improve over time as Watsco makes the necessary investments in assets and people and systems.

Another big plus for us is the increased, again, in selling margins that moved to 24.6 percent versus 24.5 percent a year ago. This comes as a result of our focus on selling margins while emphasizing our policy of competing with service rather than price at every opportunity. Operating expenses were up 6 percent in aggregate, but were flat on a same-store basis. Interest expense was down 21 percent on lower average borrowings. On a year-to-date basis compared to last year, diluted earnings-per-share was up 16 percent to a record $1.18 versus $1.02. Net income was up in 11 percent to a record $30.5 million from $27.4 million last year. Operating profit was up 9 percent to a record $52.7 million on a 30 basis point improvement in operating margins. This came out at 5.6 percent. Year-to-date, the soft manufacturing housing market has cost us 9 cents when compared to last year. Sales for the first nine months were up 4 percent to $947 million, including a 4 percent same-store sales increase in residential and like commercial markets. The 52 acquired locations contributed $26 million in sales, and again, were marginally accretive to earnings. Selling margins increased to 24.7 versus 24.5 percent with operating expenses up 3 percent and flat on a same-store basis. Interest expense for the nine months is down 21 percent from lower average borrowings. Cash flow continues to be strong and our asset quality initiatives continue to improve our balance sheet.

Regarding our share repurchases, so far in 2003, we've purchased 442,900 shares for $6.7 million and our total repurchases since 1999 were (indiscernible) million shares that we paid $66 million for. As a reminder, we announced earlier this month that Watsco's regular quarterly cash dividend was doubled to 8 cents per share. Obviously, we have confidence in the future of our company and in the industry that we serve. And so far as our outlook, we believe we are on track for another year of record performance. And with that, Barry Logan our CFO and I will be happy to answer questions.

(Operator Instructions). David Manthey, Robert W. Baird.

Hi, guys, good morning. Most of my questions have been answered in the monologue here, but just on Whirlpool -- I don't know if you will answer it, but I have to ask anyway. If you could talk about maybe the impact currently on your margins just for the investments that you're making in that business, assuming that there is not much of a topline going on. And when you think about the payback (technical difficulty) break even point of Whirlpool, how far out is that? Is that next year, in fact? And final question is for next year, if you could talk about goals. And if the answer is no, which I think it will be, that's fine, too.

I don't know whether (indiscernible), but let me just put everything in perspective. When we decided that private labels was an attractive growth opportunities for Watsco, we introduced a brand label called Grand Air, which is our label and we had a manufacturer making it for us, and that brand has grown to be very substantial in revenues and margins. And following without success, we thought that -- why don't we license a well-recognized brand name, which turned out to be Whirlpool, because that might even the track even still another class of consumers. And we're successful in licensing the brand and successful in having it manufactured and have now introduced it just now completing the inventory levels properly at 150 of our 323 branches with extensive training. I would say that, given our investment is north of $10 million, and I would say that the sales are very slow as we would expect because we do honor the brands that we represent. What we're trying to do with Whirlpool is have incremental business -- not at sacrificing the existing brand that we have.

But we are very pleased with it. I would say that an impact, which is a very fair question, I'm going to be conservative and I would say '05, give myself enough time to continue to incrementally grow the business. I would say from a margin point of view, as good as anything we have ever done. So we're very pleased with that and we're certainly pleased with the cooperation we have from Whirlpool, plus the manufacturer of the product. Couldn't ask for a better team there. We will also be introducing other private labels in '04, because we think that private label gives us the ability to sell products virtually in all markets that we want to get into without having to be concerned about whether a particular brand is available or not. So, David, that is a long-winded answer to your short question. I don't know if I've answered it.

That is helpful. On the Whirlpool and assuming you introduce other brand names, is there any pushback from the existing OEMs that you're getting in any areas where you are unable to introduce those products, or is it pretty much wide open?

Don't forget the premise of our private label is never to sacrifice a brand representing a particular market. And in fact, we're going the brands in all cases where we're selling Whirlpool, the other brands we represent. We're using Whirlpool as a brand to increase incrementally over the sales that we would only get by the brands we do represent. So I do think that we're dedicated to the brands we represent, I think we're doing a good job for them, and we're using Whirlpool to increase our share of an existing market through the branches that we sell in.

Just two more questions. I think you gave the year-to-date share repurchase. Could you give us the number in the quarter and what is left under your current authorizations? And then, if you could address Home Depot and if you're feeling any impact from their efforts in HVAC?

Sure. The share repurchase for the quarter, which I did report on -- let me see if I can find it here.

Is that the 442?

Yes, 442, 900 days for 6.7 million.

That was in the third quarter? Okay.

I'm sorry, that's not right. That is year-to-date.

442,000 shares year-to-date for $6.7 million. And then I said since 1999 -- that may be the confusing part, Dave -- we purchased 5.4 million shares.

I can go back and do the math on that. Could you address Home Depot?

Home Depot in HVAC?

Yes.

Not much to talk about. It doesn't seem to be impact what we're doing. We're growing well and we're strong and I don't have any data to support anything one or the other. Anecdotally, we hear things, but it is not much to say about it, Dave.

Alright, great. Thank you.

Martin Sankey, Newburger Berman.

Question -- fourth quarter is typically a seasonal low point for you in that sort of little things can mean a lot. Is there anything coming in the fourth quarter, like a royalty payment to Whirlpool or anything like that, which could have a disruptive effect?

We accrue royalty payments as they occur. We don't wait until -- but overall in the fourth quarter, we're very optimistic that this trend that we've been running on for some time will continue. As I said, I think we're going to have our best year ever, so that is my feeling about the quarter and the year.

Okay. Do you have any feel for 2004 as of yet?

Yes. I think we're probably better organized from a leadership point of view, probably have the best product offering we've ever had in our history. We're certainly well capitalized. Cash flows are very strong. And so when you have good people, good products and good financial strength, you know, I think that Watsco will continue to lead and gain and improve its performance. So I am very optimistic about '04.

I guess to put it a little bit more specifically, what is your view of the market outlook?

For the industry?

Yes.

I would say, if we're growing at 5 percent same-store sales, and I'm talking about like commercial to residential, I would -- I know that the ARI is saying that they are not -- the industry is not showing any growth, but I'm not going to take too much credit for that. I sometimes don't follow the ARI data because I'm not sure that we can. But if you ask me to guess what I think industry shipments will be in '04, I would say plus 5 (ph) would be my best estimate, which is pretty much what we're doing, at least in '03. And I think in '04, it will be plus 5 for the industry.

I think it is driven by replacements. Everybody knows that that follow the industry. I think the consumer is feeling healthier, he is probably going to replace more than he repairs or has been repairing for the last several years. New construction one way or the other does not matter, because it is only about 25 or 30 percent of the industry and the margins and the growth are really in the replacements. And I just think everything is in place for sustained and long-term 5 percent industry growth rate for quite awhile, notwithstanding what's happened the last 3 or 4 years. And of course, we would like to have our revenues and we historically have grow faster than the industry.

You seem to be doing that, not only that, but it seems like if you look at the numbers that have come out over the last couple of weeks. For example, you've had -- we've seen Trane report a third quarter North American residential increase on the order of 8 percent, Carrier was up significantly as well, Lennox came in this morning with a couple -- I believe it is about a 6 percent increase in their numbers and York (ph) was up too, and then you sort of overlay that with what the ARI is reporting and further overlay that with the fact that for the most part, those are not your brands. What are you doing to get this kind of outperformance, particularly given the industry outlook and given the brands that you're not representing seem to be doing so much better? There's sort of a little bit of a disconnect there.

Well maybe I could clarify something. We do sell American Standard, which is a brand of Trane. I think we're the biggest customer they have for that brand. We do sell Carrier and ICP, which are both owned by Carrier. In fact, we're their largest customer. So we are, as I said, very important factors in distribution of well-recognized brands. But we have the benefit because of our size and our strength to also introduce to the marketplace where we can attract more share with these private labels. And I think that is something that is very difficult for a competitor to do because they don't have the scale that we have to acquire a private-label product and sell it competitively with a reasonable margin. You need to be able to deal with fairly substantial numbers.

So I think it is a combination of us providing high levels of service. We have spent huge sums of money in '03 training our counter people in our branches. We're very training-focused and we have spent huge sums of money to do the same thing with our sales force, which is the largest in the country. And a combination of high levels of service, plus great brands and great products, I think is just, Martin, a formula for not only today's success, but ongoing.

Grand Air must really be knocking the cover off the ball this year.

It is nice -- one of our private labels. It's growing very well and fits in a niche where we desired to go. And again, we're doing it without sacrificing the brands that we sell.

I believe last year it was a $50 million business for you. How much is it up this year?

It is up. Barry, do you have an answer to that?

Between 10 and 15 percent, Martin.

Pretty healthy chunk of your same-store sales growth.

What Grand Air?

Yes.

We've looked at all our brands. Everything is growing. I think we're increasing our purchases of one of the -- both manufacturers that you mentioned, double digits. Both Carrier and Trane were increasing our purchases double digits.

Martin, something else that I think has helped us and is -- we sell primarily residential products. So some of the pressure that the commercial side has been under, or some of our subsidiaries that sell commercial products have experienced. But in terms of a product mix, we are more residentially oriented and that certainly has helped stability and consistency with what we're been doing this year.

It looks like you're pretty much in a -- balance sheet seems to be doing nicely. Inventories are -- what shape are they?

The best it had ever been, and we measure that by agings, how long, what we have in three categories -- excess, slow-moving or damaged. And we're in the best shape we've ever been.

Let me just check something here. You say -- accounts receivable and inventories are both doing normal seasonal trends?

Correct.

I cede the floor. Thanks.

You bet.

(Operator Instructions). There are no further questions at this time.

Thank you very much for listening, and we will talk to you next quarter.

This concludes today's Watsco third quarter earnings earnings release conference call. You may now disconnect.