Watsco Inc (WSO.B) 2004 Q2 法說會逐字稿

Good morning. My name is Tina, and I will be your conference facilitator, today. At this time, I would like to welcome everyone to the Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 1 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, everybody. This is Al Nahmad. I'm the CEO. With me is Barry Logan, who's the Sr. VP. As always, before we get started, I'd like to read a cautionary statement.

"Please remember that this conference call has forward-looking statements, as defined by SEC law and regulations that are made pursuant to the Safe Harbor Provisions to these various laws. Ultimate results may differ materially from the forward-looking statements."

Watsco had a great second quarter, which was on top of a great first quarter, and we are operating at record levels. Our solid performance in the first half of the year is expected to continue and result in another record-breaking year.

Our performance trends which I'd like to highlight are the following. Revenues have been showing strength so far this year, demonstrating a healthy market for HVAC products, and good sales execution on the part of Watsco. This has been quality revenue growth, as our selling margins improved for the sixth consecutive quarter, on a year-over-year basis. We have also kept SG&A in check, which in combination with sales growth and higher selling margins, have produced exceptional improvement in operating margins and accelerated earnings growth rates.

Also, our continued focus on asset quality and a conservative mindset toward our balance sheet has strengthened our financial position. Return on investment capital has improved consistently over the last four years, and over the last 12 months, return on investment capital is at its highest level in more than 10 years.

Now I'm going to go to the second quarter in more detail. Diluted earnings per share increased 38 percent, to a record $0.72, compared to $0.52 last year. Net income was up 44 percent to a record $19.4m, from $13.4m last year. Profitability continues to improve, with operating margins expanding to 8.7 percent. That's a 200-basis point improvement, and our best-ever for any quarter. This also marks our sixth consecutive quarter of enhanced operating margins on a year-over-year basis.

Revenues for the quarter increased 9 percent, to a record $373m. Most of the sales growth was internally generated as same-store sales, and our core HVAC operations were up 8 percent -- the highest growth rate in 3 years. Gross profit increased 14 percent, to a record $96m, with a gross profit margin increasing 100 basis points, to a record 25.8 percent, compared to a year ago.

We continue to effectively leverage our cost structure. SG&A increased at a slower rate than sales. That is to say, SG&A increased at 4 percent, while sales increased at 9 percent. And as a percentage of sales, SG&A decreased by 100 basis points.

Operating cash flow the quarter was strong, and the Company was able to generate $12.1m in cash from operations. Speaking about cash flow, let me provide a reminder of our strong track record for cash flow during the last five years. Over those years, operating cash flow was $271m, exceeding our net income target by over $134m. This led to a debt reduction of $113m and a share repurchase of $66m.

Cash dividends have also increased during the last 2.5 years. And also, I want to remind everybody that we announced in February of this year a 25 percent increase in dividends to a quarterly rate of $0.10 per share. We continue to expect cash flow to grow substantially during the last half of 2004. Operating cash flow is targeted to be equal to or greater than net income for the year.

Moving on to the results for the first half of 2004. Diluted earnings per share was up 45 percent, to a record $0.97, compared to $0.67 last year. Net income rose 51 percent to a record $26m. Operating profit increased 45 percent, to $44m, with operating margins expanding by 170 basis points, to 6.8 percent. That's an all-time high. Revenues were up $53m, or 9 percent, to $651m -- with same-store sales in our core HVAC operations growing by 7 percent.

Gross profit margin increased to 25.7 percent -- a 90 basis point improvement for the first half of 2004. I should say a 90 basis point improvement over the first half of last year. SG&A increased at a slower rate than sales -- that is, an increase of 5 percent, versus a 9 percent sales increase, and as a percent of sales declined by 70 basis points.

Another thing I'd like to again point out is the quality of the balance sheet. Over the last year, Watsco's reduced its debt load by 25 percent, and our debt-to-cap ratio now stands at 13 percent, which is the lowest in recent history. Our working capital, consisting of accounts receivable and inventory has increased. As you'll notice, the balance sheet as of the end of June. But that's in anticipation of seasonal mass and will decrease as the year winds down.

Finally, our outlook. First, why don't we take a look back? Over the last 10 years, the Company's compounded annual growth rate for earnings per share is 17 percent. That's 17 percent compounded growth rate over the last 10 years. However, over the last 1.5 years, the EPS growth rate has accelerated to 33 percent.

This last June, we announced that we expected our EPS growth rate for the year to be in the 20-25 percent range. Given our strong second quarter, we are now raising our annual EPS growth rate to an estimated 25-30 percent. That's 25-30 percent, or $1.68-1.74 per share. Obviously, we feel good about what's going on in Watsco.

Now, with those comments, Barry Logan and I would be happy to take your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the q-and-a roster.

Your first question comes from the line of Adam Drake, with Robert W. Baird.

Good morning, gentlemen. Great quarter!

Thank you.

A question on the EBIT margin in the Distribution segment. It's like 10 percent this quarter. Is that sustainable? Can it go higher? I'm just trying to understand the moving parts and what got you there.

Well, don't forget, we're in the seasonal business. The second and third quarter are always more productive than the first and fourth quarter, due to the weather. So you should not look at the second-quarter EBIT margin being equal to the full-year EBIT margin, for that seasonality.

But what's even more important than that is the trend. We continue to increase EBIT margin, quarter-after-quarter. And that's for all the reasons we just stated. We're leveraging SG&A expenses. We're providing high-quality services, which give us an ability to price our goods where we can increase our margins. We're also leveraging the size of our company and able to buy -- we'll continue to buy -- at good prices from our vendors.

But the trend is the big thing. You should have seen and will see that we continue to increase our operating margins. And we see no end, yet, to where that operating margin may cap out. We think it's got more to go.

And then as a follow-on to that. You mentioned two things of how margins are going better. Service. Obviously your scale -- your size is helping. Consolidating vendors. Anything there than that? Anything to do with the strategy or the other initiatives? Maybe not just margin-related, but new initiatives, otherwise?

Well, we're always initiating product strategies, one way or the other. And we're always initiating different promotions for marketing. So I'm not sure I understand your question. But we have a private-label initiative. We have geographical expansion. So for our coverage in the United States, we're only in 31 states now, and we're not fully covering those states. So it's just when you look at a national picture, you see that it's a $20b market -- and we're basically at about 6.5 percent of that share. So we have huge growth rates ahead of us, in terms of gaining share. So we're just frankly at the beginning of the expansion that we see. If you're only 6.5 percent of a $20b market, you can see that for yourself.

Right. And I'll ask the requisite. Whirlpool initiative? If you can give us an update on that.

Whirlpool initiative is part of our private-label initiative. It's not the only brand we put into our private labels. And it is, as we have characterized it, a very high-quality but very slow-to-the-market. We want to make sure that where we introduce Whirlpool, we're not substituting our revenues of something we're already selling for the Whirlpool brand. So it's increasing over the prior year, but it's going at a slow rate, as we designed it to do.

Okay. And then just lastly, anything of change with the acquisition pipeline? Of course, we'd probably hear about it, but anything different from potential sellers? Any different tone there?

Barry, you want to deal with that?

Well, in terms of a different tone, I think companies are doing better. So that always bodes well. Because good companies that want to sell will a little more likely sell when they're doing better. And I think the industry is having a good year -- and that will help us.

The emotional process of a family deciding to sell a business is the same as it is and the same as it has been. So that's our biggest process, is to get past the emotional level of an owner wanting to sell his family's business. And we do sense that they're doing better. So that certainly helps the process. But other than that, there's really not a lot of other changes to speak of.

Great. Thanks. That's all I have for you.

Again, in order to ask a question, please press star, then the number 1 on your telephone keypad.

At this time, there are no further questions. Are there any closing remarks?

Well thanks for listening, and we look forward to talking to you at the end of the third quarter.

Bye.

Thank you. This concludes the conference. You may now disconnect.