Watsco Inc (WSO.B) 2005 Q1 法說會逐字稿

Good morning. My name is Tonya and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Watsco First Quarter Earnings Release Conference Call. (Caller Instructions.) I would now like to turn the conference call over to Albert Nahmad. Please go ahead, sir.

Good morning, everyone. This is Al Nahmad. With me is Barry Logan, our Senior Vice President. A pleasure to be with you this morning. We've had a terrific first quarter. Our game plan continues to get better. We're going to cover some of those details later in this conference call. First, let me provide the cautionary statement. Please remember that this conference call has forward-looking statements as defined by 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.

Let me now start by saying that Watsco continues to operate at record levels and we are very pleased with the consistency and quality of our performance. I think that we're hitting on most cylinders and things are good and going to continue to get better. Two important highlights. First, our base business from a year ago, which consisted of 318 locations. That base increased sales, gross profit, gross margin, and leveraged operating expenses and expanded operating margins during the quarter. These are all important benchmarks that we continue to watch and are continuing to perform well.

Second, East Coast Metal Distributors, a company we acquired in January, added 27 locations to our network in five Sunbelt states. It also had a strong performance and contributed to earnings per share during the quarter. Just as a personal note, I think that's one hell of a great organization, and we're very pleased that they are part of the Watsco team.

As for the numbers, diluted earnings per share was up 32 percent, a record 33 cents compared to 25 cents in 2004. Operating profit improved 34 percent to a record $15.8 million with operating margins improving 40 basis points. Net income was up 38 percent to a record $9.1 million. Revenues for the quarter were $346 million, an increase of 24 percent over 2004. This increase came from a 7 percent same store sales increase and a $46 million revenue contribution from East Coast Metal.

Gross profit increased 22 percent to $87.4 million. Overall gross margins were 25.3 percent, and includes the fact that East Coast operates at historically lower selling margins than Watsco has. But we expect East Coast margins will increase over time. On the same store basis, gross profit margins actually increased 20 basis points, continuing a trend.

Operating expenses increased 20 percent to $71.6 million and on a same store basis increased 5 percent. Operating expenses as a percentage of sales improved by 70 basis points. Interest expense was down 10 percent on a lower effective borrowing rate. Cash flow used in operations was $30 million compared to $25.4 million in 2004 and reflects a buildup of inventory in preparation for our selling season.

Finally, our quarterly dividend rate increased in January by 40 percent to 14 cents a share, reflecting our confidence in our growth strategy and in the quality of our financial position. We believe we're off to a great start for a very successful 2005.

Our guidance continues to be 20 percent growth in earnings per share this year, which is in line with Watsco's 10-year compounded annual growth rate of earnings per share.

And I want to close by reiterating what our goal is. That is to build a national network of locations that provide the finest service and product availability for HVAC contractors, assisting and supporting these contractors as they serve the country's homeowners and businesses. In other words, we're still a work in process and we still have a lot more to build out throughout the United States. And with that, we'll be happy to take any questions.

(Caller Instructions.) Your first question comes from the line of David Manthey with Robert W. Baird.

Morning, David.

Hi, Al. How are you?

Terrific.

Hey, Barry. How are you also?

Good, Dave.

Good. Just a first question on price increases. I know last quarter you said you were pushing through successfully 3 percent type price increases and I'm wondering if that's still the case or if that's changed at all this quarter?

Good question. As we anticipated, those price increases did come from the OEMs and we were successful in passing them on as reflected by our increased gross profit margin during the quarter.

Okay. And then, East Coast Metal Distributors contributed $46 million in the period. That was considerably higher than what we were expecting. And I'm wondering, is the business less seasonal than core Watsco or is that business just doing better than you expected from a revenue standpoint?

Well, I wouldn't say it's doing better than we expected. We think they're terrific and they just took the ball and ran with it and had some opportunities to move into additional markets and expanded their revenue substantially over their prior year. So they're in a very high growth mode.

So we should still expect approximately $180 million run rate for the year?

Well, that was their historical run rate at 2004. And in 2005, they'll do better. We have not provided any guidance as to what that revenue is in 2005, but they certainly are growing.

Okay, great. And then, 13 SEER. Any change in your outlook? I would expect not, but American Standard mentioned that some of their customers were buying higher end units, which I thought was unusual. But if you would comment on 13 SEER?

Well, we think, of course, that anytime the consumer moves to our higher efficiency it's a benefit to the consumer, and, of course, it's an improvement in margins throughout the channel. So we think that if that's occurring that's a positive thing. But we don't see any major movement in that direction. I think the 13 SEER will have the most major impact, because 90 percent of the business today is in the--probably 89 percent in the 10 SEER business and that's all going to move up 30 percent in efficiency. So the scenario, David, I don't think has changed. I think it's a wonderful opportunity for the consumer and for everyone in the channel as the mandate comes into effect in January '06. And I do believe that the OEMs are all--every one of them is prepared and will be ready with great product.

Okay, great. And just one final question. Some companies that are reporting their first quarter results are reporting that there was something of a slowdown. I know it's mainly industrial, which wouldn't necessarily impact you. But from a consumer standpoint, I'm just wondering if there was anything in terms of the linearity of the quarter that concerned you at all.

Well, that's an interesting question. I can tell you that in March we did see softness as compared to January and February. And it was throughout most of the geography. And that seems to have turned around in April.

Great, okay. Thank you very much.

Your next question comes from the line of Kurt Wuhlber with J. P. Morgan.

Hi. Good morning, guys.

Hi.

A question on East Coast. You talked about lower selling margins and a little bit lower gross profit margin in that business. Can you talk about on the EBIT line, is their SG&A as a percent of sales different than yours? And maybe talk about the steps to improve margins in that business going forward, either leveraging your supplier relationships, etcetera?

East Coast is--I don't know how else to say it, one fine organization. And they do everything very well. And our role as the owner is to really support them. And if they--and the way we're going to do that is if they need the capital to expand, we're going to provide it without any question. And they do want to expand. And, so far as margins goes, they have historically had lower margins than we have. And how do they get those higher? Well, I think the principal way is growing the top line, growing the revenue line and increasing the leverage over the operating expenses, which is our historical way of helping companies grow. As they grow the revenues, then everything else gets better.

And in terms of vendor programs, sure, they will participate in those vendor programs that the corporate has if they want to. And sometimes they'll provide, and I think they already are providing, vendor programs that they have that might be advantageous to some of its sisters companies. So it's really a combination of a bunch of things. But there is no question in my mind, nor do I believe there is in East Coast's, that their margins will start rising and certainly be part of the overall growth of margins that's going on in Watsco and has been going on for some time.

So in terms of giving them more access to capital to grow the business, I mean, can you just talk specifically about maybe some of the initiatives that are ongoing there or--?

Well, this is three months.

Right.

And as I said earlier in the conversation, they haven't needed any capital. As a matter of fact, so far, they're spending less cash in the first quarter, which is always nice to see. But what they had occur to them is that one of the principal manufacturers said we have some additional market opportunities we'd like for you to develop. And so they took advantage of them and that's why the revenue growth has accelerated. This is mostly within their existing territorial area. But I think in the future what East Coast might decide to do, and, of course, we would support it, is to expand beyond their existing five-state area. And we would be only too happy to provide whatever they need.

Great. And then, were there any one-time costs in this quarter associated with East Coast, either with regard to inventory step-up--?

--Not that I'm aware of. Barry, was there anything like that?

No, Kurt. There's no unique costs in the quarter related to East Coast.

Either way, either it affects--increases or decreases income.

That's correct.

Okay. And then, just some general market commentary from you guys would be helpful in terms of--obviously, there has been a lot of price escalation in the product line this year. Do you think there has been any element of a pre-buy? And do you have a sense for inventory levels among the distributors right now? Do you feel pretty comfortable with just the overall market dynamics?

Well, I mean, I had an earlier question. We were--we had same store sales growth rates in the high single digits in January and February, which slowed down to low single digits in March. And now we're seeing April starting at low single digits, but I like the trend. I think that's coming back stronger. So from a same store sales point of view, I think it's returning already to healthier growth rates than we saw in March.

From an inventory point of view, we are at a very high level, but we wanted to be there. We expect a good selling season. Our Company is larger, so we're investing in more inventory. And so far as the channel goes, Kurt, I just--I couldn't comment on that. I don't know what OEMs are--their policy or other distributors. I just--I'd be guessing. But the kind of picture is the one I painted for you.

And then, do you have the financial metrics available for the distribution segment this quarter in terms of sales and EBIT? That's historical--you break that out relative to--?

--I thought we did that already.

Well, we break out the operating performance, but we'll file the segment data with our 10-Q, Kurt.

Okay, great. Thank you.

We'll talk about the same store data in terms of performance, that is, our distribution business.

Right. Okay, great.

Thanks, Kurt.

(Caller Instructions.) Your next question comes from the line of Keith Hughes with Robinson Humphrey.

I just had one question. Your comments on the business you saw in March. Do you have a feel whether that was economic driven or because temperatures were a little cooler in the Sunbelt during the month?

That's a great question, Keith, but not possible to answer. What I can tell you is that it was widespread. So I don't think it was geographically orientated, nor do I think it's really much to think about or focus on. We went from a high single digit to low single digits and that's already changing.

And your earlier comment, will East Coast--are you looking for expansion this year from East Coast or is that something we would see perhaps in the future?

Oh, this is whenever they want to go. This is a great organization and they have a great spirit and the change of ownership just went without a hitch from everything I can tell. And we just--we're just so happy with them.

Any plans to carry your private label lines at East Coast?

They haven't told us of anything like that. They're happy with the lines they represent.

Okay, thank you.

At this time, there are no further questions.

Well, great. Looking forward to the next quarter's conference. Thank you very much for attending. Bye.

Thank you. This concludes today's Watsco First Quarter Earnings Release Conference Call. You may now disconnect.