Watsco Inc (WSO) 2014 Q1 法說會逐字稿

Good morning and welcome to the Watsco first quarter earnings conference call. (Operator Instructions).

Please note, this event is being recorded. I would now like to turn the conference over to Albert Nahmad, please go ahead.

Good morning everyone and welcome to our first quarter conference call. Where today, will be all good news. This is Albert Nahmad, President and CEO, with me is Barry Logan and Paul Johnston. As we always do, here's the cautionary statement.

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.

Watsco continued to perform very well during the first quarter, the momentum from 2013 is continuing. Sales, operating income, net income, earnings per share and cash flow, reached all time highs. We enjoyed another quarter of growing replacement demand and the continued movement towards higher efficiency systems.

The combination of sales growth, higher selling margins and improved operating efficiencies produced a 23% increase in earnings per share. Also, we have confidence in 2014 will be a very strong year of both earnings growth and cash flow. And, we are pleased to announce our dividends will increase by 50% to an annual rate of $2.40, effective with our payment in July.

Now for the details. Revenues grew 7% to a record $763 million. Domestic sales of residential HVAC equipment increased 13%, non-equipment products increased 6%, and commercial refrigeration products increased 2%.

Gross profits showed 7%, and gross margin improved 10 basis points. SG&A as a percentage of sales improved 30 basis points. Operating profit increased 16% and operating margins expanded 40 basis points. $25 million of operating cash flow was generated in the quarter, compared to a cash use of $17 million last year, a $42 million positive swing. Our debt to EBITDA ratio remains under one times and our debt to total cap ratio is 17%.

We will provide an Outlook for 2014 during the second quarter conference call when we have a look at trends in the selling season. Now with that said, Barry, Paul and I would be happy to answer your questions.

(Operator Instructions). Josh Pokrzywinski, MKM partners.

Hi, good morning guys.

Good morning, Josh.

Al, could you just talk a little bit about the progression through the quarter? Any interruptions related to weather and then exit rates as we get closer to the selling season here, for first question?

Good question, Josh. Yes, the weather impacted regions of our country, particularly the Northeast. We think that's temporary, but it did impact us. And I'm glad to see a think we'll recover from that as the year progresses.

If I look at the overall US equipment business, resi equipment business up 13%. Should I think of that is being something on the lower end to start the quarter and then progressing higher as we get into March? Or is that putting too fine a point on it?

Paul, you have a comment on that?

Yes, I think that's too fine a point, Josh. Because the volumes we're talking about in the first quarter as you know they accelerate during March. March is half of our sales, so naturally it did increase as the quarter went on.

And don't forget, Josh, this is a continuation of what we saw last year. So it's just continuously getting better.

And then, can you comment at all about how pricing has been on the resi side? Are you seeing OEMs coming in with price increases? How is that sticking? And I guess on a related point, I noticed you guys took in some more inventory. Was that in anticipation of more increases to come or just timing and build for seasonal demand?

Go ahead, Paul.

The price increases pretty much across the board had been announced in the fourth quarter. Once again for first quarter, we saw some of that stick, some of it obviously you have a harder time pushing it through. You have some longer term commitments to those contractors. As far as the inventory is concerned, our inventory pretty much is in line with our sales. It's up roughly 10% from first quarter of last year and the inventory turns remained pretty much in line. So when you have double digit growth in equipment, you're going to have a growth in inventory also.

Understood. And then just one last one for me. I know it's still a small part of your business and there's plenty of room to outgrow. Any comment on how the commercial business did and the sense of what you're seeing out there in the market, maybe more broadly?

Our commercial, wasn't widely exciting. It was basically, when you look at it in total it was flat. When we look at the individual companies we had, we probably had a little bit of shifting around due to some of the weather conditions that we had in the Northeast and the mid-Atlantic on some jobs that maybe we had a little bit of a delayed delivery there that's all.

In the Northeast. I would agree with that. I think the commercial is more impacted in the first quarter than certainly in the residential.

Impacted by the weather you said?

Yes. Because of the markets we're in, in the Northeast.

Got you. And there are signs now, much like residential, that is starting to improve as the weather turns?

Yes.

Excellent. Alright, thanks, guys.

Ryan Merkel, William Blair & Company.

Morning, Ryan.

Thanks, good morning everyone. Nice quarter.

Thanks.

So want to start off with a couple of questions on sales. Could you just give us the growth rate for the international markets in the quarter? Obviously the US was pretty darn good.

Pretty flat.

Pretty flat. Okay. Do you have the Canada number handy? I'm just curious --

We wouldn't break that out.

You wouldn't break it out. Okay. Alright. And then do you have the volume and price mix breakdown for that strong growth on the equipment side?

Go ahead Paul. I didn't know whether we should talk about those things, but go ahead you start.

(multiple speakers) -- give any detail on that, but we're --as we indicated in the release, we're seeing a stronger presence with above 13-SEER equipment sales, a higher efficiency product.

And as a matter of fact, with some of our business units, we'd have to go back to 2010 to see those sort of levels of higher efficiency products when we had the tax incentives.

Yes, the market is showing some good things.

Yes.

Just to answer it a little more directly, we did see double digit unit increases in the quarter. Again, which as Al said, is a real continuation of what we've been seeing for the last few quarters now.

Okay, great. And then last one for me. Gross margins, I'm pretty impressed you're able to continue to inch that up, especially given that equipment, which is lower margin, is growing faster. So what is it you're doing on the selling margin side to have those gross margins, or --

I think it's moving towards higher efficiency, most of --.

It's that and did the price increases in the OEs help you on the gross margin as well?

It always helps.

It always helps. Great. Well thanks guys. I'll jump back in queue.

Matt Duncan, Stephens Inc.

Good morning, Matt.

Good morning, Al. Good quarter. First thing I'm curious about is on the equipment side, is that still at this point mostly being replacement driven or do you feel like --

Yes, by far. I mean we are a replacement house. On an annual basis the new construction would be at most 10% to 15%. So what you're seeing is the unraveling of the demand for replacement.

Okay, so it's this pent up demand that we've all been expecting for some time it's just coming through?

Yes. The good news of that is new construction is cyclical. It goes up and it goes down. We don't like that. I mean we'll participate in it, but we really focus on the replacement business. That's our core business.

Sure. Looking -- maybe this is for Paul -- at the recent I guess settlement with the DOE on the regional energy efficiency standards. It looks like instead of January 1, 2015 there's now going to be a little bit of a grace period for the install of 13-SEER units in the Sun Belt.

Is that going to cause any noise in the market or is the market pretty much already shifted over the 14-SEER at this point anyway?

It is hard for me to talk for the market. I can talk for Watsco. But our people have been moving with or without the regional standards, so a lot of the movement has been going to the higher efficiency product, just for energy rebates that you get for utility rebates that you get or from energy star credits that the builders get in the Southeast.

We've been seeing a movement to. The really change is, you've got 18 months now, an extra 18 months to adjust your inventories to make sure you don't have any stranded inventory, which was --

Or in our case it doesn't matter because we can move our goods throughout the nation.

Yes, I guess that's the thought is you guys have the ability to move product around, but it maybe helped some of the regional guys a little bit.

Yes.

And then last thing, I know we're early in the selling season if we even want to say we're there yet since it's still been pretty cool in a lot of the South.

But as you look at equipment growth so far, is it -- your inventory was up, Paul I think you said 10% in the first quarter. You see a good sell through so far in the selling season?

I'll respond to that. April is showing mid-single digit growth rates in revenues and double digit EBIT growth rates.

Okay. Thank you, Al.

But we're early into April. It's through the first half of April. It's a continuation of what we saw in the first quarter.

Keith Hughes, SunTrust.

Morning, Keith.

How are you all doing? Our question is on the other HVAC accessory sales. A little bit better growth the last several quarters than we've seen in some time there. Can you talk about what's going on, how much of that market -- how much of that is potentially (tiered)?

I'll give you general comment. You'll see that grow whenever we start participating in new construction. That because of the offering that we have that serves the new construction in non-equipment. Paul, do you want embellish there?

The non-equipment part sales obviously are tied to -- the non-equipment, non-parts sales are the supply side of our business. And that's growing because of new construction.

The other equipment that we saw increasing, or the parts that we saw increasing, were pretty much related to some repair activity where -- particularly in the Mid-Atlantic all the way through the Northeast.

And then finally on refrigeration, any comments there, lower growth small segment for you, but any comments there of what we'd you'd see in the market in terms of trends (for the year).

There's some commodity pricing shifts that occurred with refrigerant. I wouldn't say that's a normalized performance for us. I think we have to wait until refrigeration -- refrigerant pricings, which has begun to stabilize. I think then we'll get a real feel for what growth rates we'll see in the future.

Winnie Clark, UBS.

Good morning. Could you talk about, you highlighted balancing the return of cash to shareholders with reinvestment in the business. Could you talk about the current M&A pipeline? I know that you have the option to purchase the additional 10% in carrier in July and you've indicated you are likely to do that. But anything you're seeing with independent distributors as well?

We get that question every quarter and the answer is always we do have a pipeline. We are in conversations constantly. And so that's the best I can do regarding that. And on the question of the option, I want to once again state that we will exercise that option in July to additional 10% of the original joint venture.

In terms of the dividend increase though and coming a bit earlier than we actually thought, we shouldn't read that as there's -- you're not seeing as much in the pipeline so you're moving more in the direction --

Not at all. I wouldn't read that into it at all. I've never been more optimistic about that side of the business. Because we reached a certain size where we have to do transactions that mean something to us and I'm optimistic we're going to get those down.

Okay, great. And then you've talked about the ductless opportunity. Any update there in the terms of the trends that you've been seeing?

More of the same. It's a high growth area, but still (small) in the overall scheme of things. And we intend to be a major player in it.

Have you ever provided -- do you provide the breakdown you're taking about? The higher efficiency and higher sales in the greater than 13-SEER product lines. Can you tell us how that's increased in terms of a percentage of the overall mix?

I'm not sure I understand the question.

Just what is the percentage of your mix that's in the higher SEER --

No, that's not something we would provide (to) the competition.

Okay, perfect. Thank you very much.

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

Hi, Al, good morning. First off, I think April is when your mobile app was going to go live and that the customers of Baker were going to be able to purchase from that app. Is there anything you can share with us on early returns on that effort?

I think not. I'm not sure that we gave the information correct. I don't know that we went live on e-commerce on Baker. I think we went -- we're still in development across the board on all of our subsidiaries in terms of e-commerce, or the latest version I should say. There's nothing to significant to report in e-commerce at all, David.

Okay.

Other than we're investing heavily to be the best and the strongest in the industry in e-commerce and any other related technology.

Okay and on related technologies, what about the business intelligence software, any update on --

Yes, it's a good question and we feel very strongly about it. And we're investing in it. And it's going to take years to get the kind of benefits we want, but we're getting incremental benefits as we develop it. And we want to lead the industry in it, because we're committed to that.

Okay. And then in terms of the price mix question that has been asked a number of ways and times here. Looking past equipment, which it sounds like you did get some benefit, what about parking supplies and commercial refrigeration? Is there any pricing component of those two segments of the business?

Paul you want to deal with that?

Yes, there are some pricing consideration there. Obviously the margins are higher when you sell replacement parts. But the opposite would hold true if you selling more supplies, generally don't have a very, very, very high margin to them. So they kind of balance each other out.

Okay. And then last question, if I can here. Could you share with us what percentage of carrier enterprise today is parts and supplies? I think when you bought it was less than 10% or when you went into --

That's not something we're going to report on either.

Are you still making progress though and there's still opportunity there?

Yes, I can answer that as affirmatively, yes.

Alright. And then would you share with us what percentage of your sales today is R-22? (22-gas)?

Well, we're going to do well over $4 billion this year. I don't think it's a material number.

So low single digit percentage?

Paul?

Yes, it's low single-digits. It's never been --

Very low.

Fair enough.

I mean I understand the question because it ties into the earlier question of refrigeration. It did affect the refrigeration profitability and revenue stream. But we see that as a temporary thing because prices have stabilized.

Walter Liptak, Global Hunter Securities.

Hi, thanks, good morning. And great quarter, especially on the leverage. And I apologize if I read this wrong, but my understanding was that there be a little bit more guidance for the full year. And I understand that you have some data points here --

That's a good issue. We struggle with that, but I don't want to let this great optimism that I seem to be enjoying right now get me carried away in a too early outlook putting together an outlook for the year.

So it was a struggle in my mind and our minds, but we decided not to provide it now. So we'll do it when we see something more concrete in the second quarter.

In your comments today you did give us some clues about what you're thinking --

-- yes, the first few weeks of April.

-- well over $4 billion in sales, is that we should be thinking about?

I think so. I can say that. Yes. I mean we feel confident about that (rate). I didn't realize that was in the disclosure, but okay.

And then double-digit EBIT growth --

I mean that's what we are experiencing now.

Okay, should we think that's something that could continue throughout the year?

I would like to hope so.

Can you give us -- double-digit can be a pretty big range, are you thinking 12%, 15%?

(I think we were fine to) comment I couldn't do better than what I've already done. We just feel good about it. I mean this is not new this year, it's really a continuation of what we saw last year.

And we feel that we've got the network to take advantage of any market developments. And then we also feel, although we don't have data enough to substantiate what I'm about to share, we're gaining share. Good. We think so too. Thank you and we'll talk to you --

You bet. Thanks for your interest.

Samuel Eisner, Goldman Sachs.

Thanks, good morning everyone.

Good morning. I haven't seen you at a restaurant in New York in a long time.

Sounds good. So in terms of just a couple of clean up questions here, just on the working capital this quarter. It seems as though you're just not investing as much, it was only about a usage of about $10 million or so. So just curious what the delta is year on year? Why was it so much of a build last year and why is there so little this year?

Barry, you got an answer to that?

Yes, again we pick our timing we make our (pre-season) program as we see it. And this year it was a little more -- less of a build coming into this year. And part of that, Sam, is the pricing. Last year's price increase was a little stronger than this year. So again it's just being the merchant and being effective when we make those decisions.

Understood. I appreciate that. And then just secondly on the guidance question that was just asked, just to follow up on that. In your mind, Al, you said that you struggled with giving guidance, you didn't want to get too carried away.

What about your business as it stands today? Is it different than this point last year, that doesn't allow you to give guidance?

Well we've done guidance before most of the time in the second quarter sometimes we do it in the first quarter. I just don't want to get carried away with my optimism. It's all good, there's nothing bad in what I'm saying.

All right, thanks so much.

This concludes our question and answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks.

Well once again, I just want to thank everyone for their interest in our company. And look forward to another positive, hopefully positive, next quarterly review, with you. Thanks again. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.