Q2 2020 Watsco Inc Earnings Call

Good morning, and welcome to the Watsco incorporated second quarter 2020 earnings Conference call. All participants will be in listen only mode. So do you need assistance. Please signal conference specialist by pressing the star <unk> followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one or your telephone keypad withdraw. Your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to Albert and all Ma'am. Please go ahead Sir.

Good morning, everyone.

Well coming towards the second quarter earnings call.

This is Alan Chairman and CEO with me is age economic President.

Johnson Executive Vice President Barry Logan Executive Vice President.

Before we start our cautionary statement.

Conference call as forward looking statements as defined by U.S.C.C. laws and regulations and are made pursuant to the safe Harbor provisions. So these very slow.

But results may differ materially and forward looking statements.

First and foremost.

I hope all of you and your families are healthy safe and managing well.

I'm pleased to say watsco is experiencing a very busy summer selling season. There are many here award people in our company.

Making an exceptional effort to server protect customers.

Protecting themselves.

Our most sincere thanks to that.

We also want to express our appreciation to our OEM and vendor partners, who have done extraordinary things to react to the accelerator wrap up in demand.

Since our last call in April study or recovery began in may.

An acceleration to double digit growth occurred in June and continues into July.

The growth occurred across our footprint it was driven by our U.S. presidential debates PSC equipment business.

What's your experience 20, plus.

Percent growth rates in June with similar trends in July.

Homeowners are clearly investing in their home sales are replaced assistance.

Higher efficiencies are accelerating.

Sales of commercial they see see refrigeration products, which were soft early on in the quarter pardon our recovery.

I'm also glad to report that our industry, leading technologies are contributing to our results and driving market share gains.

Adopt shouldn't use of our mobile apps and E commerce platforms have increased significantly as more customers use our technology.

Our best measurement of impact is that customers that use our technology generally are growing faster than non user of our technology.

Examples of our progress.

Mobile Wap weekly average users has grown 34% over last year to more than 22000.

With 100000 total downloads.

New process says were introduced her by rapid Onboarding of E Commerce sales.

So far this year, the number of ecommerce fuses growing 14% and the number of transactions.

12%.

Our ecommerce sales run rate in June was 33% versus 29% in December 2019, and it and in certain markets like E. Commerce run rate is now over 50%.

Kind of shows the potential of this ecommerce platform.

We also had testified to promotion to other innovative platform.

They are called on call I'm, sorry, I forgot encore air <unk> and credit for comfort.

These two platforms provide digital support for contractors and homeowners.

Connect proposals for buying.

Product after financing replacement system.

Our contractors fulfillment activities.

Which we refer to as curbside or dockside pick up expanded to more locations.

And soon will include contact less payment functionality.

It is early they sit in the early days, but adopting a growth has been terrific to this point.

As always feel free to schedule assume called with us and weaken further explain our technology and progress.

We believe these capabilities, providing differentiated customer experience by engaging with us digitally and every way.

We're also.

[laughter] excuse me, we also believe a new standard for contractor service has been established.

Which will serve us well in the long term.

Also during the quarter, we improved operating efficiency by reducing costs.

Same store as DNA declined 7% fuse store closings at a loss of business across our network.

Our financial position as evidenced by balancing strengthen during the quarter.

We generated operating cash flow $216 million, the highest of any quarter in our history.

Over the last 12 months, we've generated $529 million in cash flow versus net income of 285 million.

Dividends have been increase [laughter] and we have no debt at this time.

Further financial analysis of our second quarter is provided in our press release.

And now with that A.J., Paul Barry and I happy to answer your question.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one all your Touchtone phone if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too at the time, we'll pause momentarily to assemble roster.

And our first question will come from Josh Pokrzywinski with Morgan Stanley. Please go ahead Barney Josh.

Good morning, everyone as well, so I guess, yeah, clearly some stimulus payments there.

Helped put up a a very good quarter relative to maybe the broader macro but.

You know any regional commentary from from Paul that.

You can share either watsco level or maybe undersea observations that can help swear outside that performance.

Don't like to share regional for competitive reasons that Paul the second part of the question.

Have we seen any other trends in the industry well, obviously a demand is high.

And.

We're constantly are focused on trying to make sure that we can maintain the inventory to satisfy our customer needs.

That's been a battle for the last 60 days obviously.

Pretty much a.

You know demand has been a has been strong on the replacement side and and picking up again on the up on the supply side right now and we hope it continues.

Through the quarter.

Okay. Thanks, and then just on the on the technology initiatives, Yeah, our AJ.

I think most contractors at least Canada, the bigger more stable one and to use a couple of different brands, but are fairly sticky in that and not rotating around a lot.

I guess does that mean.

The share gains are outgrowth or however, you want to track the technology is it just doing more business with customers that are already doing something with watsco and just can do more or is it really causing folks do bring on new distributor relationship.

Asia, you want to answer that.

Yeah sure. It it's both I mean, we touch a lot of contractors in North America or some of them by lots of products from US every day send them by just a little bit of products from us every once in awhile.

Those those are all targets to get visibility and and see the technology and and action and what it can make for their businesses.

And that outreach to customers whether.

There are small customers of ours are not customers at all.

Getting then exposure to the attack helping them understand how different it is doing business with our company's versus our competition.

Is moving the needle.

So I guess, it's it's a say more and more specifically there are.

Small customer bar of ours doing more business with us and there are customers coming on board for the first time and the technology is driving a lot of that those conversations.

Another way to look at it might be Paul can you discuss share.

Yeah, I mean, it's good.

Yeah for the second quarter, we definitely had market share increases as you guys recognize the the industry.

Shipments were probably down in the 10% range.

For the second quarter and our residential sales were flat. So that's a pretty monumental move towards an increase in market share.

And then the front half of the years at the same numbers apply the market was down.

Mid single digits and Watsco, what basically was a was slightly up you know given what we did in the first quarter. So we're gaining share there.

Proud to say, we're gaining share in Canada, a those numbers come out faster than the U.S. numbers show.

We're becoming a force in Canada again, so I'm very happy to see everything that's a that's happening you know from Oh sure perspective.

Oh, that's helped in Colorado.

Our next question will come from Stephen Volkmann with Jefferies. Please go ahead Arnie Steven.

Hi, guys. Thanks for taking the question I'm curious if you could comment a little bit around gross margin I think that was a little better than some of those were expecting especially given I think your mix is shifting a little bit more toward equipment, which I would've thought would be a margin headwinds. So I'm just you know what's what's going on in gross.

Margin, how should we think about that spread going forward.

No it's remained strong.

Barrier, Paul somebody jump in with that one.

That's fair and good morning.

Right.

As equipment grades that are much faster rate algebraically. Our gross profit margin has impacted by that are in terms of what you see optically on the pace of the income statement.

Also as we get through selling season, and and a busy time at <unk> and making the efforts to sell products.

You know price and margin in cost as a and every day market by market local competitive landscape. There's not one answer. There's there's you know there's 50 answer there's 50 variables that are playing out every day so.

This year is showing some improvement over last year in terms of trend.

But that still there's a lot of work to do our margin a lot of work to do as we get through a there's this selling season and I look into next year and beyond.

Okay. Thanks, Barry is there any reason to think the second quarter was unusually a little bit better then and it would be or you know how do we think about the trajectory going forward.

No there's nothing nothing remarkable or unremarkable about the second quarter, Stephen that would or wouldn't really be commentary.

Okay. Thank you.

[noise]. Our next question will come from David mandate, but what's the Baird. Please go ahead.

David.

Hi, good morning, guys.

Oh I believe that you said June and July month to date.

The June all in July month to date were up 20% year on year first did I hear that right and second [laughter] in the context.

Same store daily sales for us.

That was good I enjoyed a very [laughter] sure well day, but yes, you heard right and then we did comment on on trends. We are adjusting for resale days those are you know.

But selling day trends that you're hearing and their remarks.

Okay, and organic and that was that was based on residential.

Air condition.

Well, yeah that was based in total though.

And a press release you read the double digit growth in June and ALS remarks, you hear residential up 20, that's you know that's what you're hearing.

Got it and that's that's a same store daily sales okay.

Second.

Looking at the operating expenses from the first to the second quarter is the reduction was impressive probably the most impressive we've seen in watsco its history sequentially like that.

You basically did $350 million more revenues 9 million lower opex sequentially I know the company's very decentralized, but are there any major cost buckets. You can talk about that drove that decline and that's that's a really unusual and a big drop.

Barry.

Hi, David well again, I I can't I invite you to our Friday June call. It 35 core managers across watsco.

I could what you'd hear is there is what you said decentralized challenges to.

Constantly reactor, what's going on in the market. So it was not a watsco a pen and paper assumption that it's 35 managers going out and prosecuting what they believe is important to take care of customers employees their markets, where revenues were untouched that needed to deal with a cost structure in that respect you had other markets.

Got were more heavily impacted the they cut costs and dealt with cost very aggressively in the short term.

And so the good news is this was all a local.

We need in reaction to what's going on in the marketplace, but that drove the costs.

As a as a parent company, we certainly have the conversation, but it's all driven in the field.

Yeah. It doesn't this age I decided to add though those that's probably about 35 leaders are so have just been tremendously impressive during that period and the 5000 6000 people that work for them.

It's unbelievable effort and and spirit and they deserve all the credit.

<unk>.

Yeah, it's really impressive a good luck guys.

Thank you.

I understand I mean, the corporate cost of Watsco corporate expenses is under 5% Oh, that's DNA. So.

The level of reductions going on in the field.

You know any reductions that you're seeing optically in terms of performances all driven by them. So again once again a credible on there.

And our next question will come from Jeff Hammond with Keybanc capital markets incorporated. Please go ahead.

Hi, Jeff Good morning, Hey, good morning.

So Paul mentioned, you know inventory you know being a challenge just talk about yeah, we picked up on our check some of the Oems you know kind of struggling to get to get product out the door and certainly it may be the expectation was demand was going to be weaker than it is so can you just speak about your your you know your ability to get.

Product you know how quickly that kinda normalizes and you know, how how you're able to kind of keep up with these strong demand trends.

Well, we can't speak for the Oh, yes, but I can tell you there doing their best it's a complicated to get their supply lines.

To accelerate but they've done it and they do in a pretty good job.

And I I don't think they're going to show a.

Lay off there, they're going to continue to support the demand and.

God bless them, they're just great suppliers.

And <unk>.

And I do not just not just the Oems, but also the regular vendors.

Yeah, we we kept up her continuous cadence of orders even in the down times of April and May We continued replenishing inventory, we didn't cancel any orders we follow through with it.

We have daily discussions with our primary Oems, we have weekly discussions with our vendors.

We're talking to them constantly about what their problems are and giving them lead time and and look at what we're doing what what our needs are going to be.

Also.

Barry and age you're mentioning the.

I'm more cohesive the opportunity that we've had you know with a 35 senior managers talking every Friday going to what their issues are.

We're seeing more and more intra company movement of the inventory as.

As one part of the country gets hot and the other one cools down on sales were able to move inventory intra company, but also a new feature that we've been able to do with our new technology inventory is intra watsco inventory, where we're actually moving orders core inventory amongst the watsco companies. So it's.

Toss it still tough yeah, we've had to do some substituting the product from time to time.

But.

Once again, I'm very very proud of what our Oems and our vendors have been able to provide us to date and we just help they can continue all the way through the season every one of our OEM to come to that.

To the two to the party [noise] there functioning as best they can vary and were very grateful for that.

Hopefully those are pool parties in Florida that they're coming to.

[laughter] seem child has jumped out just.

Just on the the comp Yeah, you talked about the residential trends can you just talk about the commercial piece of the business.

And you know any signs that as you know markets Kinda open back up a year or you're seeing some stabilization there.

Well I commented on that but I'll, let Paul go ahead.

Yeah, <unk> second quarter, obviously was what's actually brutal you know in the commercial side.

However is that states began to open up we started to see some some upticks, we're not back to zero, yet obviously on the commercial rooftop side of our business applied has remained strong and even commercial refrigeration. We've seen a we've seen good life in that in a month in July ism.

[noise], Okay, and then just last one can you give us the tech spend in the quarter either you know in total or.

Year on year, how much you expect that to be up but for the year. It is running the same.

And it will change from time to time as we see opportunities.

[music].

So don't think this the end of it.

I know that's a persistent question of years, we're going to add as much as needed. This any anything that we see it we're going to invest.

Some of it will work and some of it or not but that's the business were in innovation.

That's what watsco is an innovative business and we're going to we had the financial amazed and the to invest in it.

But there hasn't been any dramatic change from.

From recent spending.

Okay, great. Thanks, guys.

And our next question will come from Brett Linzey with vertical research partners. Please go ahead.

On a hey, good morning, guys, Hey, could you just update us on the efficiency mixed trends in the quarter any noticeable change whether it be makes up mix down by by homeowners just a little bit of color there would be great.

Hi, homeowner <unk>.

<unk> you sitting at Daytona.

Yeah, we've seen some data on that.

You know we've seen a mix up you know where.

We've seen a a bit more on the 16 situations here front.

It's it's not a remarkable change I guess a thing it's been.

The most amazing to me. This this second quarter was I didn't see any material change in system change outs.

That people were replacing the entire system they weren't just replacing outdoor unit. So.

The consumer.

I would never have guests. This was was acting fairly normal as far as what we've seen historically.

I think they now.

Just sorry, Barry I'll I'll add real quick just an interesting.

[music].

Data point on our technology, you mentioned on call there in the prepared remark that tool as about helping contract or sell into home <unk> building owners and it provides a very modern Barry feature rich.

They provide a beautiful modern experience he and the sales process and the the without going into two specific and it's early days, but the tool.

Hi efficiency failed.

Our are much higher on that cool and without the tool in other words, and helping sell bigger ticket higher margin products and higher efficiency system.

Interesting yeah. Thanks, and then maybe just shifting to price you know what are you seeing from a pricing standpoint.

Any intra intra quarter July price increases given the strength of the market here.

Oh have you seen any.

Not really haven't been any price increases on equipment side, there's been some commodity moves you know, which.

Our normal this time of the season, but nothing on the equipment side and nothing on the the finished good supply in part side.

Okay, great. Thanks, guys I'll pass along.

And our next question will come from Kristan card with Longbow Research. Please go ahead morning.

And more now morning, guys.

Got circling back to test you name for just a moment a again really impressive as David pointed out I guess just out of curiosity. How quick does some of that that spending have turned back on I know the mantra is you know we're investing for the next 10 years. So again I was also very surprised to see asked you may come down to the magnitude it did.

Just any comments on on hiring on what it takes to kind of maintain this level of growth you've seen in June July here.

Well.

So Barry you're the Futurist [laughter] give us your kids given the Crystal ball [laughter] as best you see it.

Oh gosh.

Well, yeah, I mean, the big picture. It obviously is that we're a labor driven company with you visited our stores. It's fine you know five to 20 people, helping customers and.

The extent that business is roaring, we will have more resources more cost dealing with that issue. So that's a good problem to have we're much of our labor.

It can be can be variable.

Or discretionary in a way that can be tied to the sales trend. So.

It will occur and we will see you guys Junaid I'll spend a creeping up as a business volume driver. That's that's that's part of being a distribution company and inherent in the distribution model.

Well, we've also challenge that 35 meters to look at.

Under every rock over the last two or three months and and determine what they can really change in terms of a mindset or sacredness or how do they react to the technology flow that's going on.

Alan Jane their status quo, that's where the parent company in our culture. We can I have an impact is challenging that status quo and all these markets. So that is going on as well.

I would expect there to be efficiencies that we can sustain well beyond just as this temporary state that were and how much and how material, we'll find out as we get through this year and that sort of being a futurist I know there were a better company. Today, you know 60 90 days into this and the cost struck.

Sure as a portion of that improvement that we made and and we'll see how much of it once we get into next year I wouldn't want to try to hazard a guess right now.

Yeah fair enough fair enough. Thanks for a for the color there.

And then again you both your Labor force and your customer Labor forces, you know little more specialized skills.

But again, we have seen some issues with guys not being able to the show up are being kind of enticed away from from certain jobs, just any difficulty in labor availability either for you or your customers, that's having any meaningful impact.

You don't know what our customers are having issues that way or not but I can tell you that aren't workforce has been just terrific.

And were keeping up with demand.

And we are very appreciative.

And we expect that to continue.

Sounds good well congrats on the quarter guys and thanks for detail.

Right.

Again, if you have a question. Please press Star then one our next question will come from Steve Tusa with JP Morgan Securities. Please save Hi, Steve Hey, guys. Good morning.

Congrats on now the execution and kind of a volatile quarter here.

I'm just trying to put that together <unk> did you have any significant difference in you know the performance of your suppliers on the equipment side in resi.

Now, they're all just doing the best they can and they're all.

No the said no what's going on there very supportive.

They were not there only customer they're supporting the entire work their entire customer base and they're just doing a great job I'm just couldn't say enough about the every one of them.

Yeah, I call it true true partnerships and you and you guys don't sell what kind of Lennox right.

No I don't know, but we sell any [laughter]. So unless you have some ideas we will.

[laughter] I don't have any ideas right now its size, it's all done little bit confusing.

So I guess.

If you get if youre kind of major brands are gaining share I never get I mean, as there is there like a in outlier in the industry, that's really struggling to kind of deliver product that you guys don't sell 'em 'cause Lennox already reported and you know there. They are claiming to have gained share you guys are flat they were down six im just trying to kind of.

He is everybody on the same boat do you feel like or are there. Some that are struggling more than others, well I would say that all major equipment brands that we have are doing well yep.

I mean, the issue is how quickly can they produce and get the product to us.

They're all doing well and they're all very supportive and couldn't be happier with.

Right.

How do you guys <unk> you know look at the inventory situation.

We know where do you inventories stand today and a and then what will you. How are you kind of play that out in the back half of the year. That's very good question because the inventory has come down.

But part of that is is the tools that weve.

Our technology group is a has come up with a very good technology I don't know how much detail you want to get to that but we're happy to.

Well at age I go head and talk about that.

Sure sure. So some of some of the or a lot of the inventory reduction is because of supply chain supply chain constraints and you are not affected but extreme demand, but also to the broader point or we are doing better managing inventory, we have new tools and technology at her teams that are sick.

Better focus.

Daily effort on what we call it nonperforming inventory moving low performers no.

Use that don't tell one place moving them around and I would say significant portion of the inventory reduction we've seen it's about getting our inventory position healthier.

And that should be sustained and continued.

Over the next.

I'm very.

Right. So so so you're kind of using these tools to maintain kind of a you know a lean inventory position, while you're delivering and and when you got to the back half of your there's not some need for a big kind of load up heading into next year, you feel comfortable with what you have.

Yeah, I wouldn't say lean I would say healthy right, yeah right product at the right place at the right time.

[music].

Yeah, I did that termed the term we used inventory effectiveness as opposed to inventory turns you know how effective is or inventory before we had these tools can you imagine trying to manage hundreds of thousands of skews and try to regulate or try to figure out where they should be in 600 branches.

Yeah, Yeah. The math is the math hurts your head and so the new tools that we have you know where we have meetings every day with our senior inventory management teams for every one of the watsco companies and.

Sure in their information sharing data among those people has been just invaluable.

When I look at the technology gains that we've made I.

For me personally inventories systems or just a magnificent.

And they're going to get better.

Because we haven't implemented the tools throughout the company, we just a partially through.

Great execution congrats thanks, Steve.

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

Well, let me just close with what's on everybody's mind the pandemic.

We truly with all of you to stay healthy and state.

We are staying home here as much as we can.

And.

Just want everybody to have the best possible outcome from this terrible virus.

By now thank you for attending.

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

[music].