Q1 2021 Watsco Inc Earnings Call
Good morning, and welcome to the Watsco first quarter 2000, 22021 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is.
Being recorded on now.
Like to turn the conference over to Albert <unk>, Chairman and CEO. Please go ahead.
Good morning, everyone welcome to watch because the first quarter earnings call.
And this is counting on the charms chairman and CEO.
With me is a J, Amit who's the president and our two executive Vice President, Paul Johnson and Barry Logan.
Before we start our usual cautionary statement the car.
This call is forward looking statements as defined by the SEC laws and regulations that are made pursuant to the safe Harbor provisions of these various laws ultimate results may differ materially for the.
Forward looking statements.
Now onto our financial report.
The Kochi record first quarter results.
Earnings per share grew 93% two of record dollar of 39 per share.
Records for a set for sales.
Gross profit.
Gross margin on.
Operating income operating margin.
Net income and earnings per share.
Now these results for driven by strong sales growth made it higher selling margins along with improved operating efficiencies.
When we look at our product offering we achieved double digit sales growth in equipment non equipment and commercial refrigeration.
And in terms of geography growth rates during the quarter were similar for U S markets and international markets as a whole.
For H D C equipment residential sales increased 18% and commercial the equipment sales stabilized for.
Now trending more positively.
The more important this is not just about one quarter.
Over the last 12 months residential equipment sales in our U S markets of increased 15%.
And we believe meaningful market share gains have been achieved.
Yeah.
Looking for do we expect business to be strong and the 2021 will be another record year of performance for our company.
Any more color on watsco as the industry, leading technology continues to gain the adoption.
That leads to new customer acquisition, so we believe development of greater market share.
Now a few important trends are also continuing.
Active technology users continue to outpace growth rates of non users.
Customer attrition of them on active technology users is meaningfully lower compared to non users.
And our platform is used by contractors to make sales to homeowners gain more users.
That in turn double the number of home sales presentations and increased sales volumes.
The flow through our platforms called Oncall air and credit for copper.
Yeah.
We are happy with our progress, but we believe it is still early in terms of reaching the full potential of our technology investments.
Yeah.
We once again invite you to schedule, a zoom call with us and we can further explain that technology and its impact.
Moving along financially our balance sheet remains in pristine condition with only a small amount of debt.
We are excited to have closed two weeks ago on the acquisition of the temperature equipment Corporation also known as T E C.
This is a long established generationally owned the company headquartered in Chicago.
T E C adds 32 locations and approximately 300 million in revenue and establishes watsco is first major presence in the Midwest the United States.
When I say the T. C is a great company with a long and proud history there.
They are led by wonderful team of of entrepreneurs and we are honored to be part of their family.
There are also off to a strong start this year and we expect their results to be accretive to 2021 resolve.
We continue to look for other transactions for great businesses like T C.
Wow during our search we offer are well known culture.
That is to say again, when we search we offer a well known culture that respects and continues our company's distinct legacy and we support their plans for growth.
We think the watsco is of Great next step for family owned companies.
In our industry.
Lastly, a reminder, that we raised our dividends by 10% of April of 2021 to $7.80.
A follow up to the record cash flow of achieved in 2020.
We believe our dividend is a good reason til in watsco over the long term 2021 marks our 47th consecutive year of paying dividends and share we have increased our dividend 19 of the last 20 years.
From 10 cents per share and 20 in the year 2000.
Let me say that again from 10 cents per share and 20 in the year 2000 to two days on your rate of $7 a day you set.
Now with all of that out Paul a J, Paul Barry and I are happy to answer your questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on you touched on zone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Our first question comes from Josh <unk> Winski from Morgan Stanley. Please wondering Josh.
Good morning Al Good morning, guys. Thanks.
Thanks for thanks for taking the question I hope everyone's well.
I guess, maybe just to start out here.
We're about to approach a point in time, where you have Tom start to get kind of squarely and we lap.
Some of the some of the kind of early day challenges of Covid before the industry realize the things we're going to be pretty solid.
What is it that you think folks should focus on.
The selling season as maybe something that you have visibility into now or maybe a GAAP.
Key performance indicator over the next couple of months, because I would imagine yeah.
<unk> get easier and then tougher of volume will be all over the board, but what's your sense of kind of the the health of the market because in theory. You don't have you know more than I don't know four of five per cent of the market really fail any given point in time.
You guys are up quite a bit and you know low seasonal factor. So just trying to tie out the strength today that probably isn't sustainable.
On understanding the comps kind of get wonky here. So you know what are you guys seeing today that gives you some sense of the health of the business outside of the seasonal dynamic well, let me just remind you and then I'm going to turn the question over to Barry.
Debt over the last 12 months were up double digits in equipment sales.
The last 12 months.
So that should show you something in terms of kind of annuity Barry.
Yes, Josh again, good morning, well first I think there's so much data of floating around about the industry on the whole OEM data of shipment data and of course, our focus is once the data and.
And if you do go back and look at the last.
The last year in the summertime really the second and third quarter.
Things were choppy, but they went out of volatile I think the same store sales second quarter of last year were down 6%.
Not 16 of 26 six.
So yes, there is of comp that's kind of.
Better as we approach the selling season, but not the volatility of I think most others in the industry.
We are trying to tap dance about.
So so for US again all of our seasonality.
Is it was really now through October the Sunbelt, the Sun is out of summertime.
And of course the technology.
We have our partners early on partners.
Worked with over the last six months going into the season and beyond.
So it's kind of a really a very aggressive stance on on growth and share Inc.
The product launch going on that will be important as we get through the season and into next year also.
So just don't don't be too distracted by the amount of volatility of the others have had when you when you look at watsco going forward because of.
Volatility of simply was not as great for us last year.
Hey, Josh.
Okay.
Yes, I have to add Josh Josh if you know what's going on I know you do you know that we're a long term company also.
You know of course quarterly performance is important or reinvest in our business.
With the distinct goal of continuing to separate ourselves from our competition over the long over the long run that's.
That's the thesis of all of these technology investments we make.
And that's playing out.
More customers are using more of our technologies the customers that are using our technologies are growing faster, they're trading less they're just better customers and it's also a byproduct of that is the M&A story, there's more M&A conversations.
Our spurred by.
The technology that we have and being able to leverage it in other businesses. So I just want on just the focus remains the long term, it's not just the quarter to quarter of business.
Well said.
Got it that's helpful and maybe just a follow up on that technology point a J.
One of the things that's.
Kind of gotten a distributed out of that is you guys have been able to control inventory, perhaps a little bit better than in recent years I think broadly across the industry inventories look look a little high.
What's your sense on either availability out there from the.
And you know kind of fill rates and what maybe some of those high inventory levels that you know some of your competitors. They have a means for for price realization. If you know with folks find themselves with the little extra on their hands. This year.
Right.
I think Paul.
You bet.
Yeah.
As you know we've invested heavily in technology also internally and we have.
Invested millions and in being able to analyze our inventory and make sure that our inventories of reaching the right spot at the right time for the demand that's being created out there.
We work very closely with our Oems to make sure that our inventories are in line with the with what our demand is.
Yeah, it's been it's been a tough you know 12 to 15 months you know so far from the working those through but so far our Oems of worked very hard with us.
As far as what the industry has for inventory.
Yeah.
I think theres been a little increase in inventory among a lot of distributors out there I think of a little of that is more emotional than it is status truck, but I don't think of the inventories for the field right now are really out of line with what the what the demand would be true to most of the summer.
Given that this is going to be a normal year, if it's a normal year.
Got it okay.
I appreciate the color on that I'll pass on.
The next question is from Jeff Hammond from Keybanc capital markets aren't good enough.
Hey, good morning Al Good morning, everybody.
Hey, so just on the the margins really impressive on both SG&A and gross margins and I know you know just on <unk> can sometimes be a little bit different given given the seasonally light, but just walk me through what what drove the big increase seen in.
Gross margins and how sustainable you think that is as you go into the selling season.
Barry.
Sure Jeff So again, it's the progression so yeah on the margin story gross margin story, I think started improving last spring and carrying through.
On a 12 months later, so again I'm going to tell the 12 month stories, even though we're analyzing a quarter here because.
Because I think these have all been progressing progressions that have happened.
Over periods of time to where we are.
So it is what we call of selling margin as we've said in the in the script.
The only margin, meaning simply the market we met each other on pushing products through the channel. So that's the blocking and tackling exercise.
And through other marketplace Spice sales people.
We saw an increase in performance based pay this quarter for example, which is sharing commissions on sharing.
Some of that the.
Profitability with people that have earned it.
And that's part of yesterday, and the increase which is a good thing.
As far as the overall fixed cost structure again I use the word of progression. Once again, we've seen fixed cost stay relatively neutral over the last three or four quarters. This the ones that are different.
And it shows up on the incremental margin that was achieved this quarter.
Again for the last few quarters very similar achievement.
Okay, Great and then the the non equipment piece should had spent a number of years kind of flattish to growing low single digits and you've seen a couple of quarters of uptick in.
Just.
I'm wondering what's driving that and again.
How sustainable you feel that as you know because it seems like a lot of we're shifting a lot more to replace versus repair.
And you know I didn't know how much is you're still seeing a robust repair environment or is it you know parts associated with new construction et cetera. Thanks.
Paul.
Yeah.
I've never figured out you know when we switched from per to replace and back and forth I think yes, I think both of them have of dynamic to them later on.
Not related to each other.
You know, where we're replacing units are you know as a break.
But at the same time, there's another 100 million units out there that the RMP replace the daily maintenance and repair.
And so the the part sales are you now have started to pick up again, we've increased our focus obviously on those yeah yeah.
And that's obviously helped us start.
The start growing that market again too.
Hey, you want to add something to that.
He was going to say that's the right word Paul its focus.
I mean, all of our leadership.
<unk> is very focused on parts of supplies sales now and they're using data and they're using our of our optimization tools around pricing and inventory are and understanding customers' needs and getting the right product for the right place for the right time, the right price.
So the focus which is very proud to say of delivering some results.
Okay. Thanks, guys.
The next question is from Jeff Sprague from vertical research. Please go ahead of Morningstar.
Hey, good morning, good morning, everyone.
Thanks for taking the question I was wondering if we could talk.
A little bit more about consumer behavior, and maybe it was partially addressed the net repair versus replace but it looks like mix is still shifting higher and.
Maybe you could just provide a little bit of color on on what youre seeing the consumer appetite to pay more for energy efficiency and I Wonder if you.
With all of the price so that Oems are pushing through the channel on the flip side do you see any.
The kind of tension in the ability of the consumer to digest. Some of these price increases that are kind of through excellent question.
Barry or Paul either one of you.
Give us some color Jeff welcome back by the way Josh.
Well first you know the contractor is largely of the player that is going into a home or now going through our technology into the home and saying Here's what I think you should do to the homeowner.
And so that the contractors confidence what the what they're able to close the job for it is very critical and that drives a lot of other people sales, including us on the Oems.
So the contractor focus the customer facing technology that we talk about is where a lot of this conversation.
He is heading we think is the advocacy for high efficiency the.
On the capability of the other of the.
The contractor to go ahead and recommend it and install it.
And help his business as well and so that's that's the first the fundamentals I understand that the art technology.
What we're seeing in the market also.
Yes.
Almost one of the best credit environments, we've ever seen.
And when I say credit I mean, the credit we extend the contractors to go out and grow their business for us.
One of the very best metrics on past due receivables.
Write offs things like that which no one ever asked about.
Our credit profile with our customer right now is at an all time really performance level.
And again that goes to the confidence of the contractor that we think is going on and making these deals with homeowners.
And pulling through product and we're helping them do it so Paul I know you had some color as well yeah I do not.
Not just the high efficiency that saves the contract or the consumer more.
On the electric bill over the heating bill.
But it's also all of the comfort of attributes of you get some of the highest efficiency products. It's also the indoor air quality products that are <expletive>ociated with a lot of the high a high efficiency products.
Those are also having the having a big play with the consumer right now.
And we're hoping for for 50 years of following this debt. Finally this is a market segment, which is going to continue to grow indoor air quality in the indoor comfort.
Alright.
No.
Well it was kind of out of and I don't I think the the OEM price you know.
The question you have.
One of the those prices price those.
The pricing actions influence the ultimate outcomes.
Thank very much if you think about what.
Happens all the way through the channel with the profitability and pricing of an installed system. It's really goes back to the the contractor homeowner.
I think capability to get to get it done at that level.
Yeah, I was just going to ask as an add on you gave us the growth rate of above a minimum standard.
Could you share what percent of your revenue now where volumes are kind of above minimum <unk> level.
Yeah.
Yeah.
Jeff I appreciate the of curiosity on it's not something we put out there now [laughter].
Great I'll leave it there thanks guys.
For the minority of the business still so that's the good news.
But I will add just I guess on the technology Guy and Barry mentioned it earlier when contractors views are on call air platform to sell on the house.
Dynamic slips, it's no longer the minority of the systems they sell of our high efficiency the.
Majority of systems, they sell our high efficiency when they use the tool.
Pretty fascinating day now.
Interesting thanks, guys.
The next question is from David Manthey from Baird. Please go ahead.
David.
Hey, good morning of one.
Let's see so.
From a contract of customer standpoint could you tell us what number of customers you had at the end of the year 2020 versus year end 2019.
Do you want on though the number of customers we have.
Yes, I have to say.
Well, we we published those estimates and in our public we we we believer with doing business with about 90000 contractor businesses.
And that's grown it hasn't declined.
Okay and is the growing number of on the.
Sorry on the.
Penetration of Oncall Air what are the kind of getting at is in terms of the uptake there where do you stand today and.
I didn't talk about retention rates of your customers and so forth.
Could you tell us what kind of penetration you think you have with that technology today and.
Where that compares to a year ago.
Well certainly not even close to.
Two of them wherever you want it to be the.
Hey, Jay color that was good.
Say the same thing, it's a not enough [laughter], but growth rates are.
Almost triple digits.
It's a it's just about getting it in the front of more contractors showing on the value of the tool.
And when we do when we do get them to a demo of the tool that they almost all of it not almost always but they sign up a lot of the guidance. So the conversion rates from the demo to using the tool is very high and when they use the tool is a great win for them and of great win for us.
But it is still very small numbers relatively speaking.
Yeah.
Could you please tell us of its a single or double digit number.
Of of what I'm, sorry, I don't understand of the total percent of customers.
The percentage of what percentage of the.
Yeah at the thing what percent standard.
Good okay great.
Alright.
David just to help you I mean, it's in the press release of about $105 million of theirs.
This was driven on <unk>.
Half of our contractor into the channel you know on his books so to speak.
He was here on you.
And of using our tool and I think last year was over 300 million as the full year.
Okay. It sounds like a lot, but it is a fraction of of the overall installed market that we're servicing every day. So there's a lot of a lot of room ahead of us.
Okay.
And then finally on the the CEC.
E C acquisition.
How should we think about seasonality of that business should we be thinking sort of 30% in the second and third quarter and 20% first and for ballpark.
Okay.
Barry.
Yes, I would say, 30% second third fourth I'm, sorry, the second yeah, the 30% each second third fourth quarter and 10 per cent first quarter.
Okay. Thanks.
Thanks, a lot guys sure.
The next question is from Ryan Merkel from William Blair. Please go ahead.
Morning.
Hey, great quarter, great to see.
So first off tell us what youre seeing in the commercial market are you seeing kind of demand starting to come back here.
Paul Yes.
Yes, we're starting to see.
Gives me of definitely an uptick in the commercial rooftop units.
So.
Will it be at the at the same magnitude we saw the rush back on the residential we're not sure yet.
Okay.
Great.
Is is pushing for of retrofits and schools and things like that that would impact the.
The demand as well.
They're the right they are creating or have created incentives too.
To changed.
The change HVAC systems to be.
Uh huh.
Re installed and in the schools.
And I think eventually even larger buildings and schools.
Right. That's that's all part of the guidance.
Guidance, a big plan for the infrastructure, we're seeing in terms of how a.
The big block of money in there for school rehabilitation.
And also we're seeing other other legislations riding the moves to Congress, where.
Energy credits will go to commercial.
The buildings for improving there.
The energy efficiency also.
Yeah, I'm pretty optimistic about what's coming with commercial.
Yeah Okay.
If I can ask that question next but you answered it and that's also kind of state yet for eating trends and then you know a lot of population migration South again. So it seems to me HVAC industry is seeing some pretty long tailed trends that could be helpful. Yeah.
Yeah.
Okay.
And then on the E C deal with that also largely driven by you know the family wanting the technology and then the second question would be now that you've planted the flag. There do you think you could close more deals up north of that does that how it works.
The other two questions since it's Barry Logan the successfully Inc.
The succeeded with T C L.
I'll, let him answer that one.
Say successfully he was the appointment for watch.
Oh, Thanks for thanks Al Ryan the first on D. C. It's it's been a 20 year relationship not a non in the last 12 months. So we've.
We've been building this and working on this for a long time line and it is the family business and as such multi generations of family as well as multi siblings of ownership.
So I think they reached their own conclusion is the family of of the right timing and the right.
Desire to sell at the at a given time.
And so on and I'm talking to us exclusively for all of this time.
Complement buy them.
From them and technology is what really I think brought things into light.
As you know we bought the Philadelphia of carrier distributor of about two years ago. These guys or friends they've been peers for 2030 years, the family's known each other for a longer than that.
And that was one of the Pierce's primary reasons for selling as documented in our annual report last year.
And skip and Brian Peirce, our good friends in shared notes in and made my job easier of the last 12 months getting this done.
And technology has a lot to do with why both companies.
After 80 years joined once again, so I think it is.
I think I said earlier these kind of dynamics are not just these two theres more to come.
At least in terms of conversation and meaningful.
The long beyond just you know selling.
Selling the business since joining joining the watsco technology story.
And and then we've asked Skipton and his team to find other acquisition candidates in their markets.
As part of their growth plan is to go out and end user on our relationships in their local markets to grow.
And our plan is set.
And.
If you met skiff, which youre in Chicago also I'd be happy to introduce you to them.
You've made a very big personality that really can't wait to help.
The us grow an M. P C grow as well so it's sort of it's a great great acquisition.
Yeah.
I like to add to that technology, certainly is of interest of people that own businesses, but it's also the culture, we have a long track record of respecting the the.
The legacy of the companies that we buy we don't change their names, we don't manage them. They manage it themselves were in the background. We provide financial support to act all of these support whatever they call that they need but the work we're not about to even start to dissemble. This <expletive>emble what they've already accomplished.
On the contrary, we just want them to go.
And get bigger and support it that's a very big deal for people that have created great companies and don't want to see there.
The legacy of destroyed.
Yeah, I was just kind of add to the the previous question on commercial nobody does commercial better than the CEC and we are eager and excited that they they will teach the rest of our business units a lot on that front. So.
The waterfall.
Opportunity as well for the company.
I appreciate it thanks.
Again, if you have the question. Please press Star then one.
The next question is from Steve Tusa from Jpmorgan. Please go ahead.
Hi, Steve Hi, guys good morning.
Good morning, all.
Yeah.
Here, we show of Buenos Dias Yeah.
The the could you just give us an idea of what commercial actually get in the quarter. You noted it was kind of stabilizing getting better what what was commercial actually in the quarter year over year.
The equipment.
Paul.
Well, yes, commercial yeah as far as the variance was basically flat.
However, where a lot of that was influenced obviously by the larger applied type products not being flat they were still suffering a little bit but the unitary products.
Are definitely showing growth and we're starting to see some rebound on the Dr. Atkins somebody out there for.
Cash.
On the V. R F. Okay got it what was was was the traditional commute commercial unitary rooftop rooftops up flat to down of that.
It was a lot of your growth driven thereby the RF.
No actually of unitary it was up slightly okay. What what is the can you just give us an idea of kind of when the last OEM price increase that you see currently goes through what what kind of the the rough day to that currently.
Currently is.
June one.
June one okay is that the vast majority of those guys.
Yeah. It is yeah, they're they've all publicly announced so yesterday of June one and there's the one in April on wanting to make okay.
And was there actual price realization for you guys in the quarter.
And what was that.
Barry.
Yeah, there was a small amount of price in residential and in the market.
So you look at the.
18% overall growth rate a couple of percentage of price the rest of his units got it.
And then what is the supply status of the major Oems I mean are they all are.
Back up and running.
I know one or two had some supply issues of last year are they back up and running yet or and do you expect them to be back in full force by the time you know the.
Isn't really cranks up.
Go ahead Andrew.
Yeah, Okay, yeah yeah.
They all have had glitches with the.
During this entire period, but I would say right now probably in the best shape the team.
We still have some things that are we're not out of stock, but some things we have to work harder to obtain.
But are there is it is becoming a little bit more normalized now.
Okay.
And then one last one for you on what what was your what were your sales into housing like to out of I don't know, if you've kind of differentiate that between.
Builders and you know those bigger.
Housing customers can you differentiate between those two at all.
We really don't differentiate too much for that it's not of great percentage of the business.
Okay.
It hasn't grown that much yeah, sorry, Barry one more follow up there what was pricing.
Last year for you guys.
It was very very negligible state of last year.
Okay, Okay got it and as.
The year wound up it was almost on price in terms of the residential equipment business got it.
And I would <expletive>ume you still have some kind of a I guess, we're just trying to still parse out the strong selling margin was any of that due to kind of I mean price cost is the wrong way to put it for you guys. Because you basically paid for the units that is your cost but.
Was any of that due to kind of the inventory dynamics, you know stuff you're out on hand, but for all of these all of these price increases are going through like should we <expletive>ume the gross margin stays this way or is it kind of kind of narrow over the course of the year.
Oh, it's one of our major focus is again as the being able to maintain and grow our gross profit. So we've got a lot of initiatives in place to make sure that we can continue our growth in gross margin that's our plan.
Okay, great. Thanks for the color guys I really appreciate it.
Hmm.
The next question is from Chris Dankert from Longbow Research. Please go ahead good morning, Chris.
Hey morning, everybody.
I guess thinking about the the tools you've been talking about here is the real focus on developing new technology tools or is the opportunity of really more the deepening penetration at this point I'm just trying to think about where the incremental investment dollar goes is it really more on continuing to build out that tech team or is it more about the actual rollout.
At this point.
Good question a J.
It's both it's absolutely both are we I think the thoughts on fantastic platforms.
And the customers of ours that are using them are enjoying great success.
As for themselves and then they make them better customers for us and.
We are developing additional feature functionality on those platforms.
We're constantly assessing and trying and experimenting with new things that might also be good for our customers on our business. So it's just it's just who we are now we are you know it sounds cliche now maybe in 2020, one, but we'd like to think of ourselves of a technology company that just happens to sell H D. A C and so.
It's not going to stop we are constantly looking at and trying new things.
And when we say technology, that's really an umbrella term I mean people process technology and modernization and experimentation of innovation.
The technology the catch all for continuous improvement.
Got it got it thanks.
And then you know.
Sorry to bring it back to this Barry I think you've kind of teased the new product introduction later in the year of anything you can give us on that or are you talking about you know tools you guys are introducing or is this from from your suppliers you know new products of being rolled out.
Oh, I shouldn't tease because I don't want to show my hand, it's Chris.
[laughter].
No no word on.
Try and keep the off in the future here I guess.
Oh no no part of the part of any OEM relationship as defined either segments or products or features or benefits to launching of the market and gain share.
And so that's what we're doing and so we're going to keep it quiet, but the yep.
When we say product it really is going on in addressing segments of markets or for price points, where we feel there's market share opportunity in.
And we've got some very aggressive of partners that are helping us do that.
Got it well I can't blame the guy for trying thanks, so much guys and good luck here.
Yes.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Albert on them on Nauman for any closing remarks.
Well once again, thanks for your interest in our company.
We are as of a J David has said always focused on long term and.
We hope your interest will continue for the long term. So we will see the next quarter Goodbye.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
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