Watsco, Inc.

Good morning and welcome to the Wattsco, Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in a 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 will be an opportunity to ask questions. To ask a question, you may press stars and one on your telephone keypad. To withdraw your question, please press stars and two. Please note that this event is being recorded. I would now like to turn the conference over to Albert Nahmad. Please go ahead, sir.

Morning, everyone. Welcome to Wattsco's second quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President, Paul Johnston, Executive Vice President, and Barry Logan, Executive Vice President. Before we start, our cautionary statement. This conference call is forward-looking statements as defined by SEC laws and regulations and are made in pursuit of the safe harbor provisions of these various laws. Ultimate results may differ materially from the 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 Watchco is experiencing a very busy summer selling season. There are many heroic people in our company making an exceptional effort to serve and protect customers by protecting themselves. Our most sincere thanks to them. We also want to express our appreciation to our OEM and vendor partners who have done extraordinary things to react to the accelerated ramp-up in demand. Since our last call in April, a steady recovery began in May, and acceleration to double-digit growth occurred in June and continues into July. The growth occurred across our footprint and was driven by our U.S. residential HDAC equipment business, which experienced 20-plus percent growth rates in June with similar trends in July. Homeowners are clearly investing in their homes as sales of replacement systems at higher efficiencies are accelerating. Sales of commercial HDAC refrigeration products, which were soft early on in the quarter, are now recovering. I'm also glad to report that our industry-leading technologies are contributing to our results and driving market share gains. Adoption and 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-users of our technology. Examples of our progress. Mobile app weekly average users has grown 34% over last year to more than 22,000, with 100,000 total downloads. New processes were introduced to provide rapid onboarding of e-commerce sales. So far this year, the number of e-commerce users has grown 14% in the number of transactions up by 12%. Our e-commerce sales run rate in June was 33% versus 29% in December 2019. And in certain markets, our e-commerce run rate is now over 50%. It kind of shows the potential of this e-commerce platform. We also intensified the promotion of two other innovative platforms. They are called On-Call, I'm sorry, let me say that again, On-Call Air and Credit for Comfort. These two platforms provide digital support for contractors and homeowners and connect proposals for buying product and for financing replacement systems. Our contractors' fulfillment activities which we refer to as curbside or dockside pickup expanded to more locations and soon will include contactless payment functionality. It is early, it's in the early days that adopting and growth has been terrific to this point. As always, feel free to schedule a Zoom call with us and we can further explain our technology in progress. We believe these capabilities provide a differentiated customer experience by engaging with us digitally in every way. 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. Saints Store SG&A declined 7% with few store closings and loss of business across our network. Our financial position is evidenced by our balance sheet strengthened during the quarter. We generated operating cash flow of $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 increased, 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, AJ, Paul, Barry, and I are happy to answer your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press stars and one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press stars and two. At this time, we'll pause momentarily to assemble our roster. and our first question will come from Josh Pokrowinski with Morgan Stanley. Please go ahead.