Watsco, Inc.

Good morning and welcome to the Watsco third quarter 2020 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Albert Nahmad, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone. Welcome to Wapsco's third 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. Now, before we start our cautionary statement, This conference call has four 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 four looking statements. Before I report, let me first wish that you and your families are healthy and safe. Now on to our report. Wattsco just completed an outstanding third quarter. EPS grew 25% to a record $2.76. Records were set for sales, gross profit, operating profit, operating margins, and net income. These results were driven by strong growth in our U.S. residential HVAC equipment business, which grew 19% during the quarter, and from operating efficiencies achieved throughout our network, as evidenced by the nominal change in SG&A. Homeowners clearly are investing in their homes as HVAC replacement sales have remained strong from early summer through today. We also believe that greater adoption of our Wattsco technologies has contributed to our results and led to gains in market share. Our best indication of this impact are two simple metrics. First, customers that use Wattsco Technologies are growing at a much faster rate than non-users. Second, we are experiencing minimal attrition among active users on a year-over-year basis. Now keeping this in mind, we continue to invest in our platforms and to drive for greater adoption by more customers. Here are some examples of our progress. Weekly users of our mobile apps have grown 31% since last year with over 100,000 downloads. E-commerce transactions have grown by 19% this year to nearly 1 million online orders, which is about a billion and a half dollars in an annual rate at the moment. Our annualized e-commerce sales rate is 32%, versus 29% at the end of last year, and in certain markets, the use of e-commerce is over 50%. Our dockside pickup services have expanded to more locations and now include non-contact payment functionality. This technology has only been available for a few months, and already over 12,000 orders were fulfilled during the quarter by more than 2,000 unique users. Two of our newer innovative platforms have gained momentum. We call them On-Call Air and the second one Credit for Comfort. These platforms provide digital connectivity for contractors and homeowners when making proposals and buying and financing replacement systems. Contractors using our What we call On-Call Air Platform provided digital proposals to over 39,000 households during the quarter and generated $114 million in sales, nearly double that of last year. Our Credit for Comfort Platform process doubled the number of digital financing applications, resulting in an 87% increase in third-party funded loans. Investments in inventory management software have also benefited us this year with inventory turns improving 25 basis points over last year and, of course, contributing to cash flow and operating efficiency. All of this is exciting, but we believe Wattsco technology are only scratching the surface of their full potential. As always, free feel the schedule of We also strengthened Moscow's balance sheet this quarter. We generated record operating cash flow of $373 million, which is far away a record for the year so far, and we have no debt at this time. Importantly, we have the capacity to make almost any size investment to grow in our business. And I always like to comment that we're in a $40 billion industry in which we are only $5 billion, so we have lots of room for growth. And then finally, one more very important thought. Our results are a testament to the efforts of our team to cross the Watsco network. We deeply appreciate their commitment. With that, AJ, Paul, Barry, and I are happy to answer your questions.

We will now begin the question and answer session. If you ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Josh Okawinski of Morgan Stanley.