Watsco, Inc.

Good day and welcome to the Wasco fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. I would now like to turn the conference over to Albert Nahmad, CEO. Please go ahead.

Good morning, everyone. Hope everyone is healthy and safe, and welcome to Wattsco's Fourth 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, also Executive Vice President. Now, as we normally do, before we start, here is our cautionary statement. The conference call has... forward-looking statements as defined by SEC laws and regulators that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statement. Now on to our financial report. Wasco produced another record year with sales, net income, and earnings per share reaching record levels. We generated record cash flow of $534 million during the year, well in excess of our goal of generating cash flow greater than net income. This further strengthened our balance sheet, which is now debt-free and provides us the capacity to make almost any size investment to grow our business. We also announced this morning a 10% increase in our annual dividend to $7.80 per share. That reflects our confidence in our business. 2020 results were driven by steady growth with market share gains in our U.S. residential HVAC equipment business, which grew 10% for the year and 17% during the fourth quarter. Homeowners continue to invest in their homes as replacement sales at higher efficiencies remain strong from early summer Looking long term, we see opportunity to be a significant participant and contributor in efforts to address climate change. Sales of high-efficiency products have long been a component of our business and have grown steadily in our sales mix over the past decade. This is an interesting data point. There are over 110 million installed HVAC systems in the United States, many of which are operating under old efficiency standards that resulted for the user in higher energy use and cost to them. It's important to note we will explore and evaluate impactful opportunities to make progress in our marketplace. We believe the combination of Wattsco's technology platforms, industry-leading scale, access to capital, customer relationships, and unrivalled OEM relationships provide a strong foundation and long-term benefit for all stakeholders involved. We also continue to invest in our industry-leading technology platforms, leading to Greater adoption, new customer acquisition, and market share gains. User growth on WatchGo's e-commerce platform, a good indicator of overall tech adoption, was up 20% during 2020. This is important as sales growth rates for customers that are active users uppace growth rates of non-users. Also, customer attrition among active users is a fraction of non-users, another good indicator of effectiveness. Now, some more detailed examples of our progress. Weekly users of our mobile apps increased 27% in 2020 with over 120,000 downloads. The number of e-commerce transactions grew 20% this year to 1.2 million, Online Orders. Our annualized e-commerce sales run rate is 33% versus 31% at the end of last year. In certain markets, it's over 50%. Our curbside or dockside pickup services expanded to more locations and now includes no contact payment functionality. The technology has only been available since this summer and already over 22,000 orders were fulfilled by more than 3,000 unique users. Two of our newer innovative platforms gained momentum in 2020. We call them On-Call Air and Credit for Comfort. These platforms help digitize the relationship between contractors and homeowners when buying and financing replacement HVAC systems. On-call air is growing exponentially. Contract has provided digital proposals to over 109,000 households using the tool during last year and generated nearly $350 million in gross merchandise value for our customers, an 89% increase over last year. and Credit for Comfort processed 40% more digital financing applications in 2020 versus 2019, resulting in more than 180% increase in third-party funded loans. This tool helps homeowners afford much-needed HVAC systems. Investments in inventory management software have also benefited the company, yielding lower inventory, improved turns, in contributing to our record cash flow and operating efficiency. These examples are exciting. We believe it's still early in terms of reaching the full potential of our technology investments. As always, feel free to schedule a Zoom call with us and we can further explain our technology and its progress. Now, one very important thought as we end this prepared remarks. Our 2020 results are a testament to the efforts of our valued employees across the Weltsco network. We deeply appreciate their commitment. With that, AJ, Paul, Barry, and I are happy to answer your questions. Elizabeth?

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, Please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Steven Volkman of Jefferies. Please go ahead.