EarningsCall · WSO Q1 2021

spk19: Good morning and welcome to the Watsco first quarter 2020-2021 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 will be an opportunity to ask questions. Please note, this event is being recorded. I'd now like to turn the conference over to Albert Named, Chairman and CEO. Please go ahead.

spk15: Good morning, everyone. Welcome to Watts Coast First Quarter Earnings Call. And this is Al Namid, Chairman and CEO. With me is A.J. Namid, who is the President, and our two Executive Vice Presidents, Paul Johnson and Mary Logan. Before we start, our usual cautionary statement. The conference call is forward-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 and forward-looking statements. Now on to our financial report. Wattsco achieved record first quarter results. Earnings per share grew 93% to a record $1.39 per share. Records were set for sales, gross profits, gross margin, operating income, operating margin, net income, and earnings per share. Now these results were driven by strong sales growth made at 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 HVAC equipment, residential sales increased 18% and commercial equipment sales stabilized and are now trending more positively. But more important, this is not just about one quarter. Over the last 12 months, residential equipment sales in our U.S. markets have increased 15% and we believe meaningful market share gains have been achieved. Looking forward, we expect business to be strong, and that 2021 will be another record year of performance for our company. Adding more color, Watsco's industry-leading technology continues to gain adoption. That leads to new customer acquisition, and 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 among active technology users is meaningfully lower compared to non-users. And our platforms used by contractors to make sales to homeowners gain more users. That in turn doubled the number of at-home sales presentations and increased sales volumes that flow through our platforms called OnCallAir and Credit4Comfort. We are happy with our progress, but we believe it is still early in terms of reaching the full potential of our technology investments. We once again invite you to schedule a Zoom call with us, and we can further explain our 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 Temperature Equipment Corporation, also known as TEC. This is a long-established, generationally-owned company headquartered in Chicago. TEC adds 32 locations and approximately $300 million in revenue and establishes Wasco's first major presence in the Midwest United States. I must say that TEC is a great company with a long and proud history. They are led by a wonderful team of entrepreneurs and we are honored to be part of their family. They are also off to a strong start this year, and we expect their results to be accretive to 2021 results. We continue to look for other transactions for great businesses like TEC. While doing our search, we offer our well-known culture, That is to say, again, when we search, we offer a well-known culture that respects and continues a company's distinct legacy, and we support their plans for growth. We think that Watsco is a great next step for family-owned companies in our industry. Lastly, a reminder that we raised our dividends by 10% in April 2021 to $7.80. a follow-up to the record cash flow achieved in 2020. We believe our dividend is a good reason to own Wattsco over the long term. 2021 marks our 47th consecutive year paying dividends, and yet we have increased our dividends 19 of the last 20 years. From $0.10 per share in the year 2000, let me say that again, from $0.10 per share in the year 2000, to today's annual rate of $7.80. Now, with that, Al Paul, A.J. Paul Berry, and I are happy to answer your questions.

spk19: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone 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. Our first question comes from Josh Pokryzwinski from Morgan Stanley. Please go ahead. Morning, Josh.

spk05: Morning, Al. Morning, guys. Thanks for taking the question. Hope everyone's well. I guess maybe just to start out here, we're about to approach a point in time where comps start to get kind of squirrely and we lap some of the kind of early day challenges of COVID. before the industry realized that things were going to be pretty solid. What is it that you think folks should focus on this selling season? Is maybe, you know, something that you have visibility into now or, you know, maybe like a key performance indicator over the next couple months? Because I would imagine, you know, as comps get easier and then tougher, volume will be all over the board. But what's your sense of kind of the health of the market? Because in theory – You don't have more than, I don't know, 4% or 5% of the market really fail any given point in time, but you guys are up quite a bit in low seasonal factors. So just trying to tie out the strength today that probably isn't sustainable, understanding that comps kind of get wonky here. So what are you guys seeing today that gives you some sense of the health of the business outside of the seasonal dynamics?

spk15: Let me just remind you, and then I'm going to turn the question over to Barry, that over the last 12 months, we're up double digits in equipment sales. The last 12 months. So I should show you something in terms of continuity. Barry?

spk18: Yeah, Josh. Again, good morning. Well, first, I think there's so much data floating around about the industry as a whole, OEM data, shipment data, and of course, our focus is Watsco data and If you do go back and look at last year in the summertime, really the second and third quarter, things were choppy, but they were not volatile. I think same-store sales second quarter last year were down 6%, not 16%, not 26%, 6%. So, yes, there is a comp that's kind of better as we approach this selling season, but not the volatility that I think most others in the industry are trying to tap dance about. So for us, again, our seasonality is really now through October. The sun is out at summertime. And, of course, the technology, we have our partners, our OEM partners who we have worked with over the last six months going into this season and beyond with kind of really a very aggressive stance on growth and share gain. There's some product launch going on that will be important as we get through this season and into next year also. So, Josh, don't be too distracted by the amount of volatility that others have had when you look at Watsco going forward, because that volatility simply was not as great for us last year.

spk11: Josh, this is AJ. I have to add, Josh, if you know Watsco, and I know you do, you know that we're a long-term company also. So while quarterly performance is important, we invest in our business with the distinct goal of continuing to separate ourselves from our competition over the long run. That's the thesis of all 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 that are spurred by the technology that we have and being able to leverage it in other businesses. So I just want to just, just the focus remains the longterm. It's not just a quarter to quarter business.

spk13: Well said.

spk05: Got it. That's helpful. Maybe just to follow up on that technology point, AJ, you know, one of the things that's, kind of gotten distributed out of that is you guys have been able to control inventory perhaps a little bit better in recent years. I think broadly across the industry, inventories look a little high. What's your sense on either availability out there from the OEMs and kind of fill rates and what maybe some of those high inventory levels that some of your competitors may have means for price realization if folks find themselves with a little extra on their hands this year.

spk20: As you know, we've invested heavily in technology also internally, and we have invested millions in being able to analyze our inventory and make sure that our inventories are 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 what our demand is. Yeah, it's been a tough 12 to 15 months so far working those through, but so far our OEMs have worked very hard with us. As far as what the industry has for inventory, I think there's been a little increase in inventory among a lot of distributors out there. I think a little of that is more emotional than it is data struck, but I don't think the inventories in the field right now are really out of line with what the demand would be through most of the summer, given that this is going to be a normal year, if it's a normal year.

spk04: Got it. Okay. I appreciate the call on that. I'll pass it on.

spk19: The next question is from Jeff Hammond from KeyBank Capital Markets.

spk02: Hi, Jeff. Hey, morning, Al. Good morning, everybody.

spk03: Hey, so just on the margins, really impressive on both SG&A and gross margins. And I know this 1Q and 4Q can sometimes be a little bit different given the seasonal light. But just walk me through what drove the big increase in gross margins and how sustainable you think that is as you go into the selling season.

spk18: Barry? Sure, Jeff. Well, again, it's a progression. So, you know, the margin story, gross margin story, I think started improving last spring and carrying through, you know, 12 months later. So, again, I'm going to tell 12-month stories even though we're analyzing a quarter here because I think these have all been progressions that have happened over periods of time to where we are. So it is what we call selling margin, as we said in the script. Selling margin meaning simply the market we make on pushing products through the channel. So that's a blocking and tackling exercise. And throughout our marketplace by salespeople, we saw an increase in performance-based pay this quarter, for example, which is sharing commissions and sharing some of that profitability with people that have earned it. That's part of the SG&A increase, which is a good thing. As far as the overall fixed cost structure, again, I use the word progression once again. We've seen fixed costs stay relatively neutral over the last three or four quarters. This one's no different. And it shows up in the incremental margin that was achieved this quarter. Again, for the last few quarters, very similar achievement.

spk03: Okay, great. And then the non-equipment piece had spent a number of years kind of you know, flattish to growing low single digits, and you've seen a couple quarters of uptick, and just wondering what's driving that, and again, you know, how sustainable you feel that is, 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 know, you're still seeing a robust repair environment, or is it, you know, parts associated with new construction, et cetera.

spk20: Thanks. Paul? Yeah. You know, I've never figured out, you know, when we switch from repair to replace and back and forth. I think both of them have a dynamic to them that are not related to each other. You know, we're replacing units, you know, as they break. But at the same time, there's another 100 million units out there that aren't being replaced that do need maintenance and repair. And so the part sales, you know, have started to pick up again. We've increased our focus, obviously, in those. Yeah. And that's obviously helped us, you know, start growing that market again, too.

spk14: AJ, you want to add something to that?

spk11: I was going to say, that's the right word, Paul, it's focus. I mean, our leadership is very focused on parts and supplies sales now, and they're using data and they're using our optimization tools around pricing and inventory and understanding customers' needs and getting the right product at the right place at the right time at the right price. So it's focus, which is very proud to say, delivering some results.

spk24: Okay, thanks, guys.

spk19: The next question is from Jeff Sprague from Vertical Research. Please go ahead. Morning, Jeff.

spk21: 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 in that repair versus replace. But it looks like mix is still shifting higher, and maybe you could just provide a little bit of color on what you're seeing, the consumer appetite to pay more for energy efficiency. And I wonder if... You know, with all the price, though, that OEMs are pushing through the channel, on the flip side, do you see any, you know, kind of tension in the ability of the consumer to digest some of these price increases that are coming through?

spk15: Excellent question. Harry or Paul, either one of you.

spk18: Yeah, I'll give it some color. Jeff, welcome back, by the way, Jeff. Well, first, the contractor is largely the player that is going into a home or now going through our technology into a home and saying, here's what I think you should do to the homeowner. And so that contractor's confidence, what they're able to close the job for is very critical. And that drives a lot of other people's sales, including us in the OEMs. So that contractor focus, the customer-facing technology that we talk about is where a lot of this conversation happens. His heading, we think, is the advocacy for high efficiency, the capability of the contractor to go ahead and recommend and install it and help his business as well. And so that's first a fundamental to understand about our technology. What we're seeing in the market also is almost one of the best credit environments we've ever seen. And when I say credit, I mean the credit we extend to contractors to go out and grow their business. We're seeing one of the very best metrics on past due receivables, write-offs, things like that, which no one ever asked about. But our credit profile with our customer right now is an all-time, really, performance level. And, again, that goes to the confidence of the contractor that we think is going in and making these deals with homeowners and pulling through product, and we're helping them do it. So, Paul, I know you have some color as well.

spk20: Yeah, I do. It's not just the high efficiency that saves the consumer money on their electric bill or their heating bill, but it's also all the comfort attributes that you get from the high efficiency products. It's also the indoor air quality products that are associated with a lot of the high efficiency products. Those are also having a big play with the consumer right now. And we're hoping for for 50 years of following this, that, you know, finally this is a market segment which is going to continue to grow, indoor air quality and indoor comfort.

spk18: I was going to add, and I don't, I think the OEM price, you know, question you have, whether those pricing actions influence, you know, ultimate outcomes, I don't think very much. If you think about what happens all the way through the channel with the profitability and pricing of an installed system. It really goes back to that contractor, homeowner, I think, capability to get it done at that level.

spk21: I was just going to ask as an add-on. You gave us the growth rate of above minimum standard. Could you share what percent of your revenues now or volumes are kind of above minimum SEER levels?

spk18: Boy, Jeff, I appreciate the curiosity. It's not something we put out there now. No. Great. I'll leave it there then. Thanks, guys. It's the minority of the business still, so that's the good news.

spk11: But I will add, I guess I'm the technology guy, and Barry mentioned it earlier, when contractors use our on-call error platform to sell in the house, that dynamic flips. It's no longer the minority of the systems they sell are High efficiency is the majority of systems they sell are high efficiency when they use the tool. Pretty fascinating dynamic.

spk19: Interesting. Thanks, guys. The next question is from David Mancy from Baird. Please go ahead.

spk22: Good morning, David. Hey, good morning, everyone. Let's see. So from a contractor customer standpoint, could you tell us what number of customers you had at the end of the year 2020 versus year-end 2019?

spk15: Do you want to know the number of customers we have? Yes, sir. Is that what you said? Well, we published those estimates in our public. We believe we're doing business with about 90,000 contractor businesses, and that's grown. It hasn't declined.

spk22: Okay.

spk15: In the growing number.

spk22: On the... Sorry. On the, um, penetration of on-call air, what I'm kind of getting at is in terms of the uptake there, where do you stand today? And, um, I didn't talk about retention rates of, uh, your customers and so forth. Um, could, could you tell us what kind of penetration you think you have with that technology today and, um, uh, where that compares to a year ago?

spk15: Well, certainly not even close to, to, um, where we want it to be. AJ, color?

spk11: I was going to say the same thing. It's not enough, but growth rates are almost triple digits. So it's just about getting it in front of more contractors, showing them the value of the tool. And when we do get them to a demo of the tool, they almost always, not almost always, but they sign up a lot of the times. So the conversion rate from a demo to using the tool is very high. And when they use the tool, it's a great win for them and a great win for us.

spk22: But it's still very small numbers, relatively speaking. Could you at least tell us if it's a single or double-digit number?

spk11: Of what? I'm sorry, I don't understand. Of total customers? It's a percentage of our total customers. Yeah, it's a single percent, single digits. Good. Okay, great.

spk18: They just help you. It's in a press release. About $105 million of business was driven on behalf of our contractor into the channel on his books, so to speak. Using our tool. Using our tool. I think last year was over $300 million as a full year. Okay, it sounds like a lot, but it is a fraction of the overall installed market that we're servicing every day. So there's a lot of room ahead of us.

spk22: Okay. And then finally on the CEC 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 fourth ballpark?

spk18: Barry? Yeah, I would say 30% second, third, fourth, sorry, 30% each second, third, fourth quarter and 10% first quarter.

spk10: Okay. Thanks a lot, guys.

spk19: Sure. The next question is from Ryan Merkle from William Blair. Please go ahead.

spk06: Good morning. Hey, great quarter. Great to see. Thank you.

spk07: So first off, tell us what you're seeing in the commercial market. Are you seeing pent-up demand starting to come back here, Paul?

spk20: Yeah, we're starting to see a definite uptick in the commercial rooftop units. So will it be at the same magnitude that we saw the rush back on residential? We're not sure yet. Okay.

spk15: The federal government is pushing for retrofits in schools and things like that that would impact the demand as well. Right. They are creating or have created incentives to change HVAC systems to be – reinstalled in schools. And I think eventually to even larger buildings and schools.

spk20: Right. That's all part of Biden's big plan for the infrastructure. We're seeing that there's a big block of money in there for school rehabilitation. And also we're seeing other legislations starting to move to Congress where energy credits will go to commercial buildings for improving their energy efficiency also.

spk15: Yeah, I'm pretty optimistic about what's coming with commercial.

spk29: Yeah.

spk07: Okay. I was actually going to ask that question next, but you answered it, and I was also going to say the ESG trends and then 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. Okay. And then on the TEC deal, was that also largely driven by, you know, the family wanting, you know, the technology? And then the second question would be, now that you've planted a flag there, do you think you could close more deals up north? Is that how it works?

spk15: Well, those are two questions. And since Barry Logan has successfully succeeded with TEC, I'll let him answer that. When I say successfully, he was the point man for Watchmen.

spk18: Thanks, Al. Ryan, first on TEC, it's been a 20-year relationship, not in the last 12 months. So we've been building this and working on this for a long time. And it is a family business. And as such, multi-generations of family as well as multi-siblings of ownership. So I think they reached their own conclusion as a family of the right timing and the right desire to sell at a given time. And talking to us exclusively for all this time is a great compliment from them. And technology is what really, I think, brought things into light. As you know, we bought the Philadelphia carrier distributor about two years ago. These guys are friends. They've been peers for 20, 30 years. The family's known each other for longer than that. And that was one of Pierce's primary reasons for selling, as documented in our annual report last year. And Skip and Brian Pierce are good friends and shared notes and made my job easier the last 12 months getting this done. And technology has a lot to do with why both companies, after 80 years, joined Watsco. So I think, as Dave said earlier, these kind of dynamics are not just these two. There's more to come, at least in terms of conversation and meaningful dialogue beyond just, you know, selling the business. It's joining the Watska technology story. And then we've asked Skip and his team to find other acquisition candidates in their markets. Part of their growth plan is to go out and use their own relationships in their local markets to grow. And that plan is set. And if you met Skip, which you're in Chicago also, I'd be happy to introduce you to him. You meet a very big personality that really can't wait to help us grow and TEC grow as well. It's a great acquisition.

spk15: I'd like to add to that. Technology certainly is of interest to people that own businesses, but it's also the culture. We have a long track record of respecting the legacy of the companies that we buy. We don't change their names. We don't manage them. They manage it themselves. We're in the background. We provide financial support, technology support, whatever they call it they need, but we're not about to even start to disassemble what they've already accomplished. Quite 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 their legacy destroyed.

spk11: I was just going to add to the previous question on commercial. Nobody does commercial better than CEC, and we are eager and excited. They will teach the rest of our business units a lot on that front. So that's a wonderful opportunity as well for the company.

spk01: Appreciate it. Thanks.

spk19: Again, if you have a question, please press star, then 1. The next question is from Steve Tusa from J.P. Morgan. Please go ahead.

spk29: Hi, Steve. Hey, guys. Good morning.

spk13: Good morning.

spk31: Here we say buenos dias. Could you just give us an idea of what commercial actually did in the quarter? You noted it was kind of stabilized and getting better. What was commercial actually in the quarter? You over here. Equipment. Paul.

spk20: Well, yeah. Commercial, as far as a variance, was basically flat. Okay. However, a lot of that was influenced, obviously, by the larger applied type products not being flat. They're still suffering a little bit. But the unitary products are definitely showing growth, and we're starting to see some rebound on the VRF and some of the other products.

spk31: On the VRF. Okay. Got it. Was the traditional commercial unitary rooftops up flat to down? Is that – You know, was a lot of your growth driven there by VRF?

spk20: No, actually, Unitary, it was up slightly.

spk31: Okay. Can you just give us an idea of kind of when the last OEM price increase that you see currently goes through? What kind of the rough dates of that currently is?

spk26: June 1.

spk31: June 1. Okay. Is that the vast majority of those guys? Yes.

spk20: Yeah, it is. Yeah, they've all publicly announced. So, yes, there's June 1. There's one in April and one in May.

spk31: Okay. And was there actual price realization for you guys in the quarter? And what was that?

spk18: Barry? Yeah, there was a small amount of price in residential and the market. So you look at the 18%, you know, overall growth rate, a couple percent in price. The rest is units.

spk31: Got it. And then what is the supply status of the major OEMs? I mean, are they all back up and running? I know one or two had some supply issues last year. Are they back up and running yet? And do you expect them to be back in full force by the time, you know, the season really cranks up? Yes, they are.

spk20: Okay. Yes. You know, they all have had glitches, you know, with the, during this entire period, but I would say right now they're probably in the best shape that they've ever been. We still have some things that are, we're not out of stock, but some things we have to work harder to obtain. But it's becoming a little bit more normalized now.

spk31: Okay. And then one last one for you. What were your sales into housing like? I don't know if you kind of differentiate that between builders and those bigger housing customers. Can you differentiate between those two at all?

spk20: We really don't differentiate too much from that. It's not a great percentage of the business.

spk31: Yeah, okay. It hasn't grown that much. Sorry, Barry, one more follow-up there. What was pricing last year for you guys?

spk18: It was very negligible, Steve, last year. Okay, got it. As the year wound up, it was almost no price in terms of the residential equipment business. Got it.

spk31: And I would assume you still have some kind of, I guess we're just trying to still parse out the strong selling margin. I mean, 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 pay for the units. That is your cost. But was any of that due to kind of inventory dynamics, you know, stuff you had on hand before all these price increases are going through? Like, should we assume the gross margin stays this way or is it going to kind of narrow over the course of the year?

spk20: Well, it's one of our major focuses, again, is 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.

spk30: Okay. Great. Thanks for the call, guys. I really appreciate it.

spk19: The next question is from Chris Dankert from Longbow Research. Please go ahead.

spk09: Morning, Chris. Hey, morning, everybody. I guess thinking about the tools you've been talking about here, is the real focus on developing new technology tools or is the opportunity really more 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?

spk11: Good question. AJ? It's both. It's absolutely both. I think we've built some fantastic technology platforms and the customers that are using them are enjoying great success for themselves and they make them better customers for us. We are developing additional feature functionality on those platforms and we are constantly assessing and trying and experimenting with new things that might also be good for our customers and our business. It's just who we are now. It sounds cliche now, maybe in 2021, but We like to think of ourselves as a technology company that just happens to sell HVAC. And so it's not going to stop. We are just constantly looking at and trying new things. And when we say technology, you know, that's really an umbrella term. We mean people, process, technology, and modernization, and experimentation, and innovation. It's just technology is a catch-all for continuous improvement.

spk09: Got it. Got it. Thanks. And then, you know, sorry to interrupt, bring it back to this, Barry, but I think you kind of teased a new product introduction later in the year. Anything you can give us on that? Are you talking about, you know, tools you guys are introducing or is this from your suppliers that, you know, new products are being rolled out?

spk18: Well, I shouldn't have teased because I don't want to show my hand now.

spk08: Well, then we'll try and keep you honest in the future here, I guess.

spk18: That's right. No, part of any OEM relationship is defined as either segments or products or features or benefits to launch into the market and gain share. And so that's what we're doing, and so we're going to keep it quiet. But when we say product, it really is going out and addressing segments and markets or price points where we feel there's market share opportunity, and we've got some very aggressive partners that are helping us do that.

spk09: Got it. Well, I can't blame the guy for trying. Thanks so much, guys, and good luck here.

spk19: There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Albert Namad for any closing remarks.

spk15: Once again, thanks for your interest in our company. We are, as A.J. Namad has said, always focused on long-term, and we hope your interest will continue for the long-term. So we'll see you the next quarter. Bye-bye.

spk19: The conference has now concluded. Thank you for attending today's presentation you may now disconnect. Thank you. you you Thank you. Bye. Good morning and welcome to the Watsco first quarter 2021 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 will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Albert Named, Chairman and CEO. Please go ahead.

spk15: Good morning, everyone. Welcome to Wattsco's first quarter earnings call. And this is Al Namid, Chairman and CEO. With me is A.J. Namid, who is the President, and our two Executive Vice Presidents, Paul Johnson and Barry Logan. Before we start, our usual cautionary statement. The conference call is forward-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 and forward-looking statements. Now on to our financial report. Wattsco achieved record first quarter results. Earnings per share grew 93% to a record $1.39 per share. Records were set for sales, gross profits, gross margin, operating income, operating margin, net income, and earnings per share. Now these results were driven by strong sales growth made at 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 HVAC equipment, residential sales increased 18% and commercial equipment sales stabilized and are now trending more positively. But more important, this is not just about one quarter. Over the last 12 months, residential equipment sales in our U.S. markets have increased 15% and we believe meaningful market share gains have been achieved. Looking forward, we expect business to be strong, and that 2021 will be another record year of performance for our company. Adding more color, Wattsco's industry-leading technology continues to gain adoption. That leads to new customer acquisition, and 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 among active technology users is meaningfully lower compared to non-users, and our platforms used by contractors to make sales to homeowners gain more users. That, in turn, doubled the number of at-home sales presentations and increased sales volumes that flow through our platforms called OnCallAir and Credit4Comfort. We are happy with our progress, but we believe it is still early in terms of reaching the full potential of our technology investments. We once again invite you to schedule a Zoom call with us, and we can further explain our 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 Temperature Equipment Corporation, also known as TEC. This is a long-established, generationally-owned company headquartered in Chicago. TEC adds 32 locations and approximately $300 million in revenue and establishes Wattsco's first major presence in the Midwest United States. I must say that TEC is a great company with a long and proud history. They are led by a wonderful team of entrepreneurs and we are honored to be part of their family. They are also off to a strong start this year and we expect their results to be accretive to 2021 results. We continue to look for other transactions for great businesses like TEC. While doing our search, we offer our well-known culture That is to say again, when we search, we offer a well-known culture that respects and continues a company's distinct legacy, and we support your plans for growth. We think that Watsco is a great next step for family-owned companies in our industry. Lastly, a reminder that we raised our dividends by 10% in April 2021 to $7.80. a follow-up to the record cash flow achieved in 2020. We believe our dividend is a good reason to own Wattsco over the long term. 2021 marks our 47th consecutive year paying dividends, and yet we have increased our dividends 19 of the last 20 years. From $0.10 per share in the year 2000, let me say that again, from $0.10 per share in the year 2000, to today's annual rate of $7.80. Now, with that, Al Paul, A.J. Paul, Barry, and I are happy to answer your questions.

spk19: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone 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. Our first question comes from Josh Pokryzwinski from Morgan Stanley. Please go ahead.

spk05: Morning, Al. Morning, guys. Thanks for taking the question. Hope everyone's well. I guess maybe just to start out here, we're about to approach a point in time where comps start to get kind of squirrely and we lap some of the kind of early day challenges of COVID-19. before the industry realized that things were going to be pretty solid. What is it that you think folks should focus on this selling season? Is maybe something that you have visibility into now or maybe a key performance indicator over the next couple months? Because I would imagine as comps get easier and then tougher, volume will be all over the board. But what's your sense of kind of the health of the market? Because in theory – You don't have more than, I don't know, 4% or 5% of the market really fail any given point in time, but you guys are up quite a bit in low seasonal factors. So just trying to tie out the strength today that probably isn't sustainable, understanding that comps kind of get wonky here. So what are you guys seeing today that gives you some sense of the health of the business outside of the seasonal dynamics?

spk15: Let me just remind you, and then I'm going to turn the question over to Barry, that over the last 12 months, we're up double digits in equipment sales. The last 12 months. So I should show you something in terms of continuity. Barry?

spk18: Yeah, Josh. Again, good morning. Well, first, I think there's so much data floating around about the industry as a whole, OEM data, shipment data, and of course, our focus is Watsco data and If you do go back and look at last year in the summertime, really the second and third quarter, things were choppy, but they were not volatile. I think same-store sales second quarter last year were down 6%, not 16%, not 26%, 6%. So, yes, there is a comp that's kind of better as we approach this selling season, but not the volatility that I think most others in the industry are trying to tap dance about So for us, again, our seasonality is really now through October. The sun is out. It's summertime. And, of course, the technology, we have our partners, our OEM partners who we have worked with over the last six months going into this season and beyond with kind of really a very aggressive stance on growth and share gain. There's some product launch going on that will be important as we get through this season and into next year also. So, Josh, don't be too distracted by the amount of volatility that others have had when you look at Watsco going forward because that volatility simply was not as great for us last year. Josh, this is AJ.

spk11: I have to add, Josh, if you know Watsco, and I know you do, you know that we're a long-term company also. So while quarterly performance is important, we invest in our business with the distinct goal of continuing to separate ourselves from our competition over the long run. That's the thesis of all 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. It's also a byproduct of that is the M&A story. There's more M&A conversations that are spurred by the technology that we have and being able to leverage it in other businesses. The focus remains the long term. It's not just a quarter-to-quarter business.

spk13: Well said.

spk05: Got it. That's helpful. Maybe just to follow up on that technology point, AJ, one of the things that's kind of gotten distributed out of that is you guys have been able to control inventory, you know, perhaps a little bit better in recent years. I think broadly across the industry, you know, inventories look a little high. What's your sense on either availability out there from the OEMs and, you know, kind of fill rates and what maybe some of those high inventory levels that, you know, some of your competitors may have means for price realization if folks find themselves with a little extra on their hands this year.

spk20: As you know, we've invested heavily in technology also internally, and we have invested millions in being able to analyze our inventory and make sure that our inventories are 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 what our demand is. Yeah, it's been a tough 12 to 15 months so far working those through, but so far our OEMs have worked very hard with us. As far as what the industry has for inventory, I think there's been a little increase in inventory among a lot of distributors out there. I think a little of that is more emotional than it is data struck, but I don't think the inventories in the field right now are really out of line with what the demand would be through most of the summer, given that this is going to be a normal year, if it's a normal year.

spk04: Got it. Okay. I appreciate the callers on that. I'll pass it on.

spk19: The next question is from Jeff Hammond from KeyBank Capital Markets.

spk02: Hi, Jeff. Hey, morning, Al. Good morning, everybody.

spk03: Hey, so just on the margins, you know, really impressive on both, you know, SG&A and gross margins. And I know, you know, this 1Q and 4Q can sometimes be, you know, a little bit different given the seasonal light. But just walk me through what drove the big increase in gross margins and how sustainable you think that is as you go into the selling season.

spk18: Larry? Sure, Jeff. Well, again, it's a progression. So the gross margin story, I think, started improving last spring and carrying through 12 months later. So again, I'm going to tell 12-month stories, even though we're analyzing a quarter here, because I think these have all been progressions that have happened over periods of time to where we are. So it is what we call selling margin, as we said in the script. Selling margin meaning simply the market we make on pushing products through the channel. So that's a blocking and tackling exercise. And throughout our marketplace by salespeople, we saw an increase in performance-based pay this quarter, for example, which is sharing commissions and sharing some of that profitability with people that have earned it. That's part of the SG&A increase, which is a good thing. As far as the overall fixed cost structure, again, I use the word progression once again. We've seen fixed costs stay relatively neutral over the last three or four quarters. This one's no different. And it shows up in the incremental margin that was achieved this quarter. Again, for the last few quarters, very similar achievement.

spk03: Okay, great. And then the non-equipment piece had spent a number of years kind of you know, flattish to growing low single digits, and you've seen a couple quarters of uptick, and just wondering what's driving that, and again, you know, how sustainable you feel that is, 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 know, you're still seeing a robust repair environment, or is it, you know, parts associated with new construction, et cetera. Thanks.

spk20: Paul? Yeah. I've never figured out when we switch from repair to replace and back and forth. I think both of them have a dynamic to them that are not related to each other. We're replacing units as they break, but at the same time, there's another 100 million units out there that aren't being replaced that do need maintenance and repair. And so the part sales, you know, have started to pick up again. We've increased our focus, obviously, in those. Yeah. And that's obviously helped us, you know, start growing that market again, too.

spk14: AJ, you want to add something to that?

spk11: I was going to say, that's the right word, Paul, is focus. I mean, our leadership is very focused on parts and supplies sales now, and they're using data and they're using our optimization tools around pricing and inventory and understanding customers' needs and getting the right product at the right place at the right time at the right price. So it's focus, which is very proud to say, delivering some results.

spk24: Okay, thanks, guys.

spk19: The next question is from Jeff Sprague from Vertical Research. Please go ahead. Morning, Jeff.

spk21: Hey, good morning. Good morning, everyone. Um, thanks for taking the question. I was wondering if we could talk, uh, a little bit more about consumer behavior and maybe it was partially addressed in that repair versus replace, but, uh, it looks like mix is still shifting higher and, um, maybe you could just provide a little bit of color on, on what you're seeing the consumer appetite to pay more for energy efficiency. And I wonder if, uh, You know, with all the price, though, that OEMs are pushing through the channel, on the flip side, do you see any, you know, kind of tension in the ability of the consumer to digest some of these price increases that are coming through?

spk15: Excellent question. Harry or Paul, either one of you.

spk18: Yeah, I'll give it some color. Jeff, welcome back, by the way, Jeff. Well, first, the contractor is largely the player that is going into a home or now going through our technology into a home and saying, here's what I think you should do to the homeowner. And so that contractor's confidence, what they're able to close the job for is very critical. And that drives a lot of other people's sales, including us in the OEMs. So that contractor focus, the customer-facing technology that we talk about is where a lot of this conversation happens. is heading, we think, is the advocacy for high efficiency, the capability of the contractor to go ahead and recommend and install it and help his business as well. And so that's first a fundamental to understand about our technology. What we're seeing in the market also is almost one of the best credit environments we've ever seen. And when I say credit, I mean the credit we extend to contractors to go out and grow their business. We're seeing one of the very best metrics on past due receivables, write-offs, things like that, which no one ever asked about. But our credit profile with our customer right now is an all-time, really, performance level. And, again, that goes to the confidence of the contractor that we think is going in and making these deals with homeowners and pulling through product, and we're helping them do it. So, Paul, I know you have some color as well.

spk20: Yeah, I do. It's not just the high efficiency that saves the consumer money on their electric bill or their heating bill, but it's also all the comfort attributes that you get from the high efficiency products. It's also the indoor air quality products that are associated with a lot of the high efficiency products. Those are also having a big play with the consumer right now. And we're hoping for for 50 years of following this, that finally this is a market segment which is going to continue to grow, indoor air quality and indoor comfort.

spk18: I was going to add, and I think the OEM price question you have, whether those pricing actions influence ultimate outcomes, I don't think very much. If you think about what happens all the way through the channel with the profitability and pricing of an installed system. It really goes back to that contractor, homeowner, I think, capability to get it done at that level.

spk21: Yeah, I was just going to ask as an add-on. You gave us the growth rate of above minimum standard. Could you share what percent of your revenues now or volumes are kind of above minimum SEER levels?

spk18: Boy, Jeff, I appreciate the curiosity. It's not something we put out there now. No. Great. I'll leave it there then. Thanks, guys. It's the minority of the business still, so that's the good news.

spk11: But I will add, just I guess I'm the technology guy, and Barry mentioned it earlier, when contractors use our on-call error platform to sell in the house, that dynamic flips. It's no longer the minority of the systems they sell are High efficiency is the majority of systems they sell are high efficiency when they use the tool. Pretty fascinating dynamic.

spk19: Interesting. Thanks, guys. The next question is from David Mancy from Baird. Please go ahead.

spk22: Good morning, David. Hey, good morning, everyone. Let's see. So from a contractor customer standpoint, can you tell us what number of customers you had at the end of the year 2020 versus year-end 2019?

spk15: Do you want to know the number of customers we have? Yes, sir. Is that what you said? Well, we published those estimates in our public. We believe we're doing business with about 90,000 contractor businesses, and that's grown. It hasn't declined.

spk22: Okay.

spk15: In the growing number.

spk22: On the... On the penetration of on-call air, what I'm kind of getting at is in terms of the uptake there, where do you stand today? I think you talked 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?

spk15: Well, certainly not even close to that. where we want it to be. AJ, color?

spk11: I was going to say the same thing. It's not enough, but growth rates are almost triple digits. So it's just about getting it in front of more contractors, showing them the value of the tool. And when we do get them to a demo of the tool, they almost always, not almost always, but they sign up a lot of the times. So the conversion rate from a demo to using the tool is very high. And when they use the tool, it's a great win for them and a great win for us.

spk22: But it's still very small numbers, relatively speaking. Could you at least tell us if it's a single or double-digit number?

spk11: Of what? I'm sorry, I don't understand. Of total customers? It's a percentage of our total customers. Yeah, it's a single percent, single digits. Good. Okay, great.

spk18: They just help you. It's in the press release. About $105 million of business was driven on behalf of our contractor into the channel on his books, so to speak. Using our tool. Using our tool. I think last year was over $300 million as a full year. Okay, it sounds like a lot, but it is a fraction of the overall installed market that we're servicing every day. So there's a lot of room ahead of us.

spk22: Okay. And then finally on the TEC 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 fourth ballpark? Barry.

spk18: Yeah, I would say 30% second, third, fourth, sorry, 30% each second, third, fourth quarter and 10% first quarter.

spk10: Okay. Thanks a lot, guys.

spk19: Sure. The next question is from Ryan Merkle from William Blair. Please go ahead.

spk06: Good morning. Hey, great quarter. Great to see. Thank you.

spk07: So first off, tell us what you're seeing in the commercial market. Are you seeing pent-up demand starting to come back here, Paul?

spk20: Yeah, we're starting to see a definite uptick in the commercial rooftop units. So will it be at the same magnitude that we saw the rush back on residential? We're not sure yet. Okay.

spk15: The federal government is pushing for retrofits in schools and things like that that would impact the demand as well. Right. They are creating or have created incentives to change HVAC systems to be – reinstalled in schools. And I think eventually to even larger buildings and schools.

spk20: Right. That's all part of Biden's big plan for the infrastructure. We're seeing that there's a big block of money in there for school rehabilitation. And also we're seeing other legislations starting to move to Congress where energy credits will go to commercial buildings for improving their energy efficiency also.

spk15: Yeah, I'm pretty optimistic about what's coming with commercial.

spk29: Yeah.

spk07: Okay. I was actually going to ask that question next, but you answered it. And I was also going to say the ESG trends and then 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. Okay. And then on the TEC deal, was that also largely driven by, you know, the family wanting, you know, the technology? And then the second question would be, now that you've planted a flag there, do you think you could close more deals up north? Is that how it works?

spk15: Well, those are two questions. And since Barry Logan has successfully succeeded with TEC, I'll let him answer that. When I say successfully, he was the point man for Watchmen.

spk18: Thanks, Al. Ryan, first on TEC, it's been a 20-year relationship, not in the last 12 months. So we've been building this and working on this for a long time. And it is a family business. And as such, multi-generations of family as well as multi-siblings of ownership. So I think they reached their own conclusion as a family of the right timing and the right desire to sell at a given time. And talking to us exclusively for all this time is a great compliment from them. And technology is what really, I think, brought things into light. As you know, we bought the Philadelphia carrier distributor about two years ago. These guys are friends. They've been peers for 20, 30 years. The family's known each other for longer than that. And that was one of Pierce's primary reasons for selling, as documented in our annual report last year. And Skip and Brian Pierce are good friends and shared notes and made my job easier the last 12 months getting this done. And technology has a lot to do with why both companies, after 80 years, joined Watsco. So I think, as Dave said earlier, these kind of dynamics are not just these two. There's more to come, at least in terms of conversation and meaningful dialogue beyond just, you know, selling the business. It's joining the Watsco technology story. And then we've asked Skip and his team to find other acquisition candidates in their markets. Part of their growth plan is to go out and use their own relationships in their local markets to grow. And that plan is set. And if you met Skip, which you're in Chicago also, I'd be happy to introduce you to him. You'd meet a very big personality that really can't wait to help us grow and TEC grow as well. It's a great acquisition.

spk15: I'd like to add to that. Technology certainly is of interest to people that own businesses, but it's also the culture. We have a long track record of respecting the legacy of the companies that we buy. We don't change their names. We don't manage them. They manage it themselves. We're in the background. We provide financial support, technology support, whatever they call it they need, but we're not about to even start to disassemble what they've already accomplished. Quite 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 their legacy destroyed.

spk11: I was just going to add to the previous question on commercial. Nobody does commercial better than CEC, and we're eager and excited. They will teach the rest of our business units a lot on that front. So that's a wonderful opportunity as well for the company.

spk01: Appreciate it. Thanks.

spk19: Again, if you have a question, please press star, then 1. The next question is from Steve Tusa from J.P. Morgan. Please go ahead.

spk29: Hi, Steve. Hey, guys. Good morning.

spk13: Good morning.

spk31: Here we say buenos dias. Yeah. Could you just give us an idea of what commercial actually did in the quarter? You noted it was kind of, you know, stabilized and getting better. What was commercial actually in the quarter year over year? Equipment.

spk23: All.

spk20: Well, yeah. Commercial, as far as a variance, was basically flat. Okay. However, a lot of that was influenced, obviously, by the larger applied type products not being flat. They're still suffering a little bit. But the unitary products are definitely showing growth, and we're starting to see some rebound on the VRF and some of the other products.

spk31: On the VRF. Okay. Got it. Was the traditional commercial unitary rooftops up flat to down? Is that – You know, was a lot of your growth driven there by VRF?

spk20: No, actually, Unitary, it was up slightly.

spk31: Okay. Can you just give us an idea of kind of when the last OEM price increase that you see currently goes through? What kind of the rough dates of that currently is?

spk26: June 1.

spk31: June 1. Okay. Is that the vast majority of those guys? Yes.

spk20: Yeah, it is. Yeah, they've all publicly announced. So, yes, there's June 1. There's one in April and one in May.

spk31: Okay. And was there actual price realization for you guys in the quarter? And what was that?

spk18: Barry? Yeah, there was a small amount of price in residential and the market. So you look at the 18%, you know, overall growth rate, a couple percent in price. The rest is units.

spk31: Got it. And then what is the supply status of the major OEMs? I mean, are they all back up and running? I know one or two had some supply issues last year. Are they back up and running yet? And do you expect them to be back in full force by the time, you know, the season really cranks up? Yes, they are.

spk20: Okay. Yes, you know, they all have had glitches, you know, with COVID. during this entire period, but I would say right now they're probably in the best shape that they've ever been. We still have some things that are, we're not out of stock, but some things we have to work harder to obtain. But it's becoming a little bit more normalized now.