Watsco, Inc.

Good morning and welcome to the Wattsco First Quarter 2022 Earnings Conference 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. 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 Namad, CEO and Chairman. Please go ahead. Albert Namad, CEO and Chairman.

Good morning, everyone. Welcome to our first quarter earnings call. And as she said, this is Al Namad, Chairman and CEO. With me is A.J. Namad, who is the President, and Paul Johnson, Barry Logan, and Rick Gomez. Now, before we start, our cautionary statement as usual. This conference call has 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 from the forward-looking statements. Well, now that that's over, let me report that we had another exceptional quarter New records were set on virtually every measurement of performance. Earnings per share jumped 109% to a record $2.90 per share. Sales grew 34% to a record $1.52 billion. And operating income increased 109% to a record $171 million. Gross margins expanded. And that, along with improved operating efficiencies, led to record operating profit as well as operating margins, which expanded 400 basis points to a record 11.2%. Now, this is important. The sales growth was strong and consistent across all markets and product groups. Also noted is that companies that we acquired during the past year also performed significantly at record levels. The reason we like that is that we believe that shows, once again, that Wattsco is a great home for family-owned businesses. We sustain their culture, invest in people, and provide technology to secure and build upon their very great legends. Also, please note that the quarter's results are all the more impressive, giving the strong comparison from a year ago. A year ago was very strong, and this year is even stronger. While it's early in the year, we are encouraged by this terrific start and by current demand trends. Let me say that again. We are encouraged by terrific start and by current demand trends. And we think that 2002-2022 should be another record year for Wattsco. Looking beyond sales and profits, it is important to highlight some of the important catalysts going on, both in the short term and the long term. and we emphasize, as we always do, the long term. The industry is still experiencing inflationary pressures, and OEMs have recently announced additional price increases. As you can see from our results, we are capturing price in the marketplace, given the reliance and necessity of HVAC products in homes and businesses. Looking forward to next year, Energy efficiency mandates enacted a few years ago are now in effect, and they will raise the minimum standard for base efficiency systems beginning in 2023. So the government is very involved in raising efficiency mandates or efficiency ratings through mandates. Now, we're working closely with our OEM partners to transition inventory ahead of next year. Historically, energy efficiency mandates provide us the opportunity for a richer sales mix of higher efficiency systems, and importantly, our customers have greater value to offer to end users in replacing and upgrading older systems. We have the same expectations going forward. Federal mandates are also in place that would ultimately phase out the current high GWP refrigerant used in millions of systems throughout the country. 10% reduction in these refrigerants is in effect now. That's mandated by the government. A 30% reduction is scheduled for 2025 with a further reduction in 2030, a further 30% reduction in 2030. OEMs are actively developing new products to incorporate the lower GWP refrigerants, and those products are expected to be launched in the next couple of years. But as a result of that, today's cost of refrigerant used to repair older systems has risen sharply, and so too has the cost of repairing and maintaining older systems. Forgive my slight cold here, please. Working with our contractor customers, we see the opportunity for homeowners and businesses to upgrade systems that will cover over time more efficient. I should say that over time will be both more efficient and environmentally friendly. That's a nice thing that's coming to our industry. In terms of our commercial markets, we believe there's potential for greater infrastructure upgrades and climate change capital spending along with an increased focus on indoor air quality. Although it is likely that this trend will take years to play out, Wattsco's organic sales growth rate for commercial products accelerated during the first quarter to 29%. That's 29% growth in commercial products in the first quarter. Longer term, there are other potential catalysts. Expansion of federal, state, or local programs to help fund the purchase of high-efficiency systems. We see that happening. The trend towards electrification and the adoption of heat pump systems to replace fossil fuel powered heating systems, like gas furnaces. And the second phase out to even lower GWP refrigerants is on the books in 2029. This information emphasizes Wattsco's significant role in the drive to lower CO2 emissions. According to the Department of Energy, heating and air conditioning accounts for roughly half of U.S. household energy consumption. As such, replacing HPA systems at a higher efficiency is a meaningful action that a homeowner can take to reduce energy consumption and carbon footprint over time. We offer a broad variety of systems that go well beyond the minimum standards that can exceed 20 SEER. First quarter sales of high efficiency systems, those above the minimum standards, grew 31%, outpacing the 26% growth rate for the residential equipment. Based on estimates validated by independent sources, averted 11.4 million metric tons of CO2 emissions since January 1, 2020, through the sale of high-efficiency HVAC systems. This kind of information and more information is available on our website, including sources and assumptions used to support the estimate. Simply put, there's a lot going on, and we love our industry. Better yet, we believe entrepreneurial culture, custom-focused technology, scale, access to capital, and leadership positions provide unique advantages in our industry. We are fortunate to serve a large and growing population of contractors and technicians with the industry's most innovative technology. Our annual run rate for e-commerce sales now exceeds $2 billion. and we can see that our active technology users continue to grow at a faster rate. Let me say that again. E-commerce users of Watsco technology, at least the e-commerce platform, are growing at a faster rate than those that do not do e-commerce with us. On-call air, that's one of our tech developments. A Watsco digital sales platform used by contractors and credit for comfort, which extends credit to the end user, continues to expand. Contractors presented quotes to approximately 45,000 households during the quarter, a 40% increase and generated $160 million worth of sales for our customers, a 59% increase over last year. the information presented today is only some of what is going on in terms of technology initiatives. As we said before, if you have any interest on learning more, let us know. We will schedule time with AJ and his team. We believe we are transforming the industry, and we are always happy to share more about our progress. With that, let's now go on to Q&A.

We will now begin the question and answer session. To 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. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question will come from Tommy Moll of Stevens. Please go ahead.