Watsco, Inc.

Good morning and welcome to the Watsco fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal 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 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 Named, CEO and Chairman. Please go ahead.

Good morning, everyone. I do hope everyone is healthy and not struck by the virus. Welcome to our fourth quarter earnings call. And this is Al Namid, Chairman and CEO. With me is A.J. Namid, President of Wasco, and Paul Johnston, Barry Logan, and Rick Gomez. Before we start, here's our cautionary statement. 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 statement. Now, Wattsco delivered an exceptional quarter to close out a fantastic year. We are especially pleased because in the fourth quarter of last year, I should say the prior year, sales were up 21% and earnings per share were up 77%. So the results we're reporting today were against that performance in the fourth quarter of the prior year. So how did we do on the fourth quarter of this prior year, of 2022? Well, sales grew 5%. to a record $1.6 billion. Adjusted operating income increased 14% to $141 billion. EBIT margins expanded 50 basis points, correction, 80 basis points, to a record 8.9%. And adjusted earnings per share increased 16% to a record $2.35. $2.35. Now, we're going to explain what the adjustment is as we go through here. So remember, this fourth quarter results were running against the prior year where sales were up 21% and earnings per share was up 77%. So we think we did well. Now, for the full year, sales grew 16% to a record $7.3 billion. Adjusted operating income increased 33% to $835 million. EBIT margins expanded 150 basis points to a record 11.5%. And adjusted earnings per share increased 32% to a record $14.20. Now let me clarify what the adjustment means. The adjusted figures exclude a $49 million net tax benefit from vesting of restricted shares, which added $1.20 in earnings per share for the quarter and $1.21 earnings per share for the year. Those were excluded in the numbers that I just gave you. And very important, we generated a record cash flow of $572 million during 2023 and ended the year with a strong balance sheet and virtually no debt. I like having very little debt, if any at all. Our financial strength gives us the ability to invest in most any opportunity as we continue to build scale in the very fragmented $50 billion North American. distributor market and we continue to look for acquisitions at Swatsco is a great home for family businesses and why is that well because we sustain cultures we invest in people and we provide technology to secure and build on their great legacies our focus is always always on long-term which makes us different than other acquirers in the industry We have challenged our leadership teams to develop aggressive growth plans utilizing our scale, product diversity, and technology leadership and build upon our growing market share position. To that end, we are working collaboratively with our OEM partners to develop forward-looking growth initiatives, particularly in light of the various regulatory and positive industry catalysts that lie ahead, and there are some good ones. This quarter results also reflect continued progress on two key areas of focus, and those are sustaining growth margins and improving operating efficiencies. There's more to do on both, but we are encouraged by our progress and our intent on achieving more operating efficiencies across our network. This morning's press release provides important concepts and details that support Wattsco's long-term growth trajectory. Some of them are, we have an immense technology advantage and we are investing to grow that advantage. These technologies are increasing customers' engagement, reducing attrition, and creating sustainable market share gains. In addition, Wattsco's broad array of products and brands is a competitive advantage that allows us to serve contractors in any environment. We also have a leading market share position in some built markets, proving stability and higher growth over time. Regarding those Sunbelt markets, a lot of people seem to be immigrating to the Sunbelt markets in recent times, and that works in our favor since we're the leader in those markets. In addition, there are several important regulatory and industry catalysts for growth that will play out in the next few years. 2023 saw the introduction of high-efficiency standards for HVAC equipment. which will provide a pricing opportunity for us as well, and this is very important, as well as energy-saving opportunities for homeowners and businesses in 23 and beyond. And then in 2025, we'll also mark an introduction of new refrigerant standards, which historically made it harder to repair existing systems and drive customers to new equipment. We also see continued movement towards electrification and greater adoption of heat pumps, which generally come at a higher price and higher margin. Sales of heat pumps grew 25% in 2022. I should say our sales of heat pumps grew 25% in 2022, and 21% during the fourth quarter, outpacing overall growth rates. Finally, the new Inflation Reduction Act provides enhanced tax credits and incentives for efficiency upgrades and electrification. All of these catalysts will benefit the industry in the years ahead, and we certainly believe that our scale, Technology and financial strength positioned us to capture these new market opportunities. Finally, we always are concerned about our balance sheet so that we are in a position of financial strength. Today's balance sheet remains in a pristine condition to invest in any size growth opportunity in the coming years. Lastly, before turning to Q&A, I would like to thank the more than 7,000 employees of Wattsco across our market for their service and commitment to customers. They have done an extraordinary job to serve our customers and generate historic performance, as you see today. Now, with that, let's go on to Q&A.

We will now begin the question and answer session. To ask a question, you may press star the one in your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.