Watsco, Inc.

Good day, and welcome to the Wattsco first quarter 2023 earnings conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any assistance during that time, 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. If you would like to ask a question, you may press star, then one on your telephone keypad. And to withdraw your question, please press star, then two. Please also note that today this event is being recorded. I would now like to turn the conference over to the Chief Executive Officer, Albert Named.

Please go ahead, sir.

Good morning, everyone. I hope you all got to see the spaceship Starlink launch a few minutes ago. Biggest spaceship in the history of our country, or probably in the history of the world, to climb from our orbit. In any event, welcome to our first quarter earnings call. This is Al Namid, Chairman and CEO, and with me is A.J. Namid, President, Paul Johnson, Barry Logan, and Rick Gomez. Now, before we start our cautionary statement, this 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 than the forward-looking statements. Now, Wattsco delivered an exceptional first quarter, especially in light of last year's impressive first quarter. Last year, same-story sales were up 25%, and EPS was up 109%. Let me say that again. This quarter compares to last year, and last year's sales were up 25%, and earnings per share was up 109%. This quarter, sales grew 2% to a record $1.55 billion. Gross margins of 28.9 reflect our mindset around price and continued progress in our investments in pricing technology to help our leaders in the field optimize margins. You will recall that last year's first quarter gross margins also benefited from OEM pricing actions in response to unprecedented inflation. We are happy with the quarter's result given the reduced level of OEM pricing actions during this first quarter of this year compared to last year. SG&A increased 1% reflecting early progress with cost containment and gains in operating efficiency that builds on what we achieved, started to achieve last quarter. Operating income was $165 million Operating margins remain in double digits at 10.6%. And earnings per share was $2.83 for the quarter. As for cash flow, this is the time of the year when we build inventory for the upcoming selling season. And we are seeing supply chains ease in certain product segments versus last year. I must say, not all OEMs are OEMs. over the supply chain problem yet, but they're improving. Cash use during the quarter improved $54 million year over year, despite an unprecedented shift in inventory to new higher cost systems as a result of the change in efficiency standards that took place January 1st. We expect further progress in terms of improved inventory terms and cash flow as the year goes on. All in all, our balance sheet remains strong with almost no debt. This provides us the flexibility to invest in virtually any opportunity as we continue to build scale in a very fragmented $50 billion plus North American market. We continue to look for acquisitions as Wattsco is a great home for family businesses. We sustain cultures, invest in people, and provide technology to secure and build on their great legacies. That's something we love doing, building great legacies of companies that we acquire. Looking beyond the short term, our press release today provides critical details that support Wattsco's long-term growth trajectory. We have an immense technology advantage, and we're investing to grow that advantage. These technologies are increasing customer engagement, reducing attrition, creating market share gains, and supporting margin. Wattsco's broad array of products and brands is a competing, is a competitive, I should say, a competitive advantage that allows us to share contractors in most environments. We also have a leading market share position in Sunbelt Market to provide stability and higher growth rate. 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 federally mandated high efficiency standards for HVAC equipment, which will deliver price benefits in 2023 and beyond. 2025 will also mark the introduction of new refrigerant standards. which historically has made it harder to repair existing systems and favors more demand for replacements. We also see continued movement towards electrification and greater adoption of heat pumps, which generally come at higher prices and higher margins. Sales of heat pumps grew 7% in our company during the first quarter, outpacing overall growth rates. Finally, We also expect new Inflation Reduction Act to provide enhanced tax credit and incentives for efficiency upgrades and electrification in the years ahead. All of these catalysts would benefit the industry in the coming years, and we certainly believe our scale, technology, and financial strength position us to capture the new market share opportunity. With that, let's go on.