Watsco, Inc.

Good day, and welcome to the Watts Co. Third Quarter 2023 Earnings Conference Call. All participants will be in a 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 a touch-tone phone. 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 Al Namid, CEO. Please go ahead.

Good morning, everyone. Welcome to our third quarter earnings call. And this is Al Namid, chairman and CEO. With me is AJ Namid, president, and Paul Johnston, Barry Logan, and Rick Gomez. Before we start our normal 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 from the forward-looking statements. Now on to the quarter. Wasco delivered a record quarter, which is all the more rewarding given that record performance achieved in the third quarter last year. Their quarter last year was a barn burner, and so I'm so happy we're able to beat that. Sales grew 4%, driven by 6% increase in HVAC equipment. Residential unit volumes steadily improved throughout the quarter, and price realization continues to be strong. Commercial end markets also remain very healthy. As a reminder, we have navigated through an immense product transition in 2023, following the step up minimum efficiency standards mandated across the United States by the US federal government. Approximately 60% of the HVAC systems we are now selling represent new products. Let me repeat that. 60% of the systems we're selling are new products. Thousands of customers have been trained. Our digital product library has been updated, adding over 400,000 new SKUs since the start of the year. As mentioned in our second quarter call, one of our primary OEM partners was disproportionately impacted by the product transition affecting product availability during the summer selling season. That impact diminished during the third quarter and I'm happy to share that our locations are now fully stocked, sales growth has returned to the effective stores, and our partner is aggressively investing and collaborating with us to drive growth. But the reality is that all our OEM partners were affected to some measure, and all have improved the supply chain to help us meet the needs of our customers. Here are some other highlights. Our commercial business continued to grow at a healthy double-digit rate this quarter, and our backlog of projects extend into next year. Sales of ductless systems, an increasingly important component of our business, also grew double-digit during the quarter. We saw the continued trend of gas furnaces converting toward heat pumps, which sell at higher average selling prices. SG&A's percentage of sales decreased 80 basis points this quarter, a good start to what we feel is an important opportunity to improve productivity and overall efficiency. We are optimistic about driving more operating efficiencies across our network as supplies change and improve and operating conditions return to normalcy. We have the tools, the technology, and most importantly, the entrepreneurial culture to achieve more, particularly as it relates to our internal productivity. We are focused on internal productivity. And of course, our balance sheet remains strong with a small amount of debt offset by cash. In other words, no debt. As always, the financial position provides us the flexibility to invest in virtually any opportunity as we continue to grow our scale in a very fragmented $50 billion plus North American market. M&A remains an important contributor to growth. This quarter, a great family business joined our family with the acquisition of Gateway Supply in South Carolina. I've spoken to the principals, and you couldn't ask for higher quality people. Gateway is a legendary company in its Sunbelt market and provides us with the ability to partner with great leadership to grow beyond their current $180 million sales run rate. We continue to look for more entrepreneurs and businesses to partner with. Wattsco is a great home for entrepreneurs in our space. We sustain cultures, invest in people, and provide technology to secure and build on their great legacies. Looking beyond the short term, our press release provides critical details to support Wattsco's long-term growth strategy. We have an immense technology advantage, and we are investing to grow that advantage. Our mobile platforms and e-commerce channels have increased customer engagement, reduced attrition, created market share gains, and supported our margin expansion in recent years. Watsco's broad array of products and brands is a competitive advantage that allows us to serve contractors in any environment. We have a leading market share in Sunbelt markets that provide stability and higher growth rates over time. We have also made important technology investments with our business that will support margins and productivity in the years to come. In addition, there are several important regulatory and industry catalysts that are in effect, which are listed in today's press release. All of these catalysts will be good for the industry in the coming years, and we believe our scale technology and financial strength position us to especially benefit from these opportunities.

With that, let's go on to Q&A.