Watsco, Inc.

Good morning and welcome to the WatsGo fourth quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 Namid, Chairman and CEO. Please go ahead.

Thank you, and good morning, everyone. Welcome to our fourth quarter earnings call. This is Al Namid, Chairman and CEO. With me is A.J. Namid, Watts Coast President, and Paul Johnston, Barry Logan, and Rick Gomez. Now, before we start, our cautionary statement is always, This conference call has forward-looking statements as defined by the SEC laws and regulations that are made pursuant to safe harbor provisions of these various laws. Ultimate results may differ materially from forward-looking statements. Now, Wattswood delivered strong results in 2023 despite some market conditions which were somewhat inedible after two extraordinary years in 2020. 2021, and 2022. Reflecting in the year's results, I am proud of the accomplishments we delivered. We achieved market share gain in markets we serve. We further scaled Wasco's industry-leading technology platforms. We had a successful start driving down long-term productivity gains. I should say we had a successful start driving long-term productivity gains. We expanded our network and product offerings by acquiring great businesses to grow our scale, and we fortified our balance sheet through inventory reduction and generated record fourth quarter cash flow. And once again, shareholders will receive a meaningful dividend increase in 2024. which was in April 2024. This is Watsco's 50th consecutive year of paying dividends. 2023 was also a year of immense change, and virtually all equipment products transitioned to new high-efficiency systems. In collaboration with our OEM partners, Watsco introduced new products and SKUs for over 25 brands of HVAC systems. Our teams executed well, and thanks to our scale and speed to market, we are confident that we gained share. We also trained thousands of customers on new products, and our digital product library was updated with approximately 500,000 new SKUs. And this spring, we will begin the next regulatory transition to new 828. L products with lower GWP refrigerants. These regulatory transitions are positive for our industry and are good for WatchWiz business. They offer meaningful value to homeowners and businesses to upgrade systems that are more efficient and better for the environment. WatchWiz has an extra unit values, although still down, stabilized during the second half of 2023. Commercial end markets remain strong across all markets. Our commercial business continues to grow at a healthy rate and our backlog of products extends well into next year. Sales of ductless systems, an increasingly important component of our business, grew double digits in a year and offset declines in conventional residential business. SG&A has a percentage of sales on a same story basis decrease for the year, indicating progress in driving more productivity across the company. We believe we are in early innings of a long-term opportunity to meaningful improve productivity and overall efficiency. We have challenged our leaders and provided them with tools and data to implement change, and most importantly, We possess an entrepreneurial culture to execute change in a responsible way. Over the past year, we expanded our network through acquisitions with three terrific business joining the Wapsle family. Collectively, their annual sales are around $200 million. These businesses will retain their culture, leadership teams, and uniqueness in the market, consistent with a long-term practice of honoring and sustaining great businesses. Our industry remains highly fragmented, and we will continue to pursue other great companies to grow scale in our $60 billion North American market. We believe Wattsco's technology advantage, market-leading scale, and the strength of our balance sheet are all great reasons to join the Wattsville family. Now, before getting to Q&A, as always, I want to emphasize that our core focus remains on the long term. We believe our scale, the quality of our balance sheet, and unique culture will continue to drive long-term growth and performance. We have an immense technology advantage, and we are investing to grow that advantage. Wattsco's broad array of products and brands is also a competitive advantage that allows us to serve contractors in any environment. And finally, our industry is fortunate to benefit from an important regulatory and industry catalyst that should positively influence Wattsco's performance in the years ahead. With that, let's go on to Q&A.

Thank you. 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. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Tommy Mull with Stevens Inc. Please go ahead.