Watsco, Inc.

Good morning and welcome to the Watsco first quarter 2024 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 Al Named, Chairman and CEO. Please go ahead.

Thank you. Good morning, everyone. Welcome to our first quarter earnings call. And this is Al Named, Chairman and CEO. With me is A.J. Named, President, Paul Johnston, Barry Logan, and Rick Gomez. Now, before we start, I will state 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 meant different materially from the forward-looking statements. Now on to the performance. Watsco delivered good results despite softer market conditions. As a reminder, the first quarter is traditionally the low season for sales in our industry. Although it is early, we are encouraged by the improved sales trends in April ahead of the summer selling season. We believe our technology, breadth of brands and products, and the expansion of our network have generated market share gains. Our balance sheet strengthened during the quarter through a combination of record cash flow and an equity raise using our ATM program. And once again, we boosted our annual dividends by 10% to $10.80 per share beginning April of 2024. This year marks Watsco's 50th consecutive year of paying dividends. Now, Commentary and highlights on the quarter. Although residential equipment unit demand remains low, our price realization, a richer sales mix of heat pumps as well as high-efficiency products, and new locations contributed to record sales in the quarter. Commercial end markets experienced growth, and our backlog of projects remained healthy. Sales of ductless systems, an increasingly important component of our business, grew and offset declines in the conventional ductless residential business. Gross margins perform well and are consistent with our near-term target of 27%, though we believe higher margins are achievable over time. Turning to expenses, SG&A increased 2% on an adjusted same store basis. Variable SG&A expenses were lower for the fourth consecutive quarter, and our teams across Watskill have implemented a number of actions to improve efficiency and reduce SG&A. And to that end, we have equipped leaders with the necessary tools and data to improve productivity, and most importantly of all, we possess an entrepreneurial culture to execute change in a responsible way. Since the beginning of last year, we expanded our network through acquisition with three, through acquisitions, with three terrific businesses joining the Watchgold family. Collectively, their aggregate sales are approximately $200 million per year. And more importantly, they expand Watchgold's reach into new markets. These businesses will retain their culture, their leadership and teams, and uniqueness in the market, which is consistent with our long-term practice of sustaining great legacies and investing to drive additional growth. Our industry remains highly fragmented, and we will continue to pursue other great companies to grow scale in our $64 billion North American market. Wattsco's technology advantage, industry-leading scale, equity culture, and the strength of our balance sheet are all great reasons to join the Wattsco family. And finally, before getting into Q&A, as always, I want to emphasize that our focus remains on the long term. Our balance sheet is strong, and we stand ready to invest in the right growth opportunity. 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 most any environment. And we are also fortunate to operate in an industry that benefits from regulation changes and fundamental catalysts that will play out in the years ahead.

With that, let's go out 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 our roster. Our first question today is from Jeff Hammond with KeyBank Capital Markets. Please go ahead. Hey, how are you doing?