Watsco, Inc.

Good day and welcome to the Wattsco Third Quarter 2024 Earnings Conference Call. Please note that today's event is being recorded and all participants will be in a listen-only mode. Should you need any assistance on today's call, 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'd like to ask a question, you may press star then one on your telephone keypad. And to withdraw a question, please press star then two. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Albert Namad, CEO of Wattsco. Please go ahead, sir. Good morning.

Welcome to our third quarter earnings call. And this is Albert Namad, Chairman and CEO. And with me is A.J. Namad, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start our usual cautionary statement, this conference call has four 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 states. Wattsco produced record sales and net income for the quarter. Our markets have shown signs of stability, and the fourth quarter is off to a good start with October sales up mid-single digits driven by meaningful unit growth. Let me say that again. October sales are up mid-single digits and driven by meaningful unit growth. We also believe we have gained share based on industry data and shipment trends. We have also generated record cash flow this year and our balance sheet remains in pristine condition to enable investments As communicated in our press release, we are in recovery mode with one of our primary OEMs, a fairly large supplier of equipment to us. We're collaborating with them and co-investing to make the needed investments to regain business and add new customers. Moving on. We continue to make investments in the industry's most innovative technology platforms for HVAC contractors. Greater adoption and use of our platforms by a growing number of contractors has helped produce market share gains. Annualized e-commerce sales now exceed $2.5 billion. And our active users continue to grow faster than non-users. On-Call Air, which is Wattsco's digital sales platform, continued to expand and generate growth for our contractor customers. Thus far, in 2024, On-Call Air contractors presented close to approximately 258,000 households, a 17% increase, and generated $1.2 billion of sales for our contractors. That's a 22 percent increase over last year. We are also leveraging our technology platforms to optimize the launch of the new federally mandated A2L systems beginning in 2025. Historically, regulatory changes have been good for our industry and good for our business. In 2023, energy efficiency mandates went into effect, providing contractors the ability to upgrade older systems with higher efficiency systems. The trend to electrification of fossil fuel heating has driven increased sales of heat pump systems, which are both sold at higher average unit prices than conventional alternative systems. The growing penetration of ductless HPA systems has also been a catalyst for growth as they provide homeowners and businesses a more energy-efficient alternative to conventional systems. And now, the A2L transition is upon us, and we look forward to the opportunity. Turning to our balance sheet, we have a strong cash position, no debt to support, and that supports most of our investment we choose to make. Although we have produced record cash flow this year, we are still not satisfied with our inventory returns. We are working with our OEM community and continuously improving our methodology to improve our inventory returns. We have also made progress improving operating efficiency across our network. as evidenced by the modest change in SG&A year over year. But there is more to do. In summary, we operate in a great industry and in attractive geographical markets. We have a proven entrepreneurial culture that empowers local leaders. We possess the industry's most innovative technology platforms for HVAC contractors. We have leading scale and product diversity, particularly in high-growth markets. And finally, our balance sheet and access to capital enables future investments in our highly fragmented industry. As always, if you have an interest in learning more, please visit Miami and see us. We are transforming an industry, and we enjoy telling you about it. With that, let's now go on 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're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, you may press star, then 2. At this time, we will take our first question, which will come from David Manthe with Baird. Please go ahead. Morning, Dave.