WSO - Earnings call transcript Q4 2019

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Operator

Good morning and welcome to the Watsco Incorporated Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Albert Nahmad, Chief Executive Officer and Chairman of the Board. Please go ahead.

Albert Nahmad

Good morning. Chairman and Nahmad, A.J. me Al is and with CEO; is This President; President; well. President Vice Johnston, Barry Nahmad, Executive Vice and Paul Logan, Executive as

before provisions and materially statements. regulations The are as may more statements cautionary differ the start, from various that defined call safe laws. to harbor results as laws has forward-looking forward-looking these Now usual. SEC by pursuant we of our the conference statement Ultimate

and earnings to with income On report. sales, levels. another Watsco share year record per the produced record reaching net

also a produced record million, We cash flow XXX% $XXX of representing income. of net

confidence is XX% next XXXX. payment in cash we strong our share, raise our Reflecting balance this regular quarterly announced in per business our dividend supported by sheet, with of conservative and and April to our an morning $X.XX flow starting

our invest continued today technology. have nearly to We embraced customers year we last our technology Interestingly, have that XX,XXX platforms. industry-leading in

most attrition higher sales active growth For year. annual are the over rates users, our less considerably with

We drive new have greater and asking features customers and our intensified develop for. adoption widespread are that our to use functionality and efforts to

as Technologies legacy to internal-facing end, year locations. and improved improve of efficiency were are by that we drive X speed to SG&A customer evidenced fulfilling XXXX and platforms our same-store operating the to and U.S. built increase performance. These supply optimize To all chains. across over operational now implemented per efficiency and efficiency million excellence our to orders during inventory

We team. each you and to the obsessed technology platforms, the more transform, with Our and is our and develop Miami, industry's customer again from of learn day remains and which long-term the invite goal our us Utica spend the done. most to same, revolutionize attractive business

become our that York. in with increased to XXXX was is These new Dasco release companies wonderful Jersey, and summarized and Peirce-Phelps today. part activity. M&A in N&S they Supply of New we published Philadelphia, are in an operating New also We Watsco. companies to press three family, in honored our active added we That choose also are year,

relationships. It is What and deep the return name culture to companies capital, ask entrepreneurial accomplish equity operate incentives, We our us. technology, line. is our from and for of bottom we accretive leadership, including each in contributed a contact year. XXXX owners other empower remain and these active growth. respect access to in were more very to performance this companies vendor in resources they Watsco's under and great to These for market, culture companies expect same we historical to We their are their with do team with the of to request, provide

can believe resources time technology, opportune advent the our we for the should or Watsco develop help I join much scale it family, them of With faster. since say independent an opportunity modern to distributors an is

We also to promote XXX(k) our in investments us areas long-term the Watsco's compensation long-term. ownership expand large based our and are continuity, of thinking. to increased incentivize ownership talent, and made equity in important - match retain culture, culture We to expect that

wellness employee our to will and and care. investments industry's enriched also preventive program the These we important, attract talent. good more not retain if best encourage important, As health help

remarks, Q&A. I details release during recite color be performance, details important Our more our but provide will my in financial to not provides these press happy prepared about will

answer your Paul, questions. A.J., I are Barry that, With and to happy

Operator

go Hammond Markets. comes KeyBanc with Instructions] Please ahead. Capital first Our from Jeff [Operator question

Jeff Hammond

like a year of It on the one-time items. of had Just kind SG&A a line. number last seems you

that know some of I there bumped. in number? elevated pieces that Can just surprised is little M&A was you there. moving impact kind - speak to I So any that that

Albert Nahmad

Barry?

Barry Logan

was basis - up performance data same-store the and on a so at look we show things a SG&A to on, in have same-store that basis do we X%. You

of terms on the And very so in so on, and if investments growth you going despite on. overall at know growth some still moderate going some a picture you rate look that

we So the investments some activities. percentage, including including ended with transaction we expenses I highlight, that think basis for the including exact on year overall, technology, same the a up same-store M&A X%

them, we the say if account and So the SG&A flat quarter. had the itself for those for actually and business both I exclude would pretty in base year

Jeff Hammond

speak And early have the early into know trends then on kind of the year? into in just headwinds a guys XXXX. you about whether in you Can know maybe and number I think XQ talked you of maybe an

Albert Nahmad

Paul?

Paul Johnston

really to and us fourth blow a to early the market the like talk year. really entire about going for of out strong the it is But in starting Jeff Boy finished is February - January which the indication early it quarter. year in early trends XXXX. give Yes, don't way

Jeff Hammond

And level last comfort of guys moving and one looks of up given raised that cash. of the kind that you're rationale payout just against the kind - dividend your your bumping then just you kind of like payout free the maybe ratios? speak a it to of kind of XXX% up And

Albert Nahmad

Well, Barry is that. on expert our

Barry Logan

and if cash Sure cash free cash that well, look we've is year it dividend you source flow our Jeff flow at going to flow pay this this flow and there the the cash record just we're room again still was past of obviously dividend, is produced. our the free between year. And

have free look where the I cash flow at opportunities we at past and cash how strong very flow we looked objective really cash the we to that's the have year and forward-looking as that's it. another So think flow for

Operator

Ryan Blair. ahead. Merkel next question go from is Please with The William

Ryan Merkel

part mix quarter, first walk So what the in big us is through gross I explains year-over-year maybe decline think answer that? off just the fourth but probably that of in margin

Albert Nahmad

from on have to we that, OEMs them going have what two large engaged stated. an we're well that some with of part and on if as as can pricing with issue resolve we might Well, see that pricing you as action

Ryan Merkel

dig with into you the more bit outlook larger the exactly? Maybe little pricing what’s on a could OEMs that issue

Albert Nahmad

with that. to deal Barry, you want

Barry Logan

ever, last XXXX forward-looking XXXX, we and years, margin profile our look at into look at the and few the volatility about think to we've business. XXXX had you market into pricing more XXXX look if again that back now the the operate well Ryan and really probably Sure we seek margins than in

given and act of we the all take the volatility present we and realities we years, few the we the data, we're the data, with our examine the doing. the data So, on what last data, that's OEMs

Ryan Merkel

is guess we weakness XXXX? be should I So in extrapolating or into XXXX this the gross goal margin flat

Albert Nahmad

very like it's optimistic I work but Excellent be said our question, our that in gross but recovering, process, will margins we're a margins.

Ryan Merkel

that Thanks. in just then for and the was be to lastly, ask Florida, XXXX. want what just would what helpful? What industry you growth forecasting shipments XXXX, were Maybe on are

Albert Nahmad

Paul? forecaster, you Are

Paul Johnston

in try that's you fools occurred industry in No, this year forecast the Batman, total. what do don't I know to to prior but a know industry we the

it well gas was both year as very and as splits. furnaces U.S. flat the the the it a residential industry on for far as as was For shipments were industry what

Ryan Merkel

all. that’s Thanks Okay.

Barry Logan

overall to growth But to Just rates. our our way to data that from when the have - Florida you markets the behaved being than to the in the point the largest hanging up and a We and add year performed seaboard Eastern north that. leave markets. that Florida better we measure view. of have growth to had Ryan market completely all individual ourselves really sea and for on earlier Eastern share We’ll not the said sales well

and country the of quarter in irritated this But irritation year Florida the our we really in And middle XXXX was the table to about of think we'd the - we growth we rates said I to part last I year. average as more this said, push or market. said it react come OEMs consistent better said Florida we'd to in we were like whatever - last the said than idea

Operator

go Research. Barry with The from next question ahead. is Robert Buckingham Please

Robert Barry

the more more pulling quarter curious northeast be it there was little a growth one. color out the only why that down the of the just of a little it would country middle on color helpful? Just Was part in or

Albert Nahmad

Barry?

Barry Logan

Rob the it stable obviously of and and country part again not of of as in Sure, country middle Eastern terms know outgrowth. is stronger you weaker the - it's part the

Robert Barry

what's the middle Yes, factor weather causing or it and to is just weak? be the part that

Barry Logan

Yes, long, it But have is, on our is so is us the in what we'll to part when think point. data comment in market yet was examine we it pretty which temperate at summer it. biggest can't state-by-state of And the sent it that that Texas, industry it all I hasn't this the I country.

Robert Barry

by you're Just getting? like just with and a Or with more to that gross rebates what on - you issue about to aggressive margin aggressive as the follow-up question, you pricing the when would have pricing, to you trying that not with on see they're do being or anything issue? be to OEMs those - mean talked is do

Barry Logan

discussions ongoing not and best comment to it’s since think that on are these negotiations. I

Robert Barry

just really question SG&A and only a performance good guess, same-store, the X% me from I a lastly there. so on

sustainable that the about as you curious, Just is and think going if whether think that's goal? forward, you

Albert Nahmad

Well, why ask the of as and much the A.J.? an the as - company can has he develop been and he so don't technology he from has told can to we're fast we sustaining - him. complete opportunity because come as as President he expenditure of could

Aaron Nahmad

well there we've in there our there with it it and think said investment that’s We is taken in is line think we result But of of I Sure, and come well and performance put as for tools the more you efforts said, is good XXXX. investment. SG&A opportunity some leveraging to earlier a the said technologies good Barry that leaders’ that hands. do on

We a are long-term company.

technology today And the don't Our necessarily we’re this investing XX-month all ahead. years ROI have a spending. for that's with true investments

a as the are result processes. the immediate these in just is financials, our quality well, not are as a And can them. This company and program have while of all offensive people And and we of not - greatest showing latest we is and say, the we and company stronger may really up this defensive you impact are an an technologies program. on where tools with a a

So where we see more invest opportunities will. we to

Robert Barry

It hearing So opportunities sure all of on sounds low just see X correctly. maybe the to technology front? SG&A you is invest know I'm only the like a maybe you too same-store to make given you little

Aaron Nahmad

should to as and our efficiencies. lower spend, it's proliferate these far investments it through future as Well, say offset investments. but as technology organization results be SG&A because see impacts have may hard We by the on

Operator

with Manthey David is The Please from Baird. next go question ahead.

David Manthey

question philosophical is off limit upper relative could you and on view and us debt-to-EBITDA there just net to cash on the that acquisitions, be with? on and flow willing refresh free to the first run to dividends So leverage an company's you'd

Albert Nahmad

you numbers, don't like we so I that. can't give

to requires we'll with at equity be and keep solve that intend We have order a program moderate deal can leverage to our balance large debt If that equity to some But size and appropriate and time. is it size, but doing, way. of to debt continue to shouldn't the you consistently nothing debt our the If that sheet debt along part. we of of investment, able there M&A conservative change with some been anything more in see comes we the size. in we've any

David Manthey

be HVAC there repair related second, inconsistent can well what's bit lot that category, overall? cohort, with other supplies And has there? weaker, recently, happening housing and category construction a market discuss, And that I'm there, products I maybe just parts just the little to you of in doing doing at this as units mid-teens of and the age been better makeup more in there's looking products shouldn't understand as better the and business. know trying

Albert Nahmad

Paul?

Paul Johnston

that's the commodity prices probably as us category most far demand. - - demand as as it's seasonal well - Yes, for as fluctuates the that most the

the as such, we're tariffs So going unbundle that think I fluctuations I China going anything of back there. don't strange forth - we the on some to that. and some see think on just there's and

Barry Logan

moving Well, roughly of is, lines a XXX what product about I I and XX thought pieces. vendors it, add would it's if lot

and - the Paul said, that's a said, construction bag the would growth within lines the rate the a of bucket. largest it's growth. - in Parts faster both also grab stuff, extent of But to it's going one to of only as new there growing be is it's parts. product line product but As only one at I parts equipment drive that's equipment versus the

a So moving lot of pieces there.

David Manthey

sneak could one And question, I then if here. in last

that we're be should zero? pushing On the if are about And cost are you as I have year, price thinking clearly? your dynamic be seen price outcome? through changes, successful, manufacturers negotiations the a is do, And situation might the - thinking could that nothing about coming or positive price the not talking they price moderate we would the if and have assume typically that

Albert Nahmad

mostly, OEMs are the you what Paul, are increases? hearing? you with About price

Paul Johnston

single-digit everybody have players Carrier, effective through single-digit big New all is increases Lennox, York, pushing January, Goodman, price Trane, low out Basically pushed there through Yes, February. Rheem, now. six moderate increases right the price -

the those have So going on roll now what we're they're the to to impact see season getting of market. into just up sort and

Operator

The is Chris Dankert next ahead. with from go question Research. Please Longbow

Brian Bollenbacher

Chris. for on at just the in Brian is thing The XXXX. are This we tax spend looking

Now, will seen the normal increase of of and kind have in is to growth there? that of safe guys past you the assume years it increase couple

Albert Nahmad

I sorry you I'm - didn't the Barry did question?

Barry Logan

increase, yeah. Spend

Albert Nahmad

Okay, and go answer. ahead

Aaron Nahmad

Yes, is Brian this A.J.

is going I consistent technology opportunity more, long-term we would few is is state, ROI invest spend steady last think which a say years. and the ramped at there to this in overall, a when our And more invest opportunity, I've because it's we're however been that answer in to over up company. certainly I where

Brian Bollenbacher

to of be sheet stock into willing into then, as are switching gears inventory the previously the average know XXXX. still mentioned And above you'd that to Is long I balance looking XXXX? case? heading remained entering guys healthy. the how inventories kind And as seasonal you

Albert Nahmad

A.J.?

Aaron Nahmad

far that's modern tools meet the that to unit now to product, a right technology as we're and expected that's And We right location the business as equation. the time platforms by the demands. slotting branch, have initiative right inventory, ensure customer having as a by in Yes, at as math place, far major again go.

rates have we and We've jumped rates, significantly. teams great that fill tools. customer the using fill now are these have tools right our So our got

we Make product right place quantity step. right to the in to fill in first right customer sure have the the demand. right that's the So time

of Secondly to our out shareholders sold flow product has to is make return dividends take network cetera. not cash underperforming that to free or investments et up

vendors, there's the always from with So the or that general overall OEMs not or with in in chain I Asia is say in should on that focus. their what's all tandem In reliable XXX% remains with now, especially going a that, that parallel it's supply and time. right

extra we So necessary sure need, some inventory have to think it's you are know if when and those can we in power bring make. if make our customers they to the that investments

Brian Bollenbacher

Thanks. right. All

Barry Logan

customer But on the needs. is focus our

Brian Bollenbacher

quick able one, in just here resi? then And you mixer's one the drive final volume Are to equipment the in price is.

Albert Nahmad

Barry, I think got you a question.

you I may. think that's Paul. or probably Barry, Barry

Barry Logan

for far price for than you business Again, and and can our both the see rates quarter the the Yes. year. equipment units growth obviously more in XXXX

Operator

is Patrick go with question Please Baumann from ahead. next The JPMorgan.

Patrick Baumann

about asked in Most over back good past or there's On seeing OEM/distributor of I'm competitors any the competition I'll ones have the lost couple. market from aggressive talking so whether just and been year but try more you’re your to win to give behavior market? one share a trying been wondering the

Barry Logan

That's a good question.

go But, in and they out. think I in come they cycles and Paul? in

Paul Johnston

hard Yes, develop in sales is and think working I juices don't been sales on everybody to try to relaxes competitive grow would say market growth. has I it their far the anybody Everybody is trying as marketplace. share; as to

based or competition I'm be. has call. somebody what marketplace what been fluctuates the their earnings in said it Its can't on I and up see it strong where on this always down sure So will always it and –

Patrick Baumann

over numbers half change Maybe revenue the growth have on acquisition exact that, - least of so of contributed don't to I at couple the like No know not. it's don't revenue it your that’s quarters. but the I looks past

on margin coming a So in. don't curious implications these it's in if operating what kind there? related and of revenue curious or if I'm margin know there's I anything come at any deals just gross there's if to margin just margins drag that

Albert Nahmad

Barry?

Barry Logan

and ask point not margin so EBIT development the EBIT them they're conversation. we in where businesses historically take to we in we forward. and invest the that's a these terms where business growth in OEM a do organization view and to of advantage ask margin to the in and don’t that, of looking of margin gross them EBIT neutral of margin comes From margin and we our a challenge we don’t view is really – gross from touch we well that's lower come cost, expand to with point no businesses their Yes, them touch want from a to our ask programs, grow our change

the out margin in the basis. of this type to to kind a break on first margin you are know we'll to the long-term Watsco raise short-term margin year same-store them things the dilutive So we to and margin. your EBIT and medium like we They – and grow that have though

Patrick Baumann

view back more a And the consider it. or the kind the and you there know whether or curious closer we you tipping that where the where you to behavior just pushing might a replace how on view for price close Got kind like is a the to point know view your maybe then pricing for on you versus price have point of that? like we're that on consumers repair that one last getting me harder do – - of do that what's that in consumer on switch

Albert Nahmad

Apart showed are sales unit from higher you data continuously. me the that the

Paul Johnston

Yes.

sales continue grow. to unit Our

I a because price tough only and product that's it their would we represent to then a whatever have we get around sell it's think each on really data question would given that installation dealer to contractor cost a that for try be.

and – there's So into just things the equipment installation an a then than that more more lot go cost. and

issues see least. know horizon don't the So on at real now I any you elasticity right

Patrick Baumann

Okay.

Barry Logan

correlation, have think the been picture most good, low residential would I strong, in our business say consumer big consumer is the of the and the is think consumer be general I to and at always based in what a something they on the important spend and in product and quality is of the and then end really unemployment in to is have Yes. day. people this those data I going consumer the have the think I so is is it

Albert Nahmad

also I financing are add before homeowners making more buy options consumer add. A.J. I’ll there coming believe new equipment. also it This I’ll is than to more affordable ever actually that online for

Operator

from question Blake ahead. next The with go is Please Stephens. Hirschman

Blake Hirschman

assume I just could and like check say year? missed the see? pretty looked and did similar have overall, First one, operating I it, the margins guys margins but but for I to the SG&A heard you wanted same-store to what gross

Albert Nahmad

Barry you want to take that.

Barry Logan

XX about would Yes, it’s point basis difference. right I higher. think XX around be points basis Organic

Blake Hirschman

most the some M&A on you that then of an look thinking or did And one-off? deal be is that expand more as area about might Should had we guys plumbing. recent a you kind to of then

Albert Nahmad

we would That's hesitate like continue question. not the because find is do there we they're will a of just that capital well. negative. see grow proven. product growth we managed they out Why great the a yes, convergence but need would dual we be in with observation. a double we that eventually that's because is not and and that's Then profitability they hesitate we if one, that will When what do But branches else great theory faster distribution a business whatever with well to a will and not doing not But there not placing help business have well examine very more good them and principles providing you,

Barry Logan

customer they that, XX it. year the DNA. it. market, what part and more Yes. it's of I like It's family of part their how add It's mean they do their in started address run old they're business just it's the by same a that to

down keep been at product that's long always for from so reason doing or enough number continuity convergence of our well. say end growing company great to and that's cut, of that's we're of this So technology to simply that day, But it after and around does the as the nice. really one, or line, what more is the we keep the

Albert Nahmad

maybe us do do to how plumbing. And don't know teaching how with things we to

Blake Hirschman

the than where on And the as plumbing the putting or the that too country? of you're follow-up not, more showing does in same is it's based HVAC and in there, vary often it you're it kind contractor the at but

Albert Nahmad

wants that Who to for volunteer one?

Barry Logan

convergence, lot think, go contractors. more vary conditioning get does a it's country, I to plumbing down air at you're air person, know you south, the to find we mean but to spreading around going plumbing overlap throughout person it seeing and are I and north, find Yes, the some more point you some conditioning the this a country. in you

Albert Nahmad

they HVAC a just survive and with business a products. or sometimes also, up market in air Blake small branch a But can't conditioning

market. So It's survive model market they to by needs be add plumbing, in the sustain that having able because and lenient the do did service level very revenue pretty that in order the We a you small to know see very a interesting both service to customer. too.

Operator

session. Nahmad turn our This question-and-answer to Albert closing over conference the I to back remarks. would any like concludes for

Albert Nahmad

interest again to you Once come cold company north. get in there please of what we're that up and again are a look we'd you visit. those at It bye your see thanks and once for is doing the love Good in And Miami. now. out our you firsthand here and in at have then

Operator

concluded. Thank now for today's conference presentation. is The you

You now disconnect. may

Watsco (WSO) 13 Feb 202019 Q4 Earnings call transcript