Watsco Inc. (NYSE:WSO.B) Q2 2018 Earnings Conference Call - Final Transcript
Jul 25, 2018 • 10:00 am ET
Good morning, everyone, and welcome to the Watsco Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Albert Nahmad. Please go ahead.
Good morning, and welcome to the Watsco second quarter earnings call. We're coming to you from Sunny Miami, where it's very warm. This is Al Nahmad, Chairman and CEO. And with me is A.J. Nahmad, President; Paul Johnston, EVP; and Barry Logan, SVP.
(Forward-Looking Cautionary Statements)
Now on to the report. Watsco achieved record second quarter results. Our performance includes record sales, profits, operating margins, net income and earnings per share. Sales growth was driven by increased unit demand, price and mix for replacement systems. Importantly, Watsco's results were achieved while continuing to make significant investments in our industry-leading technology platforms as well as the addition of customer-facing employees to expand sales and service capabilities.
As we mentioned in the release, we are challenging our employees to accelerate utilization of our innovations to build market share, develop more efficient processes and reduce costs. A number of initiatives are underway, all with the goal of improving sales and profitability over the long term.
During the quarter, we raised our annual dividend to $5.80 per share. 2018 marks the 44th consecutive year that we have paid dividends. Future dividend increases will be considered in light of investment opportunities, cash flow, our financial condition and business conditions.
Our balance sheet remains conservative with a debt-to-total cap of 8%. This positions us to make -- take advantage of almost any sized investment opportunity that may come along.
As always, the second half of the year will be a strong cash flow period. We, again, target a cash flow to exceed net income this year.
On our very important game-changing initiatives, we continue to grow adoption and use of our various technology platforms. For example, more customers are using our apps and e-commerce to gain speed and efficiency in their business. More SKUs have been digitally mastered and added to our product information database, which is now over 650,000 SKUs. Given our progress to date, we believe our e-commerce sales could reach $1.2 billion this year and exit the year close to a 30% run rate.
More of our locations have implemented order fulfillment technology to complete and ship orders faster and save customers time. More employees are using our data analytics to gain insight into operations and opportunities. Technology spending so far this year has increased 9% with an annual run rate of $24 million. In summary, Watsco's transformation of our distribution channel continues.
Now the second quarter results. Revenue grew 5%, including a 6% in equipment sales. Operating income increased 6%. Operating margins expanded 20 basis to a record 10.3%. EPS increased 16% to a record $2.40 on net income of $90 million, including the benefit of lower income taxes. Debt has been reduced by $238 million from a year ago.
Our gross margins reflect higher