Watsco Inc. (NYSE:WSO) Q3 2018 Earnings Conference Call Transcript

Oct 25, 2018 • 10:00 am ET

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Watsco Inc. (NYSE:WSO) Q3 2018 Earnings Conference Call Transcript

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Presentation
Operator
Operator

Welcome to the Watsco Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

And I would now like to turn the conference over to Albert Nahmad, CEO and Chairman of the Board. Please go ahead, sir.

Executive
Albert H. Nahmad

Cheerio. Good morning and welcome to Watsco's third quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A. J. Nahmad, President; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President.

(Forward-Looking Cautionary Statement)

Now, on to our performance. Watsco achieved record third quarter results. This includes record sales, profits, net income and earnings per share. Sales growth was driven by increased unit demand, price and mix for replacement HVAC systems. We also announced a 10% raise to our annual dividends to $6.40 per share effectively in January of next year. 2018 marks the 44th consecutive year that we have paid dividend. In addition, adoption and use of our various technology platforms continues to grow and our run rate for e-commerce sales now exceeds 30% of total sales.

Now that our selling season has concluded, we are on a mission to accelerate the pace of adoption in customers -- with customers, as well as within our own organization. Further investment into technology was made during the quarter, as we completed the acquisition of Alert Labs, a technology company in Canada. This is a terrific team of entrepreneurs that have talent and products to help our customers grow and become more profitable.

This morning's press release also mentions a company-wide initiative to leverage our technology investment, improve productivity and reduce costs. Watsco's culture is to challenge our leaders and provide necessary support. To that end, unprecedented investments were made in technology and our organization to support the launch of our many innovations. Given the results this year, we are now challenging our leaders to use our business intelligence platform to find and execute on opportunities. Progress was made in the third quarter and there's more to come over the next several months.

Our balance sheet remains conservative with a debt-to-total capitalization ratio of 7%. The fourth quarter is a strong period for cash flow and we expect to close the year with very little debt. This positions us to take advantage of almost any size investment opportunity.

Now, the detailed third quarter results. Revenues grew 5%, including a 7% increase in HVAC equipment sales. Gross profit increased 8% with a gross margin improvement of 50 basis points. Operating income increased 7%. Operating margins expanded 10 basis points to 9.4%. EPS increased 16% to a record $2.11 on net income of $79 million including the benefit of long term -- I'm sorry, of lower income taxes.

Looking at our third quarter results a little closer. Profits in our Florida locations were down $3 million after growing during the first half of the year. Margins and