Watsco Reports Record First Quarter Sales, Record Cash Flow and Improving Business Trends Ahead of Summer Selling Season
- Record first quarter sales of $1.56 billion
- Gross profit of $431 million and operating income of $127 million
- No debt and $479 million in cash and investments
- 10% increase in annual dividend to $10.80 per share
- Investing in technology to enhance customer experience and drive growth
- Long-term growth drivers include regulatory changes, technology investments, electrification of heating systems, growth of ductless HVAC systems, and a buy-and-build acquisition strategy
- Record operating cash flow of $104 million and $282 million raised through equity offering
- $2.9 billion in shareholders' equity
- None.
Insights
Watsco, Inc.'s first-quarter results paint a mixed financial picture. Revenue growth at 1% indicates a stable but not rapidly expanding top line, contrasting slightly with the 2% decline on a same-store basis, which may hint at underlying challenges in achieving organic growth. Gross profit margins have remained steady at 27.5%, which is healthy for the distribution industry and reflects efficient cost management. However, SG&A expenses outpacing revenue growth at an 8% increase, including costs for 18 new locations, suggest an aggressive expansion strategy that could pressure operating margins.
The 10% dividend increase aligns with Watsco's history of dividend growth but must be examined against the backdrop of a lower EPS of $2.17 compared to $2.83 last year. This might raise questions about the sustainability of future dividend increases unless earnings rebound. The record first-quarter operating cash flow of $104 million is impressive and provides the company with substantial liquidity to invest in its 'buy and build' strategy, as well as buffer any short-term market volatility.
The equity-raise through the ATM offering strengthens the balance sheet but dilutes current shareholders. This move indicates confidence in the company's long-term growth prospects while also signaling that Watsco may be preparing for significant investments or acquisitions. From an investor's perspective, it's essential to monitor how effectively the raised capital is deployed to foster growth.
Watsco's report highlights the seasonal nature of the HVAC industry, with Q1 typically being slower. The company's focus on technology transformation, including its advanced mobile apps and e-commerce platform, which now accounts for 33% of total sales, indicates a forward-thinking approach aiming to streamline the contractor experience. This tech-centric strategy may appeal to a growing segment of contractors who value efficiency and speed, potentially leading to increased customer loyalty and market share.
Regulatory changes, such as new energy efficiency standards and refrigerant phase-downs, are poised to spur innovation and likely drive demand for upgraded systems. Watsco's strong positioning in heat pump and ductless HVAC systems sales – which are outpacing conventional systems – positions the company to capitalize on trends towards electrification and energy efficiency. Investors should note that Watsco's ability to ride regulatory waves could translate into competitive advantages and consistent market gains over its highly fragmented industry landscape.
Watsco's emphasis on scaling its technology investments reveals a commitment to staying at the forefront of the HVAC distribution market. Their suite of technological tools, from real-time technical support to e-commerce, is not only improving customer engagement but also showing promise in enhancing margins and operating efficiencies. Active users of Watsco’s technology platforms are demonstrating stronger sales growth rates and significantly lower attrition, which could imply higher customer satisfaction and retention.
The adoption of Watsco's OnCallAir® platform, with a 22% increase in GMV, reflects a successful expansion into digital sales, a important area for modern distribution models. For investors, the ability of Watsco to leverage technology and innovate within a traditional industry is indicative of potential for long-term growth, especially as the company seeks to attract and support a new generation of tech-savvy contractors.
Continued Customer Adoption of Industry-Leading Technologies Drives Share Gains;
Company Strengthens Balance Sheet for Long-Term Investment and Growth
MIAMI, April 24, 2024 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) announced its operating results for the first quarter ended March 31, 2024 and provided commentary on business trends, growth opportunities, technology innovation and its financial position.
With more than
Watsco’s balance sheet strengthened during the quarter. At March 31, 2024, Watsco had no debt and held cash and investments of
Albert H. Nahmad, Watsco’s Chairman and CEO stated: “While softer market conditions persisted during what is essentially the low-season for product sales, we are currently experiencing growth in end-market demand as we enter the summer selling season. We believe market share gains are continuing, and we are proud to have added three new companies to our family since the beginning of last year. Finally, and most gratifying, we further strengthened our balance sheet and generated record cash flow during a period that typically requires working capital investment ahead of the selling season.”
First Quarter Results
- Revenues increased
1% to a record$1.56 billion (a2% decline on a same-store basis) - Gross profit of
$431 million (27.5% gross margin) - SG&A expenses increased
8% , including 18 new locations (a4% increase on a same-store basis) - Operating income of
$127 million (operating margin of8.1% ) - Earnings per share of
$2.17 versus$2.83 last year - Record first quarter operating cash flow of
$104 million - Equity-raise of
$282 million through the Company’s at-the-market (ATM) offering program
Sales trends (excluding acquisitions)
1% decline in HVAC equipment (68% of sales)6% decline in other HVAC products (28% of sales)2% increase in commercial refrigeration products (4% of sales)
First quarter operating results reflect stabilizing end-market demand, on-going realization of OEM pricing actions, progress in scaling Watsco’s industry-leading technology platforms and continued investments designed to drive long-term growth. Additionally, comparative results were impacted by approximately
Technology Transformation
Watsco continues to lead and innovate through customer-focused technologies designed to transform the customer experience and reshape how our industry operates. Watsco’s ecosystem of technology tools and platforms makes it easier for HVAC contractors to do business and, in turn, improve their speed and efficiency, as well as provide future growth potential with new and existing customers. Updates to our various technology initiatives include:
- Product Information Management (PIM), Watsco’s repository of rich product information, is delivered seamlessly through its mobile apps and e-commerce platform. Watsco’s PIM database contains more than 1.5 million SKUs accessible to more than 375,000 contractors and technicians annually.
- HVAC Pro+ Mobile Apps provide customers with real-time access to critical information that improves speed and productivity. This includes real-time technical support, product details, inventory availability, warranty look-up and processing, certified system matchups, e-commerce, and more. The authenticated user community (users linked to an e-commerce account) over the 12-month period ended March 31, 2024 grew
6% to more than 57,000 users compared to the same period a year ago. - E-commerce sales continue to outpace overall sales growth rates in the first quarter and accounted for
33% of total sales, inclusive of revenues from recently acquired businesses that are now adopting Watsco’s technology platforms. - OnCallAir®, Watsco’s digital sales platform, has increased penetration among HVAC contractors as digital engagement with homeowners expands. The annualized gross merchandise value (GMV) of products sold by customers through OnCallAir® was approximately
$1.3 billion as of the end of the first quarter. During the first quarter of 2024, OnCallAir® presented quotes to approximately 61,000 households, a15% increase, and generated$269 million GMV, a22% increase over last year.
A.J. Nahmad, Watsco’s President, commented: “Our journey to drive technology adoption at scale has yielded terrific results, but we are even more excited at the opportunities that lay ahead. Our tools and capabilities, which are unique in our industry, are designed to help HVAC contractors of any size grow faster and become more efficient. These investments have driven higher market share and higher growth rates with technology-enabled customers. We believe we are just scratching the surface on the internal technology deployed to enhance margins and operating efficiencies. We remain committed to doing more and transform how our industry operates.”
Long-Term Growth Drivers
Watsco believes that various company-specific and industry-driven catalysts will support continued growth and profitability in the years ahead. Watsco’s scale, technology platforms, OEM relationships and entrepreneurial culture are competitive advantages that we believe position us favorably over the long-term.
Regulatory Changes. New energy efficiency standards for HVAC systems took effect in 2023. In 2024, OEMs have begun the transition to new refrigerants in response to regulations that require a phase-down of global warming properties of the refrigerants used in older HVAC systems. These regulations advance product innovation, improve homeowner energy efficiency, reduce the carbon footprint of end-users and increase average selling prices over time.
Scaling of Technology Investments. Watsco is investing to enhance its technology advantage in the HVAC/R distribution industry. Current trends demonstrate that customers who become active users of our technology platforms produce stronger sales growth rates and exhibit approximately
Electrification of Heating Systems. Regulatory catalysts and electrification trends are also influencing the adoption of heat pump HVAC systems in lieu of traditional gas furnaces and other forms of fossil-fuel heating. In 2023, Watsco sales of heat pump HVAC systems exceeded
Growth of Ductless HVAC Systems. The growing acceptance of ductless HVAC systems in both residential and commercial applications is also a long-term growth driver. We are the leading distributor of ductless products in North America, representing approximately 20 brands manufactured by OEMs around the world. Sales of ductless HVAC systems during the first quarter continued to outpace growth rates of conventional ducted HVAC systems.
Buy and Build Acquisition Strategy. Partnering with market-leading independent distributors remains an important long-term driver to grow the Company’s scale in the marketplace. Over the last five years, Watsco has acquired nine distribution businesses, investing approximately
Cash Flow, Financial Strength and Liquidity
Watsco’s long-standing goal is to maintain a conservative balance sheet to support investments in new growth opportunities as they arise. Watsco’s strong financial position has been critical to its long-term performance as it enables meaningful investment during most any macroeconomic or industry backdrop.
During the first quarter, the Company generated record operating cash flow of
Watsco has paid dividends for 50 consecutive years. The Company increased its annual dividend rate by
First Quarter Earnings Conference Call Information
Date and time: April 24, 2024 at 10:00 a.m. (EDT)
Webcast: http://investors.watsco.com (a replay will be available on the Company’s website)
Dial-in number: United States (844) 883-3908 / International (412) 317-9254
Use of Non-GAAP Financial Information
In this release, the Company discloses certain performance measures on a “same-store basis”, which are non-GAAP and exclude the effects of locations closed, acquired, or locations opened, in each case during the immediately preceding 12 months, unless such locations are within close geographical proximity to existing locations. The Company believes that this information provides greater comparability regarding its ongoing operating performance. These measures should not be considered an alternative to measurements required by U.S. GAAP. Adjusted GAAP measures are useful to assist our investors in evaluating our ongoing operating performance for the current reporting period and, where provided, over different reporting periods.
About Watsco
Watsco operates the largest distribution network for heating, air conditioning and refrigeration (HVAC/R) products with locations in the United States, Canada, Mexico, and Puerto Rico, and on an export basis to Latin America and the Caribbean. Watsco estimates that over 375,000 owner-operators, technicians, and installers visit or call one of its 691 locations each year to get information, obtain technical support and buy products.
We focus on the replacement market, which has increased in size and importance as a result of the aging of installed systems, the introduction of higher energy efficient models and the necessity of HVAC products in homes and businesses. According to data published in March 2023 by the Energy Information Administration, there are approximately 102 million HVAC systems installed in the United States that have been in service for more than 10 years, most of which operate well below current minimum efficiency standards.
Accordingly, Watsco has the opportunity to be a significant and important contributor toward climate change as it plays an important role to lower CO2e emissions. According to the Department of Energy, HVAC systems account for roughly half of U.S. household energy consumption. As such, replacing older systems at higher efficiency levels is a critical means for homeowners to reduce electricity consumption and their carbon footprint.
Based on estimates validated by independent sources, Watsco averted an estimated 20.1 million metric tons of CO2e emissions from January 1, 2020 to March 31, 2024 through the sale of replacement HVAC systems at higher-efficiency standards, an equivalent of removing 4.8 million gas powered vehicles annually off the road. More information, including sources and assumptions used to support the Company’s estimates, can be found at www.watsco.com.
This document includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may address, among other things, our expected financial and operational results and the related assumptions underlying our expected results. These forward-looking statements are distinguished by use of words such as “will,” “would,” “anticipate,” “expect,” “believe,” “designed,” “plan,” or “intend,” the negative of these terms, and similar references to future periods. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive market, new housing starts and completions, capital spending in commercial construction, consumer spending and debt levels, regulatory and other factors, including, without limitation, the effects of supplier concentration, competitive conditions within Watsco’s industry, the seasonal nature of sales of Watsco’s products, the ability of the Company to expand its business, insurance coverage risks and final GAAP adjustments. Detailed information about these factors and additional important factors can be found in the documents that Watsco files with the Securities and Exchange Commission, such as Form 10-K, Form 10-Q and Form 8-K. Forward-looking statements speak only as of the date the statements were made. Watsco assumes no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as required by applicable law.
| WATSCO, INC. Condensed Consolidated Results of Operations (In thousands, except per share data) (Unaudited) | |||||||
| Quarter Ended March 31, | |||||||
| 2024 | 2023 | ||||||
| Revenues | $ | 1,564,991 | $ | 1,550,641 | |||
| Cost of sales | 1,134,366 | 1,102,484 | |||||
| Gross profit | 430,625 | 448,157 | |||||
| Gross profit margin | 27.5 | % | 28.9 | % | |||
| SG&A expenses | 309,548 | 287,057 | |||||
| Other income | 5,460 | 3,640 | |||||
| Operating income | 126,537 | 164,740 | |||||
| Operating margin | 8.1 | % | 10.6 | % | |||
| Interest (income) expense, net | (2,470 | ) | 615 | ||||
| Income before income taxes | 129,007 | 164,125 | |||||
| Income taxes | 24,745 | 33,754 | |||||
| Net income | 104,262 | 130,371 | |||||
| Less: net income attributable to non-controlling interest | 17,258 | 20,298 | |||||
| Net income attributable to Watsco | $ | 87,004 | $ | 110,073 | |||
| Diluted earnings per share: | |||||||
| Net income attributable to Watsco shareholders | $ | 87,004 | $ | 110,073 | |||
| Less: distributed and undistributed earnings allocated to restricted common stock | 6,836 | 7,411 | |||||
| Earnings allocated to Watsco shareholders | $ | 80,168 | $ | 102,662 | |||
| Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share | 36,999,548 | 36,301,828 | |||||
| Diluted earnings per share for Common and Class B common stock | $ | 2.17 | $ | 2.83 | |||
| WATSCO, INC. Condensed Consolidated Balance Sheets (Unaudited, in thousands) | |||||
| March 31, | December 31, | ||||
| 2024 | 2023 | ||||
| Cash and cash equivalents | $ | 278,864 | $ | 210,112 | |
| Short-term cash investments | 200,000 | - | |||
| Accounts receivable, net | 832,119 | 797,832 | |||
| Inventories, net | 1,655,635 | 1,347,289 | |||
| Other | 31,754 | 36,698 | |||
| Total current assets | 2,998,372 | 2,391,931 | |||
| Property and equipment, net | 138,486 | 136,230 | |||
| Operating lease right-of-use assets | 383,434 | 368,748 | |||
| Goodwill, intangibles, net and other | 836,826 | 832,273 | |||
| Total assets | $ | 4,357,118 | $ | 3,729,182 | |
| Accounts payable and accrued expenses | $ | 923,229 | $ | 611,747 | |
| Current portion of lease liabilities | 102,897 | 100,265 | |||
| Total current liabilities | 1,026,126 | 712,012 | |||
| Borrowings under revolving credit agreement | - | 15,400 | |||
| Operating lease liabilities, net of current portion | 290,951 | 276,913 | |||
| Deferred income taxes and other liabilities | 112,468 | 108,667 | |||
| Total liabilities | 1,429,545 | 1,112,992 | |||
| Watsco's shareholders’ equity | 2,526,425 | 2,229,839 | |||
| Non-controlling interest | 401,148 | 386,351 | |||
| Shareholders’ equity | 2,927,573 | 2,616,190 | |||
| Total liabilities and shareholders’ equity | $ | 4,357,118 | $ | 3,729,182 | |
| WATSCO, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | |||||||
| Quarter Ended March 31, | |||||||
| 2024 | 2023 | ||||||
| Cash flows from operating activities: | |||||||
| Net income | $ | 104,262 | $ | 130,371 | |||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
| Depreciation and amortization | 9,882 | 8,183 | |||||
| Share-based compensation | 8,127 | 6,701 | |||||
| Non-cash contribution to 401(k) plan | 8,735 | 8,862 | |||||
| Provision for doubtful accounts | 862 | 1,043 | |||||
| Other income from investment in unconsolidated entity | (5,460 | ) | (3,640 | ) | |||
| Other, net | 1,245 | 1,160 | |||||
| Changes in working capital, net of effects of acquisitions | |||||||
| Accounts receivable, net | (33,502 | ) | (64,691 | ) | |||
| Inventories, net | (307,219 | ) | (240,758 | ) | |||
| Accounts payable and other liabilities | 315,087 | 101,813 | |||||
| Other, net | 1,687 | 3,535 | |||||
| Net cash provided by (used in) operating activities | 103,706 | (47,421 | ) | ||||
| Cash flows from investing activities: | |||||||
| Purchases of short-term cash investments | (200,000 | ) | - | ||||
| Capital expenditures, net | (5,787 | ) | (7,449 | ) | |||
| Business acquisitions, net of cash acquired | (5,178 | ) | (2,989 | ) | |||
| Net cash used in investing activities | (210,965 | ) | (10,438 | ) | |||
| Cash flows from financing activities: | |||||||
| Net proceeds from the sale of Common stock | 281,784 | - | |||||
| Net (repayments) proceeds under revolving credit agreement | (15,400 | ) | 141,200 | ||||
| Dividends on Common and Class B Common stock | (96,765 | ) | (94,970 | ) | |||
| Other, net | 8,782 | 5,071 | |||||
| Net cash provided by financing activities | 178,401 | 51,301 | |||||
| Effect of foreign exchange rate changes on cash and cash equivalents | (2,390 | ) | 8 | ||||
| Net increase (decrease) in cash and cash equivalents | 68,752 | (6,550 | ) | ||||
| Cash and cash equivalents at beginning of period | 210,112 | 147,505 | |||||
| Cash and cash equivalents at end of period | $ | 278,864 | $ | 140,955 | |||
Barry S. Logan
Watsco, Inc.
Executive Vice President
(305) 714-4102
FAQ
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