Watsco Reports Strong 2023 Performance Gaining Share in a Soft Market Boosts Annual Dividend 10% to $10.80 Per Share
- Watsco reported a 1% sales growth in Q4 to $1.60 billion, with a gross profit of $414 million and operating income of $108 million.
- The company's 2023 results were achieved against the backdrop of record-setting performance in 2022 and 2021, driven by replacement demand and pricing actions.
- Watsco actively reduced inventories in 2023, improving operating efficiency and generating a record $299 million in operating cash flow.
- The company's technology investments, including e-commerce sales growth, product information management, and proprietary digital sales platforms, aim to enhance customer experience and operational efficiencies.
- Watsco's focus on innovation and efficiency, along with its strong financial position and dividend increase, reflects its confidence in future growth opportunities in the HVAC/R distribution market.
- None.
Insights
The financial performance of Watsco, Inc. is a testament to its robust business model, even amid softer market conditions in 2023. The company's ability to maintain a flat sales trajectory for HVAC equipment, which constitutes a significant 69% of sales, despite a general industry downturn, indicates a resilient demand for its products. The 40% increase in operating cash flow to $299 million, including a substantial reduction in inventories, demonstrates strong cash management and operational efficiency. The dividend increase marks a 50-year streak, underscoring the company's commitment to shareholder returns and financial stability. However, investors should note the 4% decrease in operating income and the EPS drop from $15.41 in 2022 to $13.67 in 2023, which may raise concerns about profitability trends and warrant a closer examination of the company's cost structures and margin pressures.
Watsco's strategic response to regulatory changes with a successful transition to higher-efficiency HVAC systems is noteworthy. The shift, which covers multiple brands and involves extensive logistics and training, positions Watsco favorably in a market increasingly focused on energy efficiency. Furthermore, the company's e-commerce growth and technology investments signal a forward-thinking approach to customer engagement and operational agility. The 5% e-commerce sales growth, reaching $2.4 billion, is particularly impressive, considering it now represents 34% of total sales. This digital transformation is likely to enhance Watsco's competitive edge and could be a critical factor in driving future market share gains, especially as the HVAC industry continues to evolve towards more technologically integrated solutions.
Watsco's commitment to technological innovation is a strategic lever for sustainable growth. The expansion of the company's product information management (PIM) platform to over 1.5 million SKUs and the growth of the OnCallAir® platform underscore the importance of digital tools in the HVAC distribution market. These investments not only improve the customer experience but also streamline operations, which can lead to improved margins over time. The use of pricing optimization software and warehouse management systems is indicative of Watsco's focus on leveraging data analytics and automation to enhance profitability. As the HVAC industry continues to adapt to new technologies, Watsco's proactive approach could serve as a blueprint for how distributors can remain competitive in a rapidly evolving landscape.
Entrepreneurial Culture, Transformational Technologies, Strong Financial Position
Continue to Provide Results and Significant Opportunities
MIAMI, Feb. 13, 2024 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) reported its results for the fourth quarter and full year ended December 31, 2023. The Company also provided commentary on business trends, growth opportunities, technology innovation and its financial strength.
Watsco began its distribution strategy in 1989 and today operates the largest distribution network for HVAC/R products in North America. The Company’s 692 locations serve over 125,000 contractors across the United States, Canada, Mexico, Puerto Rico and Latin America. Since 1989, Watsco’s entrepreneurial, growth-focused culture has driven compounded annual growth rates (CAGRs) of sales and operating income of
Watsco also announced today that its Board of Directors approved a
2023 Performance and HVAC/R Market Trends
Results in 2023 were achieved against the backdrop of record-setting performance in 2022 and 2021. 2022 sales and EPS grew
In contrast, 2023 performance reflects softer market conditions with more conventional levels of pricing actions and normalized levels of HVAC system replacement. Based on published industry data, annual OEM shipments of unitary HVAC systems declined by approximately
2023 results also reflect a significant product transition to higher-efficiency systems in response to regulatory requirements that went into effect on January 1, 2023. An estimated
In response to changing conditions, actions were taken in 2023 to improve operating efficiency, resulting in a
Albert H. Nahmad, Watsco’s Chairman and CEO, commented: “In many respects, we consider 2023 an exceptional year given the extraordinary performance during the two preceding years and considering the softer comparative market conditions that have followed. We achieved market share gains during a down market, scaled the adoption of Watsco’s industry-leading technology platforms, drove productivity gains, expanded our network, fortified the quality of our balance sheet and once again provided our shareholders a meaningful dividend increase.”
Fourth Quarter Results
1% sales growth to a record$1.60 billion - Gross profit of
$414 million (gross margin of25.8% ) - SG&A expenses increased
4% (SG&A was flat on a same-store basis) - Operating income of
$108 million versus$137 million last year (operating margin of6.7% ) - EPS of
$2.06 in 2023 versus$3.55 in 2022 ($2.35 on an adjusted, non-GAAP basis in 2022) 40% increase in operating cash flow to a record$299 million
Sales trends (excludes acquisitions)
2% decrease in sales- Flat sales for HVAC equipment (
69% of sales) 6% decline in other HVAC products (27% of sales)3% decline in commercial refrigeration products (4% of sales)
It is important to note that the fourth and first quarters of each calendar year are highly seasonal due to the nature and timing of the replacement of HVAC systems. Results are typically strongest in the second and third quarters and the Company’s fourth quarter financial results are disproportionately affected by seasonality.
Full-Year Results
- Record sales of
$7.28 billion versus$7.27 billion last year - Gross profit of
$1.99 billion compared to$2.03 billion last year (gross margin of27.4% ) - SG&A expenses of
$1.22 billion , flat versus last year (1% decline on a same-store basis) - Operating income decreased
4% to$795 million (operating margin of10.9% ) - EPS of
$13.67 in 2023 versus$15.41 in 2022 ($14.20 on an adjusted, non-GAAP basis in 2022) - Operating cash flow of
$562 million compared to$572 million last year
Sales trends (excludes acquisitions)
1% decrease in sales- Flat sales for HVAC equipment (
69% of sales) 5% decrease in other HVAC products (27% of sales)5% growth in commercial refrigeration products (4% of sales)
Technology Leadership and Continued Innovation
Watsco continued to invest and scale its industry-leading technology platforms, which collectively transform the customer experience, enhance operational efficiencies and help contractors grow faster as they deliver a more contemporary experience to homeowners and businesses. Customer-facing technology highlights include:
- E-commerce sales grew
5% in 2023 to$2.4 billion , or approximately34% of total sales. - Active e-commerce users experienced nearly
50% less attrition than non-e-commerce users. - Watsco’s product information management (PIM) platform expanded to more than 1.5 million SKUs
- Watsco’s authenticated user community for HVAC Pro+ Mobile Apps expanded to approximately 55,000 users.
- The gross merchandise value of products sold on OnCallAir®, Watsco’s proprietary digital sales platform for contractors, increased
28% to$1.2 billion during 2023 with quote volume expanding14% to approximately 256,000 households.
Investments in technologies have also been made to drive productivity, enhance operations and improve profitability:
- Pricing optimization software to provide analytics and insights on the more than 200,000 SKUs sold with the goal to modernize historical processes, enhance competitiveness and improve margins.
- Proprietary warehouse management and order fulfillment systems to enable faster and more reliable customer service and to accelerate the fulfillment of orders.
- Demand planning and inventory optimization tools to improve fulfillment rates and inventory turns.
- Logistics and operations software and expertise to facilitate more efficient movement of products.
A.J. Nahmad, Watsco’s President, added: “Watsco continues to transform every aspect of its business through technology. For over a decade, our contractor-based platforms have helped Watsco build market share, accelerate customer acquisition and drive margin expansion. We are also excited about the business-process related investments we have made to drive greater productivity across the organization. We are now imagining how AI will influence the daily lives of our customers and employees. We think in terms of decades, and we remain committed to investing more over time as we believe these technologies provide a distinct, long-term competitive advantage.”
Industry Catalysts
Various industry catalysts are influencing Watsco’s marketplace. The Company believes its scale, entrepreneurial culture, OEM relationships, leading technologies and financial strength provide important competitive advantages to optimize the opportunities provided by these catalysts.
Regulatory Changes. In response to climate change, the Federal government and various states have enacted laws and regulations, including tax credits, to incentivize the replacement of aging HVAC systems with more energy-efficient and environmentally friendly systems. New efficiency standards became effective January 1, 2023 that raised the minimum required efficiency for HVAC systems nationwide. In addition, regulations went into effect on January 1, 2024 mandating a
Electrification and Transition to Heat Pumps. The movement toward electrification of heating systems, utilizing heat pumps in lieu of gas furnaces and other forms of fossil-fuel heating, is also an important trend. The operating characteristics of heat pumps have improved such that they are now effective substitutes for many of the millions of fossil fuel-burning heating systems used throughout North America. Sales of heat pumps in 2023 once again outpaced the growth rates for conventional fossil-fuel heating systems (primarily gas furnaces). Watsco sold over 700,000 heat pump units across 25+ different brands during 2023.
Growth of Ductless HVAC Systems. The growing acceptance of ductless HVAC products by both contractors and end-market users benefits Watsco, as we are among the leading distributors of ductless HVAC products used in both residential and commercial applications. Sales of ductless products across Watsco grew
Acquisitions
Watsco has acquired 69 successful companies since 1989 and is actively seeking additional opportunities to invest and grow through acquisitions. Watsco recently completed three acquisitions as follows:
Capitol District Supply. Founded in 1945, Capitol District operates three locations in upstate New York and is led by third generation members of its founding family. Capitol District generated revenues of approximately
Gateway Supply Company. Founded in 1964, Gateway operates 15 locations throughout South Carolina and one location in Charlotte, North Carolina. Gateway is led by second generation members of its founding family. Gateway generated revenues of approximately
Commercial Specialists. Founded in 1964, Commercial Specialists operates two locations in Southern Ohio and is led by second and third generation members of its founding family. Commercial Specialists generated revenues of approximately
Consistent with Watsco’s buy-and-build acquisition strategy, these companies will operate under their existing names and under the direction of existing leadership to provide continuity to customers, employees and OEM partners. Watsco will provide the resources, capital and technology needed to assist in achieving their growth plans.
Cash Flow & Dividends
Watsco’s full-year operating cash flow for 2023 was
Tax Benefit Included in 2022’s Reported Results
2022’s full-year and fourth quarter results reflect the vesting of restricted stock, which provided the Company a
Earnings Conference Call Information
Date and time: February 13, 2024 at 10:00 a.m. (ET)
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 also discloses operating income, operating margins and diluted EPS on an adjusted, non-GAAP basis to exclude the impact caused by the vesting of restricted stock on October 15, 2022 as described above. 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. Adjusted GAAP measures should not be considered in isolation or as a substitute for income statement data prepared in accordance with GAAP and our presentation of Adjusted GAAP measures may not be comparable to similarly-titled measures used by other companies.
Operating income, a GAAP measure, reconciled to operating income on an adjusted basis, a non-GAAP measure:
| Quarter Ended December 31, | Year Ended December 31, | ||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||
| Operating income | $ | 107,748 | $ | 137,179 | $ | 794,810 | $ | 831,578 | |||||
| Primarily employment taxes related to the vesting of restricted stock | - | 3,636 | - | 3,636 | |||||||||
| Operating income on an adjusted basis | $ | 107,748 | $ | 140,815 | $ | 794,810 | $ | 835,214 | |||||
| Operating margin | 6.7 | % | 8.7 | % | 10.9 | % | 11.4 | % | |||||
| Operating margin on an adjusted basis | 6.7 | % | 8.9 | % | 10.9 | % | 11.5 | % | |||||
Diluted EPS for Common and Class B common stock, a GAAP measure, reconciled to diluted EPS for Common and Class B common stock on an adjusted basis, a non-GAAP measure:
| Quarter Ended December 31, | Year Ended December 31, | ||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||
| Diluted earnings per share for Common and Class B common stock | $ | 2.06 | $ | 3.55 | $ | 13.67 | $ | 15.41 | |||
| Primarily employment taxes related to the vesting of restricted stock | - | 0.08 | - | 0.08 | |||||||
| Tax related benefit from the vesting of restricted stock | - | (1.28 | ) | - | (1.29 | ) | |||||
| Diluted earnings per share for Common and Class B common stock on an adjusted basis | $ | 2.06 | $ | 2.35 | $ | 13.67 | $ | 14.20 | |||
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 350,000 contractors and technicians visit or call one of its 692 locations each year to get information, obtain technical support and buy products.
Our business is focused 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 its business plays an important role in the drive 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 existing systems at higher efficiency levels is one of the most meaningful steps homeowners can take to reduce electricity consumption and carbon footprint over time.
Based on estimates validated by independent sources, Watsco averted an estimated 19.2 million metric tons of CO2e emissions from January 1, 2020 to December 31, 2023 through the sale of replacement HVAC systems at higher-efficiency standards, an equivalent of removing 4.3 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 December 31, | Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Revenues | $ | 1,603,197 | $ | 1,581,223 | $ | 7,283,767 | $ | 7,274,344 | |||||||
| Cost of sales | 1,188,781 | 1,147,673 | 5,291,627 | 5,244,055 | |||||||||||
| Gross profit | 414,416 | 433,550 | 1,992,140 | 2,030,289 | |||||||||||
| Gross profit margin | 25.8 | % | 27.4 | % | 27.4 | % | 27.9 | % | |||||||
| SG&A expenses | 312,461 | 301,753 | 1,223,507 | 1,221,382 | |||||||||||
| Other income | 5,793 | 5,382 | 26,177 | 22,671 | |||||||||||
| Operating income | 107,748 | 137,179 | 794,810 | 831,578 | |||||||||||
| Operating margin | 6.7 | % | 8.7 | % | 10.9 | % | 11.4 | % | |||||||
| Interest (income) expense, net | (1,000 | ) | 14 | 4,920 | 2,165 | ||||||||||
| Income before income taxes | 108,748 | 137,165 | 789,890 | 829,413 | |||||||||||
| Income tax expense (benefit) | 11,007 | (19,965 | ) | 155,751 | 125,717 | ||||||||||
| Net income | 97,741 | 157,130 | 634,139 | 703,696 | |||||||||||
| Less: net income attributable to non-controlling interest | 15,194 | 19,459 | 97,802 | 102,529 | |||||||||||
| Net income attributable to Watsco | $ | 82,547 | $ | 137,671 | $ | 536,337 | $ | 601,167 | |||||||
| Diluted earnings per share: | |||||||||||||||
| Net income attributable to Watsco shareholders | $ | 82,547 | $ | 137,671 | $ | 536,337 | $ | 601,167 | |||||||
| Less: distributed and undistributed earnings allocated to restricted common stock | 6,707 | 9,390 | 36,932 | 51,294 | |||||||||||
| Earnings allocated to Watsco shareholders | $ | 75,840 | $ | 128,281 | $ | 499,405 | $ | 549,873 | |||||||
| Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share | 36,809,454 | 36,141,047 | 36,531,683 | 35,683,634 | |||||||||||
| Diluted earnings per share for Common and Class B common stock | $ | 2.06 | $ | 3.55 | $ | 13.67 | $ | 15.41 | |||||||
| WATSCO, INC. Condensed Consolidated Balance Sheets (Unaudited, in thousands) | |||||
| December 31, | December 31, | ||||
| 2023 | 2022 | ||||
| Cash and cash equivalents | $ | 210,112 | $ | 147,505 | |
| Accounts receivable, net | 797,832 | 747,110 | |||
| Inventories, net | 1,347,289 | 1,370,173 | |||
| Other | 36,698 | 33,951 | |||
| Total current assets | 2,391,931 | 2,298,739 | |||
| Property and equipment, net | 136,230 | 125,424 | |||
| Operating lease right-of-use assets | 368,748 | 317,314 | |||
| Goodwill, intangibles, net and other | 832,273 | 746,737 | |||
| Total assets | $ | 3,729,182 | $ | 3,488,214 | |
| Accounts payable and accrued expenses | $ | 611,747 | $ | 759,525 | |
| Current portion of lease liabilities | 100,265 | 90,597 | |||
| Borrowings under prior revolving credit agreement | - | 56,400 | |||
| Total current liabilities | 712,012 | 906,522 | |||
| Borrowings under current revolving credit agreement | 15,400 | - | |||
| Operating lease liabilities, net of current portion | 276,913 | 232,144 | |||
| Deferred income taxes and other liabilities | 108,667 | 101,270 | |||
| Total liabilities | 1,112,992 | 1,239,936 | |||
| Watsco's shareholders’ equity | 2,229,839 | 1,889,237 | |||
| Non-controlling interest | 386,351 | 359,041 | |||
| Shareholders’ equity | 2,616,190 | 2,248,278 | |||
| Total liabilities and shareholders’ equity | $ | 3,729,182 | $ | 3,488,214 | |
| WATSCO, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | ||||||||
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 634,139 | $ | 703,696 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 35,090 | 31,683 | ||||||
| Share-based compensation | 30,000 | 28,821 | ||||||
| Deferred income tax (benefit) provision | (7,179 | ) | 13,466 | |||||
| Provision for doubtful accounts | 7,158 | 8,539 | ||||||
| Other income from investment in unconsolidated entity | (26,177 | ) | (22,671 | ) | ||||
| Other, net | 8,719 | 5,122 | ||||||
| Changes in working capital, net of effects of acquisitions | ||||||||
| Accounts receivable, net | (36,035 | ) | (60,154 | ) | ||||
| Inventories, net | 64,620 | (259,860 | ) | |||||
| Accounts payable and other liabilities | (162,042 | ) | 121,993 | |||||
| Other, net | 13,661 | 1,329 | ||||||
| Net cash provided by operating activities | 561,954 | 571,964 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures, net | (34,172 | ) | (33,789 | ) | ||||
| Business acquisitions, net of cash acquired | (3,822 | ) | (47 | ) | ||||
| Investment in unconsolidated entity | (2,849 | ) | - | |||||
| Other investment | (500 | ) | - | |||||
| Net cash used in investing activities | (41,343 | ) | (33,836 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Dividends on Common and Class B Common stock | (382,646 | ) | (332,447 | ) | ||||
| Distributions to noncontrolling interest | (73,589 | ) | (69,184 | ) | ||||
| Net repayments under revolving credit agreement | (41,000 | ) | (32,600 | ) | ||||
| Repurchases of common stock to satisfy employee withholding tax obligations | (2,828 | ) | (87,107 | ) | ||||
| Proceeds from NCI for investment in unconsolidated entity | 570 | - | ||||||
| Net proceeds from the sale of common stock | 15,179 | - | ||||||
| Other | 24,238 | 17,380 | ||||||
| Net cash used in financing activities | (460,076 | ) | (503,958 | ) | ||||
| Effect of foreign exchange rate changes on cash and cash equivalents | 2,072 | (4,933 | ) | |||||
| Net increase in cash and cash equivalents | 62,607 | 29,237 | ||||||
| Cash and cash equivalents at beginning of year | 147,505 | 118,268 | ||||||
| Cash and cash equivalents at end of year | $ | 210,112 | $ | 147,505 | ||||
| Barry S. Logan Executive Vice President (305) 714-4102 e-mail: blogan@watsco.com | Watsco, Inc. 2665 S. Bayshore Drive, Suite 901 Miami, Florida 33133, USA (305) 714-4100 Fax: (305) 858-4492 www.watsco.com |
FAQ
What were Watsco's Q4 2023 sales figures?
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What technology investments has Watsco made to enhance its business operations?
