Adoption of Customer-Focused Technologies Grows as Business Transformation Continues
MIAMI, FLORIDA – (GLOBENEWSWIRE), July 25, 2018 – Watsco, Inc. (NYSE: WSO) reported record results for the quarter ended June 30, 2018.
Second Quarter Results
- 5% sales growth to a record $1.333 billion
- 6% growth in HVAC equipment (68% of sales)
- 5% growth in other HVAC products (28% of sales)
- 1% growth in commercial refrigeration products (4% of sales)
Key performance metrics:
- 16% earnings per share (EPS) growth to a record $2.40
- 22% increase in net income to a record $90 million
- 6% increase in operating income to a record $137 million
- 20 basis-point expansion in operating margins to a record 10.3%
- 3% increase in gross profit to a record $321 million (20 basis-points lower gross margin)
- 3% increase in SG&A and a 20 basis-point decline in SG&A as a percentage of sales
- $238 million debt reduction versus a year ago
Sales trends improved during the quarter and reflect strong unit demand, improved equipment pricing and a richer sales mix of high-efficiency systems. Gross profit comparisons from 2018 to 2017 include a 70-basis point improvement in selling margins for HVAC equipment offset by a non-recurring benefit in 2017 related to sales of refrigerant products and lower vendor incentives in 2018 due to timing of purchases. SG&A reflects on-going investments in technology and additional customer-facing headcount.
Albert H. Nahmad, Watsco’s Chairman and CEO stated: “Watsco’s second quarter performance produced the highest sales and profits of any quarter in our history. Looking at the bigger picture, we have invested $90 million in technology over the last five years with a primary focus on transforming our customer experience. Early results are exciting, but the adoption at scale will take time. We have also added nearly 300 employees over the last three years to supplement talent, leadership depth and service capacity to our network. Throughout
Watsco’s record results reflect continued investment in technologies designed to revolutionize Watsco’s customer-experience and help customers grow their businesses. Most notably, the digitization of Watsco’s marketplace via e-commerce and iOS/Android-enabled apps, supported by the industry’s most complete database of product information, continues to see momentum. E-commerce sales run-rate is approaching 30% of revenues.
This period of unprecedented investment, Watsco produced record operating results, more than doubled its annual dividend and reduced debt by $293 million.”
Mr. Nahmad added: “Pioneering investments of this magnitude require time and patience to determine their impact and value, especially given the focus of transforming our customer experience, which has been slow to evolve for decades. We also have the opportunity to transform our business through people, process and technology to gain market share, develop more efficient processes and reduce costs. Much foundational work has occurred to enable this transformation, and we are now challenging our leadership to accelerate adoption and utilization of these innovative platforms designed to create and capture incremental value in the coming years.”
First Half Results
- 5% sales growth to a record $2.259 billion
- 6% growth in HVAC equipment (67% of sales), including 7% growth in residential products
- 6% growth in other HVAC products (29% of sales)
- Flat sales of commercial refrigeration products (4% of sales)
Key performance metrics:
- 19% earnings per share growth to a record $3.32
- 24% increase in net income to a record $124 million
- 7% increase in operating income to a record $191 million
- 20 basis-point expansion in operating margins to 8.5%
- 4% increase in gross profit to a record $552 million (20 basis-points lower gross margin)
- 4% increase in SG&A and a 10 basis-point decline in SG&A as a percentage of sales
Watsco has launched a variety of technologies and process enhancements to transform how HVAC contractor customers are served in the marketplace. Watsco believes that speed, productivity and efficiency will be ever more critical as the digital era progresses and is investing to ensure an unparalleled customer-experience among HVAC wholesale distributors. Since 2012, Watsco’s technology team has grown from approximately 60 employees to 190 employees, and the present annual run-rate for technology-related spending is approximately $24 million.
The customer-obsessed innovations introduced by Watsco include:
- Mobile apps, websites and e-commerce platforms that employ the industry’s leading, data-rich repository of product information.
- Business intelligence and data analytics to enable insightful decision-making by 600+ managers.
- Proprietary order fulfillment software to improve speed, accuracy and convenience of the pick, pack and ship process.
- Predictive analytics-driven demand planning and inventory optimization software to improve order fill-rates, increase inventory turns, reduce real estate requirements and improve long-term productivity.
A.J. Nahmad, Watsco’s President said, “We are inspired by the progress toward adoption at scale and continue to release new iterations and solutions to market. We currently service more than 250,000 contractors and technicians across our 568 locations annually and complete over 7 million sale transactions. We have only scratched the surface of what is possible in terms of value creation and realization. What’s important is that these investments are helping our customers win, and when our customers win, we win.”
Customer adoption of Watsco’s technology platforms increased during 2018, enabling more interaction 24 hours a day to find products, place orders and obtain technical support. Key performance indicators related to the Company’s technology initiatives include:
E-Commerce and App Usage
Current e-commerce run-rate
Unique iOS or Android app weekly users Products (SKUs) digitized and available on-line Line items per order on-line versus in-store
Business Intelligence (BI) Platform
Increase in internal BI users
Average BI queries per week per user Number of total user inquiries during the year
Locations with Order Fulfillment (OF) software Number of orders filled with OF
Delivery truck miles tracked and analyzed Locations with express pickup
Dividends & Cash Flow
Progress in 2018
- 36% growth in online sales
- 37% increase in transactions
- 29% of sales versus 22% at end of 2017 14% increase in weekly active users 9% increase to over 650,000 SKUs 37% more line items per order
- 9% increase to over 1,600 weekly-users 10% increase in queries per week per user 13% increase to 10.6 million queries
- 337 locations versus 329 in December 2017 1.3 million versus less than 1 million last year 3.1 million miles versus 1.6 million last year 157 locations versus 134 in December 2017
Watsco has paid cash dividends for over 40 consecutive years. The Company’s philosophy is to share increasing amounts of cash flow with shareholders through higher dividends while maintaining a conservative financial position. Watsco announced a 16% increase in its annual dividend rate to $5.80 per share effective April 2018. Future increases in dividends will be considered in light of investment opportunities, cash flow, general economic conditions and the Company’s overall financial condition.
The Company has targeted cash flow from operations to exceed net income in 2018. Since 2000, Watsco’s operating cash flow was approximately $2.2 billion compared to net income of approximately $2.0 billion, surpassing the Company’s stated goal of generating cash flow in excess of net income.
Tax Cuts and Jobs Act of 2017
2018 results reflect lower income tax expense as a result of the passage of the Tax Cuts and Jobs Act of 2017. The Company’s effective income tax rate (net of taxes attributable to non-controlling interest) was 21% for the first six months of 2018 versus 29% last year.
Second Quarter Earnings Conference Call Information
Date: July 25, 2018
Time: 10:00 a.m. (EDT)
Dial-in number: United States (844) 883-3908 / International (412) 317-9254
A replay of the conference call will be available on the Company’s website.
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 250,000 contractors and technicians visit or call one of its 568 locations each year to get information, obtain technical support and buy products. HVAC/R products
provide comfort to homes and businesses regardless of the outdoor climate. There are approximately 92 million central air conditioning and heating systems installed in the United States that have been in service more than 10 years. Older systems often operate below today’s government mandated energy efficiency and environmental standards. Watsco has an opportunity to accelerate the replacement of these systems at a scale greater than its competitors as the movement toward reducing energy consumption and its environmental impact continues. This is especially important since heating and cooling accounts for approximately half of the energy consumed in a typical U.S. home. Additional information aboutWatscomay be found at http://www.watsco.com.
This document includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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, seasonal nature of sales of Watsco’s products, the ability of the Company to expand its business, insurance coverage risks and final GAAP adjustments. Forward-looking statements speak only as of the date the statement was 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. 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.