Watsco EPS Jumps 109% to $2.90, Reflecting Record Sales, Operating Profit, Operating Margin and Net Income
Strong Sales Growth, Higher Margins and Operating Efficiencies Drive Performance
Customer Adoption of Transformative Technologies Grows as Business Evolution Continues
Dividend Raised 13% to
Q1 Performance Highlights
- 34% sales growth to a record
- 109% increase in EPS to a record
$2.90on record net income attributable to Watscoof $113 million
- 109% increase in operating income to a record
$171 million(400 basis-point operating margin expansion to 11.2%)
- 53% gross profit increase to a record
$450 million(370 basis-point increase in gross margin)
- 30% increase in SG&A (a 60 basis-point reduction in SG&A as a percentage of sales)
These results reflect added investments to grow adoption of Watsco’s industry-leading technology platforms, which collectively transform the customer experience, enhance operational efficiency, and help contractors grow faster as they deliver a more contemporary experience to homeowners and businesses. Taken as a whole, we believe that Watsco’s technology offering is solidifying existing customer relationships and creating new customer acquisition opportunities that are producing consistent gains in market share.
Q1 Same-Store Performance
- 25% sales growth
- 26% growth in HVAC equipment (67% of sales)
- 24% increase in other HVAC products (29% of sales)
- 35% increase in commercial refrigeration products (4% of sales)
- 103% increase in operating income (440 basis-point expansion in operating margin to 11.6%)
- 43% gross profit increase (360 basis-point increase in gross margin)
- 19% increase in SG&A (a 100 basis-point reduction as a percentage of sales)
A.J Nahmad, Watsco’s President, commented: “We are particularly pleased with the continued adoption of our technology platforms by more and more customers. These platforms enable contractors to sell more high-efficiency HVAC systems, which benefits the consumer in the form of lower energy costs and benefits our climate in the form of reduced CO2e emissions over time. As the digital age influences how HVAC/R products and services are sold, we believe that Watsco’s customer-focused technologies, scale and leadership position offer significant long-term value.”
It is important to note that the first and fourth quarter of each calendar year are highly seasonal due to the nature and timing of replacement demand for HVAC/R systems, which is strongest in the second and third quarters. Accordingly, the Company’s first and fourth quarter financial results are disproportionately affected by seasonality.
External Factors Influencing Results
Certain factors continued to influence the HVAC/R industry along with the Company’s operating performance during the first quarter.
- Inflation – OEMs and manufacturers raised prices over the last two years in response to inflationary pressures.
Watscoin turn has raised selling prices, resulting in higher sales. The Company actively monitors market conditions through a variety of processes and technologies and communicates with suppliers to sustain competitiveness and profitability. For example, sales of residential HVAC/R equipment (excluding acquisitions) increased 26% during the quarter, comprised of an 8% increase in unit sales and an 18% increase in average unit selling prices, which includes the added pricing and the improved sales mix of higher-efficiency systems.
- Supply chain – OEMs have experienced supply chain disruptions attributable to component availability, labor shortages, transportation delays and other logistical challenges, resulting in constrained product availability and lengthened lead times. Despite these disruptions,
Watscodelivered strong unit growth during the impacted periods. Product availability has improved and inventory levels are being reestablished to meet demand.
- Operating expenses – reflecting the current demand environment and supply chain-related disruptions, the Company has incurred incremental costs to serve customers, including higher personnel costs and other operational increases. For example, Watsco’s freight and delivery costs (excluding acquisitions) increased 23% or $7 million (12 cents per share) during the quarter, reflecting higher-than-normal inventory movement within our network to meet customer demand. We expect incremental costs to moderate as OEM supply chains normalize.
Industry Trends and Watsco Initiatives to Drive Performance
The Company believes there are important catalysts emerging that will positively influence future replacement demand for HVAC systems above and beyond the traditional assumptions about the replacement cycle and average useful life. These catalysts include:
- Energy efficiency mandates that raise the minimum standard for new replacement systems sold beginning in 2023. In general terms, these mandates will raise the minimum SEER rating of new HVAC systems from 14 to 15 SEER in southern markets and 13 to 14 SEER in northern markets. Historically these mandates have benefited unit volumes and price realization as the industry transitions toward the new standards;
- Upcoming mandates related to the phase-out of high GWP refrigerants used in virtually every HVAC/R system currently installed. Beginning this year and continuing through 2029, the industry is required to gradually phase-out current refrigerants such that all new products beginning on
January 1, 2025will be required to have lower GWP refrigerants;
- Awareness, sensitivity and willingness of many consumers to listen to or act on environmental concerns. This includes commercial end-markets as owners of commercial and industrial buildings allocate capital to reduce their carbon footprint, improve energy efficiency, maximize indoor-air quality, and upgrade infrastructure over time;
- Contractor-customer aptitude to offer, sell and install higher-efficiency systems and related controls and accessories, particularly those who use Watsco’s proprietary technology platforms, OnCall Air® and CreditForComfort®, which provide homeowners a digital experience to buy and finance replacement HVAC/R systems; and
- The long-term trend toward electrification and the advent of ultra-low temperature heat pump systems that will gradually replace existing fossil-fuel powered heating systems.
These catalysts are expected to influence demand and contractor behavior in the years ahead and, as such,
Watscocontinues to invest in transformative technologies to better serve customers and gain market share. The community of active users of our platforms grew sales 30% faster than Watsco’s overall sales growth rate over the 12 months ended March 31, 2022and experienced 70% less sales attrition year over year. Given these results, Watscohas boosted its annual technology spending by $10 millionto $46 millionover the last 12 months ended March 31, 2022as compared to the same period a year ago. Watscohas added over 600 employees since March 31, 2021(excluding acquisitions) in response to strong sales growth, investments in new locations, and collaborative strategies with our OEM-partners to invest in future growth. In addition, Watsco’s culture to reward performance through a variety of pay-for-performance incentive programs to sales professionals and field leaders has resulted in a $7 million increase in commissions and other performance-based compensation (12 cents per share) during the quarter.
- Watsco’s location network has grown 16%, or by 96 locations, over the last three years from a combination of six acquisitions of market-leading businesses, most of which are in markets that were not served by
Watscoprior to the acquisition. We have made follow-on investments in products, people and technology in support of these new growth opportunities. In aggregate, the sales of acquired locations over the last 12 months were approximately $800 million. Watscois a leading distributor of ductless HVAC products used in residential and commercial applications covering domestic and international markets. Watsco’s sales of ductless products were approximately $400 millionbased on the 12 months ended March 31, 2022and increased by 45% during the first quarter of 2022 (excluding acquisitions). The movement toward higher-efficiency products and electrification of heating systems, along with the increasing acceptance of ductless technology by contractors and consumers, are expected to benefit the sale of these products now and over the long-term.
- Product Information Management (PIM) is Watsco’s industry’s leading repository of product information delivered seamlessly in digital form through Watsco’s mobile apps and e-commerce platform to HVAC contractors in the field.
Watscohas now digitized product information for approximately 980,000 SKUs, which are currently being accessed by more than 350,000 contractors and technicians.
- Contractor Assist mobile apps provide customers in the field with real-time access to critical information to make technicians more efficient, including real-time access to time-sensitive product detail, pricing, inventory availability, warranty look-up, technical support, and more. The number of authenticated mobile-app (defined as users with a corresponding e-commerce account) grew 23% over the prior year and the total user community now consists of more than 67,000 unique users.
- E-Commerce sales continued to grow as more customers transacted online. For the 12 months ended
March 31, 2022, the Company eclipsed $2 billionin e-commerce sales as the number of active e-commerce customers grew 19% over the prior year. E-commerce sales grew 34% during the quarter, outpacing the Company’s overall 25% organic sales growth rate.
- OnCall Air®, Watsco’s digital sales platform for use by HVAC/R contractors, and CreditForComfort®, its companion consumer financing platform, both saw increased penetration as more contractors engage digitally with consumers. During the first quarter, customers using OnCall Air® presented quotes to approximately 45,000 households, a 40% increase over the comparable prior year period, and generated approximately
$165 millionin gross merchandise value of sales from contractor to homeowner, a 59% increase over last year.
Climate Change and ESG Focus
Watsco’s business model plays an important and significant role in the drive to lower CO2e emissions. According to the Department of Energy, heating and air conditioning accounts for roughly half of
The overwhelming majority of new HVAC systems sold by
The sale of high-efficiency systems has long been a focus of
The Company offers a broad variety of systems that operate well beyond the minimum SEER standards ranging from base-level efficiency to systems that exceed 20 SEER. Watsco’s sales of higher-efficiency residential HVAC systems (those above base-level efficiency) during the first quarter grew 31% versus last year, outpacing the overall growth rate of 26% for
Cash Flow & Dividends
Watsco’s operating cash flow for the quarter was a
Watsco has paid cash dividends to shareholders for 48 consecutive years. The Company’s philosophy is to share increasing amounts of cash flow through higher dividends while maintaining a conservative financial position with continued capacity to invest in additional organic and inorganic opportunities.
First Quarter Earnings Conference Call Information
A replay of the conference call will be available on the Company's website.
Use of Non-GAAP Financial Information
In this release, the Company discloses non-GAAP measures on a “same-store basis”, which 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
Watsco is 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 671 locations each year to get information, obtain technical support and buy products.
The Company believes there is long-term opportunity to be a significant participant and contributor in efforts to address climate change. HVAC/R products provide comfort to homes and businesses regardless of the outdoor climate. Older systems often operate below current government-mandated energy efficiency and environmental standards, resulting in higher energy use and costs to homeowners. Sales of higher-efficiency replacement systems have long been a fundamental opportunity in Watsco’s marketplace. Watsco plans to actively collaborate with its OEM partners and key stakeholders to lead these ongoing efforts in its marketplace. Additional information about Watsco may 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 seasonality of product sales, 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-
Condensed Consolidated Results of Operations
(In thousands, except share and per share data)
|Cost of sales||1,073,212||841,297|
|Gross profit margin||29.6%||25.9%|
|Interest expense, net||558||88|
|Income before income taxes||170,491||81,792|
|Less: net income attributable to non-controlling interest||21,592||11,035|
|Net income attributable to
|Diluted earnings per share:|
|Net income attributable to
|Less: distributed and undistributed earnings allocated to non-vested restricted common stock||10,297||6,054(1)|
|Earnings allocated to
|Weighted-average Common and Class B common shares and equivalent shares used to calculate diluted earnings per share||35,504,380||35,329,833|
|Diluted earnings per share for Common and Class B common stock|
|(1)||These amounts include the dilutive impact attributable to the excess of dividends paid on restricted shares over the net income allocated to non-vested restricted common stock. Such excess amount was
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
|Cash and cash equivalents||$||110,607||$||118,268|
|Accounts receivable, net||790,013||698,456|
|Total current assets||2,320,128||1,961,400|
|Property and equipment, net||115,385||111,019|
|Operating lease right-of-use assets||288,660||268,528|
|Accounts payable and accrued expenses||$||750,027||$||642,221|
|Current portion of long-term obligations||86,812||84,501|
|Total current liabilities||836,839||726,722|
|Borrowings under revolving credit agreement||262,500||89,000|
|Operating lease liabilities, net of current portion||205,163||187,024|
|Deferred income taxes and other liabilities||88,672||85,700|
|Total liabilities and shareholders’ equity||$||3,473,889||$||3,085,861|
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
|Cash flows from operating activities:|
|Changes in working capital, net of effects of acquisition|
|Accounts payable and other liabilities||107,755||149,914|
|Net cash used in operating activities||(101,622)||(37,745)|
|Cash flows from investing activities:|
|Capital expenditures, net||(8,171)||(4,772)|
|Proceeds from sale of equity securities||-||5,993|
|Net cash (used in) provided by investing activities||(8,218)||1,221|
|Cash flows from financing activities:|
|Dividends on Common and Class
|Net proceeds under revolving credit agreement||173,500||48,900|
|Net cash provided by (used in) financing activities||101,412||(16,250)|
|Effect of foreign exchange rate changes||767||582|
|Net decrease in cash and cash equivalents||(7,661)||(52,192)|
|Cash and cash equivalents at beginning of period||118,268||146,067|
|Cash and cash equivalents at end of period||$||110,607||$||93,875|
Executive Vice President
Source: Watsco, Inc.