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Watsco's (WSO) CEO Albert Nahmad on Q1 2016 Results - Earnings Call Transcript

Watsco, Inc. (NYSE:WSO)

Q1 2016 Earnings Conference Call

April 20, 2016 10:00 ET


Albert Nahmad - Chief Executive Officer

A.J. Nahmad - President

Paul Johnston - Senior Vice President

Barry Logan - Senior Vice President and Secretary


Steve Tusa - JPMorgan

Matt Duncan - Stephens

Robert McCarthy - Stifel

Ryan Merkel - William Blair

Brett Linzey - Vertical Research

David Manthey - Robert W. Baird

Keith Hughes - SunTrust

Josh Pokrzywinski - Buckingham Research

Jeff Hammond - KeyBanc Capital Markets

Charles Redding - BB&T

Walter Liptak - Seaport Global

Chris Dankert - Longbow Research


Good morning and welcome to the Watsco First Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Albert Nahmad. Please go ahead.

Albert Nahmad

Good morning, everyone. Welcome to our first quarter conference call. This is Albert Nahmad, CEO and with me are A.J. Nahmad, President; Paul Johnston; and Barry Logan.

And as usual, first, the cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements.

Now, let’s get on to our results. We achieved another solid first quarter and are off to an excellent start for the year. We are operating at record levels. And at the same time, we are continuing to make significant investments in technology to transform our business into the digital age. Our annual run-rate for tech spending is now approximately $22 million. The incremental tech spending during the first quarter had a $0.03 impact on our results. It is very early, but we are already seeing benefits that include: customers are beginning to use our mobile apps. They are also adopting e-commerce to gain speed and efficiency. Our supply chain initiatives are gradually improving inventory turns. Our 565 locations are implementing technology that fulfills orders more efficiently and saves our customers time. Our employees have better insight into their operations from using our business intelligence platform. All said we are excited about what is happening in this period of – let me say that again, we are excited about what is happening in this period of creativity and innovation at Watsco is at an all-time high.

We are also delighted with our results in comparison to the strength of last year’s first quarter when operating profits was up 32%, operating margins were up 110 basis points and EPS increased 35%. Now, although it is early in the year and not yet the summer selling season, we believe our momentum will continue and expect 2016 will be a record year.

And now for the details for the quarter, a 9% increase in earnings per share to a record $0.71; a 8% increase in operating income to a record $51 million; a 20 basis point expansion in operating margins to a record 6%; a 20 basis point reduction in gross profit margins; and a 40 basis point decline to a record low in SG&A as a percentage of sales.

Sales during the quarter increased 5% to a record $851 million. HVAC equipment sales increased 7%, including 10% growth in the United States, reflecting good unit demand, pricing and a richer mix of higher efficiency systems. Sales of other HVAC products increased 4% and commercial refrigeration products increased 6%.

First quarter cash flow was the best ever by achieving a record $42 million versus a use of $17 million last year, a positive swing of $59 million. And I like this one, debt was reduced by over $100 million compared to last year comparable period. Our balance sheet remains conservative with a debt-to-EBITDA ratio of under 1x. We raised our annual dividend 21% to $3.40 per share in January. We hope to continue our policy of increasing dividends as we generate strong cash flow while maintaining a conservative financial position and a low cost of capital. As has been our policy, we will not provide an outlook for the year at this time due to the seasonality of our business.