Watsco, Inc. (WSO) Q1 2023 Earnings Call Transcript

For the period ending March 31, 2023

May 10, 2023 8:30 a.m. ET

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Watsco First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode for the duration of the call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to the Chief Executive Officer, Albert Nahmad. Please go ahead, sir.

Albert Nahmad

Good morning, everyone. I hope you all got to see the space ship Starlink launch few minutes ago, biggest space ship in the history of country or probably in the history of the world. Disclaimer for my error or [inaudible]. In any event, welcome to our first quarter earnings call. This is Al Nahmad, Chairman and CEO; and with me is A.J. Nahmad, President; Paul Johnston, Barry Logan and Rick Gomez.

Now before we start, 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 statement.

Now Watsco delivered an exceptional first quarter especially in light of last year’s impressive first quarter. Last year same store scale sales were up 25% and EPS was up 109%. Let me say that again. This quarter compares to last year and last year’s sales were up 25% and earnings per share was up 109%. This quarter sales grew 2% to record $1.55 billion, gross margins up 28.9% reflect our mindset around price and continued progress in our investments and pricing technology to help our leaders in the field optimize margins. You will recall that last year's first quarter gross margins also benefited from OEM pricing actions in response to unprecedented inflation. We are happy with the quarter's result given the reduced level of OEM pricing actions during this first quarter of this year compared to last year.

SG&A increased 1%, reflecting early progress with cost containment and gains in operating efficiency that builds on what we achieved, started to achieve last quarter. Operating income was $165 million, operating margins remain in double digits at 10.6% and earnings per sale was $2.83 for the quarter. As per cash flow, this is the time of the year when we build inventory for the upcoming selling season and we are seeing supply chains ease in certain product segments versus last year. I must say not all OEMs are over the supply chain problem yet, but they're improving. Cash flow during the quarter improved $54 million year-over-year despite an unprecedented shift in inventory to new higher cost systems as a result of the change in efficiency standards that took place January 1. We expect further progress in terms of improved inventory terms and cash flow as the year goes on. All-in-all, our balance sheet remains strong with almost no debt. This provides us the flexibility to invest in virtually any opportunity As we continue to build scale in a very fragmented $50 billion plus North American market. We continue to look for acquisitions, as Watsco is a great home for family businesses. We sustain cultures, invest in people, and provide technology to secure and build on their great legacies. That's something we love doing building great legacies of companies that we acquire. Looking beyond the Short term, our press release today provides critical details that support Watsco's long term growth trajectory. We have an immense technology advantage, and we are investing to grow that advantage. These technologies are increasing customer engagement, reducing attrition, creating market share gains, and supporting margin.