In Q3, Watsco had record sales, operating profit, EPS and cash flow. Air conditioning equipment sales were strong on the high end and low end, but soft in the middle. Watsco believes this trend reflects a cautious consumer. However, it believes that over the longer term, consumers will continue to upgrade their air conditioners to more efficient models, rather than repairing existing units. Watsco is seeing soft sales of compressor units, which suggests customers are replacing, not repairing, units. The high cost of R-22 is also driving customers to replace existing units. Watsco does not believe the pent up demand for new units will be released until employment improves.
Watsco had good growth international. Its international business is about 15 percent of sales.
During Q3, Watsco increased its ownership of Carrier to 70 percent, and it has an option to increase its ownership to 80 percent in July 2014. It feels the joint venture with Carrier, which began three years ago, has been very successful.
Watsco is not ruling out acquisitions in the future, especially to acquire more territories. Watsco is currently only 10 percent of the North American market.
Financials.
Revenues increased by 12 percent. Same store revenues increased by 1 percent. HVAC equipment sales increased by 1 percent, sales of other HVAC products declined by 4 percent, and commercial refrigeration products grew by 16 percent. Parts and supply sales will not increase until there is an increase in residential and new commercial construction, and the parts Watsco sells comes in the latter part of the construction cycle, such as installation of duct work and grills.
Operating income increased by 15 percent in Q3. Same store operating profit increased by 3 percent.
Watsco was able to reduce SG&A expenses by 4 percent, and the expenses were at their lowest percentage of sales ever in Q3.
Gross margin was 23 percent.
EPS increased by 17 percent in Q3 to $1.19/share. The company expects EPS for 2012 to be in the range of $3.00 to $3.10, which takes into account a $.38 charge for the special dividend. Watsco has lowered its revenue outlook for the next quarter based on its sense of the industry and the economy.
Cash flow for Q3 was $124 million and Watsco expects strong cash flow in Q4. The company is paying a special $5 dividend, plus its regular $.62 dividend on October 31. The $5 dividend payment is a prepayment of roughly two years of dividends and is intended to help its shareholders who may face higher dividend taxes next year. Watsco expects to pay a more moderate dividend in 2013 due to the large special dividend payment in 2012, but it does not know the amount until it sees the result of federal tax policy.
A copy of the earnings conference summary can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/952671-watsco-management-discusses-q3-2012-results-earnings-call-transcript?page=3&p=qanda&l=last
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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