Watsco, Incorporated Q2 2008 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Matt Duncan - Stephens, Inc. - Analyst : Good morning gentlemen and congrats on a nice quarter. The first question I've got, Al, you mentioned that replacements were up about 8%. Is that unit replacements or is that your total replacement related sales that were up 8% in the quarter?

Question: Matt Duncan - Stephens, Inc. - Analyst : But I mean is that just equipment sales or is that everything?

Question: Matt Duncan - Stephens, Inc. - Analyst : Okay. What do you think is driving that? I know I guess June was a little bit warmer this year than normal. How much of it do you think was weather versus other factors?

Question: Matt Duncan - Stephens, Inc. - Analyst : Sure. Just sticking with the normal seasonality, knowing that June is usually a seasonally strong quarter, if you were to look at the months, I know the quarter started a little cooler and got hotter as it went along relative to the norm. Did that have any impact on kind of a

Question: Matt Duncan - Stephens, Inc. - Analyst : Sure. Al, if the new construction revenue then, if replacements were up 8% that would seem to indicate that new construction was down pretty substantially, maybe 50% or more. Is that accurate or am I off (multiple speakers)

Question: Matt Duncan - Stephens, Inc. - Analyst : It was down 40?

Question: Matt Duncan - Stephens, Inc. - Analyst : Thank you. And then last couple of things and I will jump back in queue. Looking at the balance sheet, your accounts receivable and inventories both jumped pretty significantly. I know part of that is seasonality. Was there anything else that played there or is that just the seasonality that caused that?

Question: Matt Duncan - Stephens, Inc. - Analyst : Sure. Then on looking at the commercial refrigeration business, it was up 1% this quarter based on what was in the release. That's a little bit slower growth than what you have been seeing. Is there any change in that end market or anything going on there that we should be aware of?

Question: Matt Duncan - Stephens, Inc. - Analyst : Okay and then last thing guys and I will jump back in queue. If we look at your balance sheet you guys have done a great job paying off the debt from ACR pretty quickly and you're left with very little debt on your balance sheet. Al, you did mention that you guys would like to put that balance sheet to use. What is the acquisition pipeline look like right now and are you getting close to anything or is there anything you can kind of -- what is that acquisition environment look like for you guys right now?

Question: Matt Duncan - Stephens, Inc. - Analyst : Okay, great. Thanks and congrats again, guys.

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : Question on the third quarter in terms of the seasonality in the business. If you look back over the past, sometimes second quarter is better, sometimes third quarter is better. It seems like when the weather hits it's partly a function of that. Maybe, Barry, can you give us a sense of how you think that could play out this year? It seems like June was pretty strong so I don't know if maybe that pulled in a little from Q3 a little bit different than last year perhaps.

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : Can you give us a sense of what same-store sales growth has look thus far through the quarter?

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : But July is the most important month.

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : Okay, fair enough. In terms of ACR if you look at the margins, if you back out the margins from -- on a same-store basis it looks like it was about 40 basis points dilutive to the Company but it added $0.08 to the quarter which implies a net margin close to the Company average. So I'm just wondering can you provide us a little bit more color on ACR, what the margins look like and where you see that going near term?

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : Okay, and just last question in terms of sort of sizing the impact of the mix shift to the higher efficiency as well as the (inaudible) ASP's from what is going on in passing through the raw material costs. Would you say that a mix benefit plus price realization would be close to 5% for the Company? Is that a fair guess? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : All right, great. Thanks very much guys.

Question: Michael Cox - Piper Jaffray & Co. - Analyst : Good morning congratulations on a great quarter guys. I noticed that you closed a few branches here in the second quarter. Do you have any plans to close any further branches? And the branches you've closed thus far this year (inaudible) targeted any specific markets or any specific subsidiary company of yours?

Question: Michael Cox - Piper Jaffray & Co. - Analyst : That's very helpful. And I think in some prior quarters you've given the percentage of unit volume that would be above 13 SEER. I'm just curious as to what uptake that has reached at this point and maybe relative to (inaudible) dating back several years but what you saw the last time around when the efficiency change was made. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Ian Zaffino - Oppenheimer & Co. - Analyst : It's Ian Zaffino from Oppenheimer. How's everything?

Question: Ian Zaffino - Oppenheimer & Co. - Analyst : Certainly. A little bit of an interesting question here is driving the growth above 13 SEER, can you just get into that a little bit more? Is that -- as people open up their electricity bills now and they see them probably double what they were last year, is there more of an incentive to go above 13 SEER? Is that what's driving a lot of this or is it just more (multiple speakers)

Question: Ian Zaffino - Oppenheimer & Co. - Analyst : I think so too. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Ian Zaffino - Oppenheimer & Co. - Analyst : Okay, that's very helpful. Thanks again and good quarter.

Question: Keith Hughes - SunTrust Robinson Humphrey - Analyst : Thank you. Two questions, one on 410a. How much are your equipment being sold now is using that refrigerant?

Question: Keith Hughes - SunTrust Robinson Humphrey - Analyst : What is the current [upcharge] on a 410a system versus R22 system?

Question: Keith Hughes - SunTrust Robinson Humphrey - Analyst : On equipment pricing we've seen numerous announcements of increases from the producers. Is there a pre-buy possibility here to take some margin advantage going into the second half of the season?

Question: Keith Hughes - SunTrust Robinson Humphrey - Analyst : Are the increases, are they sticking so far? Is there any trouble (inaudible - background noise)

Question: Keith Hughes - SunTrust Robinson Humphrey - Analyst : Manufacturers, yes. Okay. Thank you very much.

Question: David Manthey - Robert W. Baird & Company, Inc. - Analyst : Good morning.

Question: David Manthey - Robert W. Baird & Company, Inc. - Analyst : It's a little cloudy and (inaudible) a little bit of rain but it's plenty warm. Thanks for taking my question. First off, could you talk about the percentage of your mix today that's new construction versus replacement? I don't know if you want to talk about just the pure residential business setting refrigeration and ice machines on the side or Watsco overall. But could you give us an estimate of what that is in the third quarter and then what you would expect it to be as we tail off seasonally into the fourth?

Question: David Manthey - Robert W. Baird & Company, Inc. - Analyst : Okay would it be -- in the current quarter wouldn't it be something less than that though given that we're -- with the (multiple speakers)

Question: David Manthey - Robert W. Baird & Company, Inc. - Analyst : 21 in the quarter, okay. Thank you. And then your profit initiatives, maybe if you could discuss some of the areas where you're having the most success or the biggest bang for your buck here as you rollout these profit initiatives.

Question: David Manthey - Robert W. Baird & Company, Inc. - Analyst : Great, thanks very much guys.

Question: David Cohen - Midwood Capital - Analyst : My question has actually been answered. Thanks.

Question: Jeff Hammond - KeyBanc Capital Markets - Analyst : Sorry, I did get kicked out of the call for a short period of time so if this has been answered or asked already I apologize.

Question: Jeff Hammond - KeyBanc Capital Markets - Analyst : Just in terms of the guidance unchanged, I imagine that this second quarter number just given the traction on cost savings and the better same-store sales decline that it came in better then your internal expectations. What would it take -- what do you need to see into the second part of the selling season to want to revisit that guidance? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Jeff Hammond - KeyBanc Capital Markets - Analyst : Okay and then clearly a lot of the OEMs have raised prices here toward the beginning of the selling season. What is the feedback you're getting in terms of those going through? Is there any kind of different level of pushback given the environment or are people kind of recognizing the inflationary pressures and just taking the increases?

Question: Matt Duncan - Stephens, Inc. - Analyst : Just one real quick follow-up. It's just a housekeeping question. Barry, do you have the D&A expense and CapEx in the quarter in front of you?

Question: Holden Lewis - BB&T Capital Markets - Analyst : I think last quarter you had commented that the pricing was more -- the pricing mix combination was more in the 500 basis point range? And I thought that they had been putting in more price sort of ahead of the selling season and you're kind of stating that it's about 400 basis points this quarter. I guess I would have expected that to be at least as much of a contribution if not more. Are we seeing something drop out or why didn't we see maybe a little bit more of an acceleration on the price mix component?

Question: Holden Lewis - BB&T Capital Markets - Analyst : And then can you talk about also the 50 basis point increase that you saw in the gross margin organically? Are you able to sort of breakout how much of that was a function of these profit initiatives that you're doing, how much of it was from sort of people moving up in terms of mix and how much of it was from price? Any way to sort of break that out or look at that?

Question: Holden Lewis - BB&T Capital Markets - Analyst : But you're not (inaudible) sort of look at that and determine how much of that was a function of just the mix versus the equipment pricing versus price on non-equipment pieces at all?

Question: Holden Lewis - BB&T Capital Markets - Analyst : Yes.

Question: Holden Lewis - BB&T Capital Markets - Analyst : And then lastly, I think you commented in the release about your cost savings. You recognized about $11 million so far which means you have got $6 million more in the quarter. And then you said another 20 to $25 million over the next several quarters. Are you sort of refining the range to that 31, 36 or how should we sort of look at that? (inaudible) by midpoint of '09, right?

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : Thanks. Looking at the SG&A structure and I know that was definitely part of the profit initiatives plan at the Company, it seems just on the map that as a percentage basis on the margin for the Company it hurt you by about 40 basis points year on year going to 17.4 from 17. I was wondering is there anything else in that SG&A number? That simply a function of maybe investments that you've made that frankly you just weren't going to get the return on this quarter?

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst :

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : Total Company reported number. So that was a 40 basis point negative to the total Company margin. And I'm just wondering why you saw that type of maybe negative leverage on SG&A. I know on a same-store basis the absolute decline was less than the same-store decline on the topline. But the margin hit was a little bit greater than we were forecasting. I'm just wondering maybe how you are thinking about that. Was that to be expected?

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : Okay, I understand. And then I guess this is somewhat of a hypothetical, but thinking maybe more out, further down the line in terms of your leverage going forward when inevitably topline will go positive on a same-store basis, conceptually how do you think about if you're same-store sales growth was up 5% you have the feel for what you think your SG&A would be up? I assume it would trend lower?

Question: Curt Woodworth - JPMorgan Chase & Co. - Analyst : Make sense. All right, great. Thank you guys.