Watsco Inc (WSO.B) 2007 Q4 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Albert Nahmad, CEO of Watsco. Thank you, Mr. Nahmad, you may begin your conference.

Good morning, everyone. Welcome to our conference call. As she said, this is Al Nahmad, I'm the CEO. And today I also have Barry Logan, Senior Vice President, and Paul Johnston, Vice President.

First, let me state our cautionary statement. A reminder that this conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements.

First, highlights for 2007. 2007 is Watsco's third best in our 60 year history from an earnings perspective and by far our best year ever in terms of cash flow. We generated record cash flow of $107 million; that's $3.84 per share. In terms of financial performance, we considered it a good year, given the many challenging factors in the general economy and the fact that 2006 was a breakaway record year for us. Importantly, our revenues to the replacement market, both residential and commercial, grew in 2007. We believe market share gains were achieved in 2007, especially in the replacement market, given the size and density of our branch network relative to our competition.

Gross profit showed improvements as the year closed and we are executing a number of initiatives to enhance profits and margins, which I will talk about later. The team at ACR Group, our newest acquisition, is strong and working well within our culture. We are very pleased with this very fine organization. I think I've said that before.

We had good timing in terms of financing future growth. Last August, we refinanced our credit facility, expanding our borrowing capacity to $300 million from $100 million and obtained better pricing. Today's pricing is LIBOR plus 40 basis points or less than 4%, obviously an attractive cost of capital in today's environment. By the way, that's a five-year commitment.

We raised our quarterly dividend rate in July, 2007 to $0.40 per share. We continue to believe that dividends are the best and most direct method to return cash to our shareholders. Today we announced a 12.5% increase to $0.45 per share effective with April's dividend. This reflects confidence in our ability to perform generating cash flow in the future.

The slowness in our markets is reflected in our fourth quarter performance as declines of residential new construction affected revenues. Remember that the fourth quarter and first quarter are seasonally low periods for the replacement market, and therefore new construction and the general economy can have a disproportionate impact on sales. This typically balances out as we move into the replacement season during the second and third quarters.

We have generated record amounts of cash. Working capital was reduced over $56 million during the quarter. Overall we generated $71 million of cash during the last 90 days of the year. Inventories are in great shape and we are ready to take advantage of buying opportunities as we approach the season.

We are executing a number of initiatives to improve our efficiency and performance. We estimate $30 million to $40 million of opportunities have been identified and will be acted upon, affecting both gross profit dollars and SG&A costs, and will enhance operating margins during the next several quarters.

That's it for the highlights. Now for the specifics on 2007 performance. Sales were $1.76 billion including $121 million from new locations on a same-store basis -- for new locations. On a same-store basis, sales decreased 7.6%. Sales of HVAC equipment and non-equipment HVAC products declined 5% and 11%, respectively. Our refrigeration business continues to perform well, up 10% for the year.

Gross profit margin declined 40 basis points due to the reasons articulated in our press release. SG&A increased 4% but was down 4% on a same-store basis; that reflects the ACR transaction. Operating profit was $111 million and operating margins of 6.3% on a same-store basis operating margin was 6.6%. Earnings per share from continuing operations were $2.43 per diluted share on net income of $67 million versus $2.95 on net income of $82 million. As previously mentioned, cash flow for the year was $107 million, our best ever, and free cash flow was $101 million.

Debt ended the year at $54 million versus $40 million last year and that's after purchasing ACR, our largest acquisition ever. We repurchased $9 million of common stock during the year and have 1.2 million shares remaining under our repurchase program. Suffice to say, we continually evaluate use of capital including stock repurchase, but our first priority is to invest in our business, given our market share in the United States is just 8%.

Now the fourth quarter. Sales increased 5% including new locations. On a same-store basis, sales decreased 9%. Gross profit margins increased to 25.4% reflecting improved margins in both HVAC equipment and non-equipment products. This is an important trend after some pressure earlier in the year. SG&A declined 1% on a same-store basis. Our operating profit was $12 million with operating margins at 3%; on a same-store basis, operating margin was 3.5%.

We discussed in the press release, new locations were dilutive by $0.03, including losses for new branches that were open during the last 12 months -- during the slow -- for the new branches during the slower selling season and finalization of purchase accounting for ACR.

Let me do that again. We discussed in the press release, new locations were dilutive by $0.03, including losses for new branches during the slow selling season and finalization of purchase accounting for ACR.

Earnings per share from continuing operations were $0.24 per diluted share on net income of $6.7 million versus $0.42 on net income of $11.5 million. Our outlook for 2008 as earnings per diluted share of $2.35 to $2.45, and that reflects our current thinking. Obviously, as we start into the season, we'll have a much better fix on that.

With that said, Barry and I will be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Matt Duncan, Stephens, Inc.

Good morning, Al and Barry.

Good morning. And Paul, I forgot to mention Paul.

Paul, how are you? Just a few questions here. First, I'm trying to get a little bit better handle on the expense side of your business. And looking especially at the SG&A line here in the fourth quarter, those expenses were flat sequentially and sales were down over 20%, sticking with the normal seasonal pattern. Can you kind of help me think about why those SG&A sales would have been flat sequentially there?

Well, I think you came upon a good subject. We agree with you. I think you're concluding that our performance wasn't that good. I think same-store sales were down -- SG&A were down 1%. And that's what's triggering a lot of this new initiative. We had expected the market to return in the second half of 2007 and it did not. So therefore, we are acting now to be more efficient with our SG&A and gross profit dollars.

And Barry, do you want to add anything to that?

I just want to make sure you're also accounting for the fact that we own ACR for the full fourth quarter and only partially in the third quarter. So, analytically there may be some difference there as well. I mean, the key number that register reference what Al said, same store sales in the fourth quarter were down 1%. If you look for the year, they're down 4%. So the question is, why didn't the fourth quarter behave like the rest of the year? Part of that's the, again, the seasonality of the fourth quarter. Part of that is, we didn't act fast enough.

You mean the SG&A, Barry?

The SG&A, that's correct. So, that's -- where obviously there's been a lot of movement in costs going forward after the fourth quarter finished.

Sure. And on that point, can you give us a little bit more detail about this $30 million to $40 million in cost savings? Exactly what you guys are looking at doing to cut some costs here?

Well, I think it's better to tell you the process. We have five subsidiaries. And each one of them has a different solution to getting more efficient. And this is -- all the time I've been here, I've never seen a better led organization. The leaders of the subsidiaries plus their teams -- very motivated to improve SG&A costs as well as improving gross profit dollars. There are just too many to innumerate. Each one has their own approach to it, which is what we like. There are local markets that we serve. And we like them to find local solutions.

But we feel, based on what they've shown us and what we've discussed, we feel pretty good about this. As I said, I feel -- never been more confident about our management team and throughout the organization.

Right. And kind of over what period of time do you expect those costs [cutting] back to (multiple speakers) --?

Another good question. I think you're going to see it quarter by quarter, probably all the way through either the first quarter or first half of 2009.

Okay. Fair enough. And then moving on, a couple of more things and I'll get back in queue. Could you talk a little bit about the market you see for your replacement sales? You mentioned those were up year-over-year. And I'm curious what you're seeing in sort of a repair versus replacement dynamic.

And then also I know in the fourth and first quarter's of your year, the discretionary spending is more important to your replacement business. And talk a little bit about have you see a pull back in discretionary spend by consumers on HVAC equipment?

Paul, I want to get you into this.

Oh, great. The repair versus replace discussion I think has gone on for -- ever since we went into the 13 [series]. And I don't really know if there is a clear understanding or a clear metric that we can point to that would identify whether or not people are repairing more or replacing equipment less or more.

The couple of things that I look at within our sales mix which indicates to me that the market is robust and there still is a good replacement market out there, and a strong replacement market out there, are two things. One, I look at the percent of our sales that are going into 13 [sear] plus range. And we've seen that continue to grow impressively during 2007. And we expect it to continue this year. It's up well over 40% year-over-year.

Another indication that I have -- that it's a strong market for us, at least -- is I look at our 410A equipment sales. And those virtually doubled last year, year-over-year. And we are continuing to put a stronger emphasis on those products as we go forward.

And Paul, remind us what the pricing differential is for 410A versus the other stuff?

The 410A pricing differential right now is probably in the 3% to 5% range. It's going to narrow, as we talked about sometime ago, that it's going to narrow as we get closer to the 2010 deadline.

Okay. And then last thing here, guys, as we look at sales growth for 2008, you've given earnings guidance. And I'm curious if you can give us a little bit of commentary on sort of what your expectations are for organic revenue growth in 2008?

Well, that's hard to say. In the first quarter, you'll have more of the same as we saw in the fourth quarter. But then I think with the normal weather patterns, we're going to have a good year in the replacement markets, which are the second and third quarter. But at this point, we're not providing any guidance -- it's just too earlier.

January and February revenues are not -- March is equal to those two combined. So, we don't have that disability yet. What we're seeing in January and February is more of what we saw in the fourth quarter of '07. But March is a big month. So we'd like to hold back on that guidance on revenues.

Jeff Hammond, KeyBanc Capital Markets.

I just wanted to go back to the cost savings. Is it fair to say kind of the low end of your guidance range captures $30 million and high captures the $40 million in savings?

Barry?

Jeff, no, I would not apply everything to 2008 as Al suggested. First, a good portion of the 30 to $40 million is not -- is in the gross profit line. It's pricing, it's vendors, it's vendor programs, it's inventory quality -- a whole list of and across many fronts in terms of our subsidiaries. So, obviously when I speak of gross profit in products and such, it's got to go through an inventory cycle that has to flow through the numbers. And that will happen over the course of the next six months or so.

The SG&A obviously is a more immediate impact. And also will begin more so in the second quarter. So, as Al suggested, I think most of the savings will be second quarter and beyond, and flow into first quarter, second quarter 2009 at the outside.

So what do you think is a reasonable cost save on these programs for '08?

There is, again, a couple of hundred moving pieces. And I'm not exaggerating to this, Jeff. And I think at the end of the first quarter, it will be more clear to us and -- it can be more clearly communicated. Because really all of this has been implemented in the last 30 to 60 days.

Okay. And then finally, if you look at the 30 to $40 million, I mean, how much would be more gross margin and take a little while versus the direct SG&A?

That's also difficult to identify now because there's so many moving pieces. But I want to say that most of this initiative is coming now, it did not occur 30, 60 days ago. It's still in front of us. But I don't think we can separate from you how much is gross profit dollars and how much is SG&A. Each subsidiary has got their own unique strategy for their region. And it's wonderful to see how they come up with how to get more efficient. And then when we sit around a table with the five subsidiary leaderships, they share a lot of these things. So a lot of it is taken back to their organizations and then implemented as they see fit. It's our de-centralized culture, but it's very healthy. I think we would not be in a position to separate the two.

I just feel real good about it, because these guys are really -- guys and girls, I don't want to forget that Carole Poindexter runs 250 of our locations. And they're just very motivated to improve efficiency and increase gross profit dollars.

Okay. And then changing gears, have you done any -- what's your sense as to why the other HVAC products, the non-equipment outside of commercial refrigeration has been considerably (multiple speakers) [more] --?

That's a great question. Yes, that's a great question. Paul or Barry? It's a great question and we've given it a lot of thought.

I think there's a number of reasons, some of which are obvious; there's been a radical decline, as you know, or a big decline in the price of copper, copper products, tubing, which dropped the non-equipment sales. But also some of our products -- and I would call them some of the more minor product lines that we handle -- tend to have a fairly heavy concentration into the residential new construction, things like duct tape and to some extent mastic, which isn't used in --

Insulation.

Yes, insulation, which generally isn't used in a replacement job, but is used in a residential new construction opportunity. So, I think part of it is that rationale. Barry, do you have anything else?

Yes, I mean, it's quite simple. Very few people ever replace their ductwork, so you can imagine those products which is in that other category, is weighted towards construction where equipment, clearly replacement market is driving a huge piece of that. And no doubt our largest part of our business is on the equipment side.

So, there's about 600 total line items in that other category. Pricing has not been favorable and obviously new construction has been unfavorable as well.

Okay. And then final question, how are you thinking about accretion for ACR within your '08 numbers?

Well, I think we said when we bought ACR, what our general thinking was on accretion and that has not changed coming into '08.

Have they -- has their business kind of weakened with the rest of the market, just in terms -- or have they proven more resilient?

It has weakened with the market. But they also have begun to take advantage of some of the Watsco programs and so on to help profitability. So the top line, yes, the overall profit picture is really -- is consistent with what we've been discussing already.

I think it's been very good for us and will continue to be good for us.

Curt Woodworth, JPMorgan.

In terms of getting back to the cost savings and all the moving pieces, what is the transparency around that, I guess maybe to you, Al? How are you going to track that and measure it?

Another good question, yes.

And is it fair to say that -- I mean, I guess, essentially you're going to need to have all those savings in place by the time the spring selling season gets here?

No, not at all. No, it is a program that goes on as I said through the first quarter of next year or the second quarter. But the tracking process, each of the subsidiaries provided line item by line item as to how they were going to get more efficient or produce more gross profit dollars. And those line items and who is going to do it has been provided to our Chief Financial Officer as well as the rest of the team here. And from time to time we get updates on that and see how they're executing against the goal that they had set.

And, as I said, if I didn't have a lot of confidence in the organizations who came up with these solutions, that's why I have confidence in their tracking too, because they'll execute -- they themselves organized the way they monitor it and to make sure that most, if not all, of these efficiencies and gross profit dollars are achieved.

So you should have fairly good visibility over the next three to four months in terms of where you would stand with this? Or is it -- you really don't know until I guess the end of the year?

Well, I guess we'll be reporting it quarter by quarter. I think we should be able to do that.

Okay. And then in terms of the acquisition climate, maybe to speak to the seller's mentality. I mean, have they become more reluctant to sell, given everyone in the industry is operating on (multiple speakers) --?

Yes, it's a good question but it's hard to generalize. I mean, this is a very healthy industry. Distributors are particularly healthy, and contractors. They don't sell because what's going on in the economy, if they sell it all. They sell because something has happened to their personal needs. And we have been and I think we'll continue to be the go-to buyer because of the way we responsibly handled the organization post-acquisition.

So I don't think the economy or what's going on with interest rates or anything affects that. It's just people's sentiment about what the right time is. And I remain very convinced that we have such a great reputation, some of the large companies that we want, we will eventually get. I just can't predict when. But it is not related to the economy or interest rates. And certainly we have the balance sheet and a lot of dry powder to do any size that we want to do.

Right. I mean, I think you have liquidity of $450 million or thereabout, so, then in terms of maybe buying back more stock or things like that, does there ever come a point in time when you would choose to do that? Or is it really you're going to be patient for the next -- however long it takes to get these large transactions completed?

Well, our first goal is the large transaction. It's building of the network. I mean, when you're only dealing with 8% share, and the way we can compete is by building a high-density of branches in good markets -- which no one else does, by the way on the scale that we do, and that's our number one competitive advantage -- build a lot of locations. This makes it convenient to the contractor, more convenient for the contractor to do business with us than our competitors. I mean, we've got years of building to do that. And in terms of stock purchase, we have done some. We announced $9 million today. But it is not a high priority versus building of the network.

And secondly, we believe the direct way to reward shareholders from this wonderful cash flow that's occurring is to pay increasing dividends. This is our sixth year of increasing dividends and I want to get to the list of 10 years, which I understand is a very small list of public corporations. This is our favorite way to do it, but that doesn't mean we don't first invest in the business, and secondly, occasionally, buy back stock.

Great. And maybe, Barry, on the gross margin this quarter was pretty strong despite the higher proportion of business that's going into the new construction channel. Do you think that the competitive pressures in terms of pricing on the gross margin, some of the mix issues you talked about in terms of going into more of the value brands, has that sort of lapsed? Or give us a sense for how to think about that going forward?

Well, first I would say, I don't think the competitive pressures have changed at all. I think that the disciplines and selling organization have done a good job as the year went on and it showed up in the fourth quarter first.

Secondly, we've mentioned each quarter of this year the [ear-tenth] of what had been a run on copper in '06 that provided a tremendous selling margin on a single product line, that's 4% of sales; nonetheless, it accounted for 25 basis points of bump in '06. And that ended as we got into the fourth quarter. So I think most of it is blocking and tackling. I don't think there's any other analytical story. I think people are focused on it. And it's something we've continued to see as we get into '08.

David Manthey, Robert W. Baird.

Could you talk about, again, on the 30 to $40 million in cost savings, I know you have been reluctant to pars out what part of that is GP versus SG&A, but given that actions related to SG&A should be more identifiable and specific, I am wondering can you talk about -- are we talking about severance, or closures? What are the pieces we're talking about related to specifically to SG&A?

And then is that a net number? Are there any costs that go in ahead of the savings?

Barry?

Dave, there are. Some costs, it's not -- none of this should be labeled restructuring. All of this is labeled, again, as blocking and tackling. There are branch closures and more so kind of branch merging going on during the first quarter. There may be $0.02 or $0.03 of charge at most I think in the quarter we'll see but so leave myself some room for that discussion, that that would be a first quarter discussion.

Beyond that, there is no kind of mammoth set of charges or something like that. And these are, in most cases, fixed costs where we think of facilities and the personnel that is in them, and the trucks that they operate and that's the type of SG&A concepts that we were talking about are fixed costs related. Variable costs take care of themselves. They did in 2007. And now the teams have gone through the fixed costs and what I would label discretionary costs. And that's what --

Freight. Freight is a good example. We're learning how to be more efficient with freight and freight is a large piece of SG&A. And they negotiate new freight terms with carriers. They change the way they -- instead of having 100% owned trucks, they -- just giving you some of the ideas off the top of my head -- they'll use outside carriers because the pricing now is more attractive. So, I mean, they just find different ways to get more efficient, David. And it's across the board.

But there's no restructuring. It's just getting more efficient.

A lot of these things we've talked about -- the vendor consolidations; becoming more efficient with the inventories. Those are things that are going to drive --

The truth is that we expected the second half of '07 to have positive comps versus '06, because '06, Dave, as you remember, was where the industry fell off. And we didn't get it on an industry basis. So we are reacting to that, maybe a little late. Maybe we should have seen to the second half of '07 it wasn't going to be as we thought it was. But we have now -- we're now taking the steps to adjust to that.

Okay. And then if you could talk about the finalization of purchase price allocations and what impact that had on this quarter?

Sure. Yes, Go ahead, Barry.

Sure. Dave, obviously it was a big project for us in the last 90 days to get the appraisals and everything done for ACR is about $0.01 of charge, in terms of catching up and getting the intangibles properly allocated and amortized. The new branches, including the cost of capital of new branches was about $0.02.

Okay. And then finally on GP, I think in the past you've implied that it might be difficult to increase. I'm wondering, as you look out to 2008, what are the chances that we actually see declines in gross profit? I know you did a good job here in the fourth quarter, but --

I feel pretty good about gross profit margin. I think it is going to improve. I can't quantify it for you, it's just I know some of the things that people are doing and I -- our subsidiaries are doing and I think it is going to improve.

Ian Zaffino, Oppenheimer & Co.

I think most of my questions have been answered, but if we could just get a little bit more detail on the SG&A line as far as a percentage of sales. It's come down, but on absolute basis, it's gone up. How much of that is related to really ACR, other things going on in the business? If you could kind of give us some granularity there, that would be helpful.

I'm not sure I'm quite there on your question. In terms of same-store SG&A, which is just trying to eliminate ACR and it's the material portion of when we say new locations.

Okay. So the entire delta was ACR?

I mean, there are some new branches in there, but they're really not -- the bigger number obviously, is ACR.

But the SG&A for the year is down 4%, same store sales. And we will have about two quarters where we still have to kind of explain ACR's SG&A and that, but it's about 4% versus the sales delta of 7.6% that we want to squeeze that. If we see sales pressure, we want to squeeze the delta so that we are generating earnings despite any kind of sales pressure. That's a very short term conversation, again, because I think the replacement season will help that, that comparison as we get into the summer. But for now, the focus is to have earnings, have kind of whatever the top line is behaving. And that's why the fixed costs and some of the discretionary costs have been targeted.

Okay. And then just one another question here. As far as the guidance into next year, I think it's essentially flat year-over-year. Some of the ACR deals is on pace, the accretion there and you layer in the cost-cutting. Does that mean the core business is going to be down in the $0.40 to $0.50 range? Or am I missing something there?

I don't know where you come up with the $0.40 to $0.50, Ian.

I'm just thinking if you said maybe $0.15 from ACR and then your $30 million per share probably gives you another $0.25 or so, $0.40 at least.

Well, maybe I can give you a more 50,000 feet view. All we have visibility now is January and February. And that is more of the same as we had in the fourth quarter. We will know better in March, because March revenues are generally equal to January and February. This is our feeling now. Now, we hope we are conservative. We won't know, but this is the best we can do for now is to give you what we've got at this point and some of the plans that we have with our subsidiaries.

I would not speculate one way or the other, if that means anything like what you suggested. I think just give us some more time. January and February is some of the weakest months in revenues in the whole year.

Keith Hughes, SunTrust.

Most of my questions also have been answered. But, yes, you've spoken several times about how the demand in I guess the fourth quarter and the third quarter surprise you on the downside. Is it fair to say that you are assuming in the guidance and in your planning, a weak HVAC environment for all of 2008?

I wouldn't say that. I would say we think the first quarter will be because it's the quarter that's not dependent on replacements. The replacements kick in, in the second quarter. But I generally can say, my feeling about the year or any year is that replacement demand is going to happen if the weather is normal no matter what the economy is doing or no matter what interest rates are doing or no matter what political things are.

You have to keep the cooling process going on in 120 million homes, which have central air conditioning. So one way or the other, I think replacement market is always going to be a good market. But what happens in the fourth and the first quarter, the season is over, and then you get more visibility into what's going on in the new construction market and discretionary spending, where it's not -- since the -- it's not hot any more or it's not cold, depending on what season, heating or cooling, then there's no need to change out and replace your equipment. Does that make sense to you, Keith, what I'm saying?

No, I understand what you're saying. Thank you.

Michael Cox, Piper Jaffray.

My first question is on the 14 [sear] and above product. I was wondering if you could provide the percentage of unit sales that that accounted for on the equipment side?

We could get that for you on an industry basis. I don't think we would disclose that.

Okay. I think in the past that you have given general ballpark ranges, but that's fine.

In terms of the migration to the new refrigerant, it appears to be certainly well underway at this point. I was wondering if you could provide any margin or inventory implications for that. Are you required then to carry the two different refrigerants through this transition through 2010? And does that cause some implications there?

It's not material. I mean, the R22 will be important -- could be important, because that's going to be a limited supply. Oh, you're talking about the equipment versus the gas?

That's right.

Paul, do you want to talk about that?

Yes, the equipment side -- what we've seen is as manufacturers are transitioning over to the 410A, several of our manufacturers have helped us by eliminating some of the high efficiency R22 units. So we would only have one model of 410A at the higher efficiency. So most manufacturers are trying to push it along in that direction. And a couple of the manufacturers have even announced that they will stop building R22 units that are 14 or 60 or 18 [sear] towards the fall of the year. So, we're getting some inventory help there. So we're not having to carry duplicate inventory, if you will.

Okay. That's helpful. Switching gears a little bit to the acquisition side, there has been some reports circulating that the HD supplies, HVAC business would be up for sale. And then it sounded like that was shelved. I was just curious as to whether that was a business you guys had formally looked and continue to have interest in?

No, we did negotiate and do our due diligence. It is a very small business. It is less than HVAC because of the termination of the Trane distributorship. I would characterize it as under $50 million. And during our due diligence, we -- it was not a profitable business so we could not agree on valuation and they decided to keep it.

Okay. That's helpful. And then my last question is on just the overall health of your customers. Your receivable dates have remained very stable. I was just wondering if you could comment on what you are hearing from the customer's perspective and their ability to weather through this downturn.

Yes, I think that credit as you move through this first and fourth quarter -- fourth and first quarter is very important. And we are very aware of it. We insure contractors where we think it's necessary. And generally we're doing a pretty good job of keeping the Accounts Receivable current.

There is a little bit -- in the first quarter we are noticing a little bit -- a little more aging, I would describe it. We're not concerned about it. And I think we're really on top of that.

Jeff Germanotta, William Blair.

Is the election going on up there?

It is.

Who's winning?

I don't know, I'm on your call.

Good answer.

I have my priorities. Anyway, could you comment a little bit on how sales trends progress through the quarter and how they might be progressing into the early first quarter?

Yes, I think we've done that. I think we are seeing more of the same that we saw on revenues in the fourth quarter to date.

Could you possibly comment by month?

Well, it's the same. It's the same minus 9.

Okay. Can you comment a little bit then on what you're seeing --

Like I said, March is generally the equal of January and February added together for revenue.

Can you shed a little color on sales by region, how the Sunbelt is performing vis-a-vis the northern markets or other geographic breakdowns?

No, I would say that, as you know, that our network is principally penetrated the Sunbelt. We do have some branches north of the Sunbelt. But whatever we are telling you about is really Sunbelt-oriented. And I am glad that is where we are, the Sunbelt. You get a normal summer and you're going to have a very vigorous -- your normal vigorous summer demand for replacement equipment.

I'm glad where we are and I'm glad that we have the penetration and branches into these markets. That's what I think you need to compete with for the aftermarket.

Robert Maloney, Morgan Stanley.

I noticed that your inventories were only off 1% year-over-year. I just wanted to find out, what makes you confident that this is the right level of inventory given the tough demand environment?

First, Rob, $40 million of it we acquired about 120 days before year end from ACR. So if you take out the inventory for ACR, just kind of look at a year-over-year comparison, inventories are down, let's see, about $46 million, which is about 15%. So year-over-year, kind of in the same store as inventory is down 15%.

Okay. Well, that's good color.

Let me also mention that our goal is to get inventory turns up to six on this present four. So, I think we can get better in the management of our working capital.

Okay, thanks. And just one more question. What kind of new residential construction forecasts are you baking into your guidance?

Well, we're not gurus on that. We just watch it day to day. I don't think we have any insight that you haven't already read anyplace else.

(OPERATOR INSTRUCTIONS). Jeff Hammond, KeyBanc Capital Markets.

Maybe a question for Paul. As part of the initiatives around talking to vendors and trying to work on better pricing, what's been the feedback to this point on both equipment and non-equipment?

Well, first on the non-equipment, our vendors, who we've developed, as you know, a strong relationship with them. They've been very cooperative. They're looking for business also, and where is the best place to get more business than Watsco?

We've always maintained competition, where we want the best vendors possible. And that's why we've never totally consolidated our vendor list. And I think that's working very well for us today.

And how about on the equipment side?

On the equipment side, I think you'd see a similar situation. I think each one of our major equipment vendors, which include everybody except I believe one, they're all working very hard, trying to come up with new programs, coming up with new products to be able to hit all facets of the market.

I think everybody is in this thing trying to generate as much business out of the market as they can. So very positive.

Okay. And then just a question for Barry. Do you have the fourth quarter numbers for HVAC equipment, commercial refrigeration, and other HVAC?

You mean percentages?

Yes.

Let's go on and I'll answer that. I'll get it and I'll answer it as we go on with the call.

Okay, thanks.

At this time there are no further questions.

I swear I didn't know that, Jeff.

Good job, Barry.

Well, I'd like for everybody to hear the answer if you're going to provide it soon.

Sure. Equipment is 44; refrigeration is 11; and the remainder is other -- 45%.

Jeff, do you have that? Did he hang up?

Would you like for me to open his line again?

Sure.

One moment.

Jeff? Well, presumably he heard us.

Jeff, your line is open.

Jeff, did you hear the answer?

Yes. What I was actually looking for is similar to what you presented in the press release for the full year is the year-over-year change in those segments.

Yes, I see. It's a down 7%; up 11%, and you have to do the algebra on the third category.

Okay. Thanks, guys.

Thanks, Jeff. Bye everybody, talk to you soon.

Thank you. This concludes the 2007 earnings conference call. You may now disconnect.