Watsco Inc (WSO.B) 2012 Q1 法說會逐字稿

Good morning. My name is Katie, and I will be your conference operator today. At this time, I would like to welcome everyone to the first-quarter 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). Thank you. Mr. Nahmad, you may begin your conference.

Good morning, everybody, from a windy and rainy South Florida. Welcome to our first quarter conference call. My name is Alberta Nahmad. I am the CEO. And with me is Barry Logan, Senior Vice President, and Paul Johnston, Vice President.

As we always do, let me read 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.

We've had a great quarter. Our business is solid as it has ever been. But before I get into the details, let me review important highlights.

During the quarter, we delivered strong growth in sales, operating profit and earnings per share, not to mention the gains we are doing in market share. We gained market share in US residential and commercial markets, as sales from both product segments were up double digits. Other regions in the Americas, consisting of Mexico and our Latin American export operations, also achieved substantial growth in the quarter from new products, new locations and great execution by our team.

We are excited about our entry into Canada, which we announced this morning. This is a huge market and we now cover that market from coast to coast. This is a great business with a terrific leadership team in place, and we welcome them to the Watsco family.

It is interesting to note that our annual sales run rate is now about $3.4 billion; yet we have only about 10% share of this total market in the Americas. We feel that there is much to accomplish.

We also announced today the completion of a new five-year $500 million unsecured revolving credit facility. This credit line simplifies our capital structure and adds more flexibility at attractive terms and cost. This is an important asset to the Company as we consider additional investments and growth opportunities. In other words, there is not much out there that we can't accomplish if we set our minds to acquire.

Now, for the details on the first-quarter performance. Revenues increased 19% to a record $634 million and were up 7% on a same-store basis. Same-store gross profit increased 1% but gross margins declined due to a number of factors outlined in the press release.

Operating income increased 19%, reflecting organic growth and a contribution from new locations. Adjusted earnings per share increased 14% to $0.24 per share. And that adjustment, by the way, was the Canadian cost -- the one time -- the Canadian cost. I'm talking about transactional cost.

As for cash flow, there was a positive swing of $54 million during the quarter. We also raised our dividend 9% in the first quarter to $0.62 per share, marking the 11th consecutive year of increases. We have continued confidence in our ability to generate cash flow and expect 2012 to meet our goal of generating cash flow that exceeds net income.

Our balance sheet remains in pristine condition, and we are looking for opportunities to expand our network.

As for our 2012 outlook, we estimate 2012 earnings per share in the range of $3.25 to $3.40 per share, reflecting organic growth, accretion from Canada and the benefits of increasing our ownership in our first Carrier joint venture by 10% this July. Let's not forget this is our first quarter; it's generally the slowest quarter of the year, and we will have much greater visibility during the second and third quarter of what the year will do.

But all in all, 2012 should be a record year for the Company.

Before I take questions, a reminder about the importance of what we sell. Our products remain of critical importance to energy conservation and HVAC systems account for more than half of the energy consumed in a typical US home. There is now and over the long term a huge opportunity to address the aging installed base HVAC base that is largely inefficient. We love being in this business because of this opportunity. We also love the markets we are in. Our market coverage now extends to most of the Americas, which is stable and growing. No competitor is close in terms of having the network, products and organization to take such -- much advantage of these opportunities as we can.

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

(Operator Instructions) Matt Duncan, Stephens Incorporated.

Good morning, guys. First question I've got for you is about the mix in equipment between 410A and R-22. Are you guys seeing any change in the marketplace in the mix of the two coolants and the equipment that you're selling?

Go ahead, Paul.

The first quarter, we really didn't see it. It was under 10% of our sales was the R-22 product. I think if we see a spike in it, we're probably going to see it in season, when people are doing emergency replacements. It's not much of a factor.

Okay. And then in terms of the 7% same-store sales increase, if I remember correctly, at the time you guys did your 4Q 11 call, it sounded like the first quarter was off to a bit of a slow start. So did you see some momentum build as the quarter progressed?

Paul?

Yes, we definitely did. The quarter started out slow and it finished up in a nice flurry, especially in the month of March.

And Paul, do you think -- is there anything in there maybe weather-related, given that we had a warmer winter in March? I know across parts of the Sunbelt, it was unseasonably warm. Did that have any impact, or is this really indicative of maybe a little bit of a bounce in the end market here?

I think it is a little bit more of a balance on the end market. I think the weather obviously helped us a little bit, but not to the extent that I would have expected.

One thing that we are trying to ferret out in the numbers right now is looking at what the relationship is between compressor sales and what the equipment sales were. And certainly in the first quarter, we saw a good rebound that we talk about in the press release on the equipment side, but we didn't see that same sort of uptick on the compressor side.

Okay. And then did the March strength, has that carried into April? Are you seeing a strong start to the selling season?

That's the way April started, and then there was a slowness and then it is coming back. So it's a little bit of a mixed picture, but I think it will be a very strong season.

All right, great. Last thing I've got for you, in the guidance, Al, you did make note that includes Carrier Canada and buying an additional 10% of the first Carrier joint venture. Can you give us some idea how much you expect in earnings from both Carrier Canada and the extra 10%?

Barry, are we disclosing that?

Well, the algebra you can do on the option is somewhat self-evident, Matt. It is about a $51 million purchase price. With our new debt agreement, the borrowing costs will be something under 2%. So you can do some math with that equation.

You have to make your own assumptions on the EBIT margin and EBIT target of the joint venture; that is not something we disclose it. But you can take a shot at that, I would imagine. And same thing with Canada -- we've not publicly disclosed EBIT of Canada, but I think you can garner some good estimates off of what have been (multiple speakers).

Can you give him a 2012 accretion for Canada, Barry, in earnings per share?

For the stud period, which is just for 2012 eight months that are left, it is around $0.13 to $0.15.

Okay. That's very helpful. Thank you, guys.

Ryan Merkel, William Blair.

Good morning, everyone. The first question I've got, usually, you give guidance in July. So just wondering why we are getting guidance here before the selling season begins.

Well, Ryan, it is just that we thought you wanted a little bit of help.

Well, you know I did.

But you know, you're absolutely right; this is our slowest quarter, and we want to be careful what we are saying. So we put out what we think at the moment, but we could adjust that and will adjust whatever we see during the second and third quarter.

Okay, fair enough. And second question, just want to talk about the timing of the inventory purchases. Why didn't we buy the inventory in 1Q? Is anything going on there?

Paul?

No, there really wasn't anything going on there. It was merely our manufacturers and vendors who we do business with are becoming better and better at supplying us with the inventory that we need when we need it, rather than pre-buying.

Leadtimes are down, yes.

Leadtimes are way down. We are buying it on an as-needed basis. So just a timing thing. It is not indicative of anything else.

Okay. And then do you have an estimate of how much that impacted EPS in the quarter? Is that something you can do?

That is not something we are going to break out for you. Sorry, Ryan.

I'll add something to that. Go back a year ago, the channel was filling up with R-22 systems in what had been a huge fourth quarter in 2010. So I think a lot of it is simply timing, turning over on a year-over-year basis. You will see in the cash flow statement a big difference in inventory purchases quarter-over-quarter, and that plays itself out as we get into the second quarter, in terms of ramping up for the season.

On the other hand, Ryan, maybe, Barry, do you have an estimate to his question?

I would rather put it in terms of gross profit impact. It was about 50 basis points for the quarter.

Okay, yes. So we can assume that as the year goes on, the rebate accruals will kick in and maybe gross margins will be a bit higher as the year goes on, to account for this.

We think so, especially as we get in season and the mix will change a bit -- more higher efficiency versus the incoming value, the lower efficiency.

And then last question from me. Core SG&A flat this quarter with 7% same-store sales is pretty impressive. Can we do something similar to that as the year goes on or any kind of estimate for what core SG&A can do for the year?

Barry, do you have that?

Well, it has been about, I think, 10 quarters with that type of a dynamic in terms of keeping SG&A in line. The fixed costs are still coming down, so for the year, we expect to continue that type of progress. I don't see a reason why that should change at this point.

Great. Very nice quarter. Thank you.

Steve Tusa.

From JPMorgan. Good morning.

Good morning. You guys [led] our line of credit, by the way.

Well, happy to do that for you guys. The new construction business, how strong do you estimate that was in the quarter? I mean, Lennox said U.S. is up like 40%.

You have to remember that the installation of HVAC systems, there is a delay between new construction -- the new construction beginning; it is late in the process. So if there is a pickup in new construction, our industry won't see it for a while until -- this is one of the last things put into a new home.

Because Lennox says theirs was up 40%. So maybe it is just less as a percentage for you guys?

Well, it depends what their 40% is from. Who knows? I don't know the answer to that. (multiple speakers) a small base, who knows.

So you are not seeing anything that would -- you didn't see anything in the quarter (multiple speakers).

We consider our opportunity, and that is where our revenues come from, is in the aftermarket. We are talking about close to 100 million homes that are now installed with a very aged basis of HVAC systems. And sooner or later, those systems have to be replaced and we think they will be replaced with higher efficiency equipment, because of the energy conservation of it, and I think that is a very positive thing. Our focus is that market. And if new construction kicks in, that is just a plus.

Right. How was your commercial business in the quarter?

It was up double-digits.

Okay. And then how do you determine whether you are taking share or not? Do you use the HARDI statistics? Is it kind of a (multiple speakers).

That is a very good question. Paul, go ahead. By the way, we are up on share gains of all the equipment lines we represent. We monitor that very carefully.

What we look at -- we don't look at HARDI statistics, no. We look strictly at AHRI shipment data, which there may be some timing issues with compared to our movement data, but over time it smooths. And when you look at the trailing 12 months shipment data versus where we are, we certainly indicate that we gained share.

Plus, the OEMs themselves keep track of shares.

Right.

And we compare our notes with them.

Okay. And then just one last question on the -- you mentioned, I think, your compressor sales will be part of that parts and supplies, obviously. Were compressor sales down in the quarter -- just stand-alone compressor sales?

Stand-alone compressor sales were down slightly, very low single-digit. But compared to equipment sales movement, it was kind of a little bit of a surprise to me.

Right, so there is a little bit of a change in behavior there.

But that's a positive change.

I'm hoping it changed. It's an early indicator to me that something good is happening out there (multiple speakers).

Yes, exactly. But we could be transforming from a repair environment to a replacement. That is our hope.

Right. And you do sell those -- sorry -- one last question -- it's on the part and supply side. The price increase of R-22, how is that kind of playing out in the channel, and how did that kind of play into your financials here in the quarter.

It was very positive for us, obviously, as we started selling through old refrigerant. Not really material in the bottom line of the entire Company as far as what our sales of refrigerant are compared to the total. It was fun to start with, and then after the excitement of it, we saw the prices starting to slow down again.

That would have been reflected in your -- that is not reflected in your equipment sales, right? That would be part of that 1%?

That's correct. In the refrigeration business, as well.

Okay, thanks a lot. Sorry for all the questions. Appreciate it.

Jeff Hammond, KeyBanc Capital Markets.

Good morning. Just on the revolver, is the $500 million replacing the [$300 million] plus the [$125 million], or (multiple speakers)?

Good question, Jeff. Good question. Yes, it is. The $300 million was supposed to expire in August of this year, and we have now replaced it earlier than necessary.

But are you keeping the $125 million Carrier Enterprises revolver as well?

No. That was a more expensive line. We've now consolidated all the lines into a less expensive and much, much more flexible line of credit.

Okay, great. And in that light, can you just -- I mean you clearly taken advantage of a number of these Carrier JVs, but those seem to be pretty much wrapped up. Can you just talk about acquisition pipeline, what you are seeing out there and as you kind of move some of these -- past some of these Carrier buys, what do you see occurring next?

Well, we are still looking for large transactions. And we obviously like joint ventures with OEMs, and there are more possibilities in that area. And we like the expansion in the Americas. Latin America as you know, Jeff, is not suffering what Europe is suffering or Asia is suffering. They are solid. And there is a lot more to do there.

We may or may not have opportunities to acquire distributors there, but that is certainly on our radar screen. And then there are some large independents in the United States and perhaps Canada that we would love to be able to bring them into the family. There is no shortage. We certainly have a 10% share. We certainly have a lot of opportunity in front of us.

Okay, and then just on Carrier Canada, it looks like, based on what you pay, that maybe the margins there are a little bit higher than (multiple speakers).

Yes, they are. That's a good observation, yes.

Can you maybe just talk why structurally you think the margins are higher. And then also, where do you see the biggest opportunities to really add value to that business as you bring it into the fold?

I don't think this joint venture will be any different than the other joint ventures we've already had with Carrier. Even though we are starting with a higher margin, because that is the position they have in Canada, we will do what we've always done with Carrier joint ventures. We add additional product offerings. We will add additional distribution points. We will have our own way of incentivizing leadership there and motivating them. We are a big believer in equity as an incentive.

And I don't see any difference, other than we are starting from a higher EBIT margin with Canada than we did with the others, but there is nothing wrong with that. I think it is positive.

Why do you think they have higher margins at this point?

I don't know why they've done it, but it is what it is. They've done a great job up there and we just want to continue it.

Okay, thanks guys.

It's a very high-efficiency market, Jeff.

Your next question comes from the line of a participant whose information was not gathered. Caller, please state your first and last name, as well as your company name. Your line is now open.

Good morning, guys. It is Josh Pokrzywinski. Sorry, I got cut off by the beep there.

Want to mention your company?

MKM Partners.

Great company. Heard of it.

Wanted to dig in a little bit on Carrier Canada, first on seasonality. Just wondering if we are kind of above or below average versus base Watsco, and what we are really missing by leaving that first four months of the year off, in that $0.13 to $0.15. Is it more or less profitable kind of in the first quarter?

Well, that's a good question, and it follows the same seasonality that our existing business follows. So their first quarter is not their strongest quarter, just like the rest of Watsco is not.

Okay. And I guess just kind of running through the math here and maybe applying a similar multiple as what you've had for some of the other Carrier properties and taking into account the share component, it seems like the $0.13 to $0.15 is a little bit light of what I would have thought. Are you assuming a tougher market in Canada, or any kind of integration expenses within that? Or is it just simply early in the year and you want to be kind of gentle how you put that (multiple speakers)?

Yes, this is no different than anything else we've done with Carrier. This is a very well-managed company. As you've seen, their -- as we've explained, their margins seem to be higher in Canada. I think it speaks to their performance.

And we will have a better -- as you said, as the season gets into, we will have a better picture. We've just given you what we think is our best shot at it today. Barry, do you want to add anything to that?

Yes, Josh, I would say this, that we are applying some cost for amortization of intangibles in the numbers, which is not in historical, but it's in the go-forward numbers. That would be the only difference in maybe looking at it the way that you're looking at it.

But I think Al said it well. We are going to be conservative as we start the year and give you an update as we get through the year.

Okay, that's fair. And maybe just back on guidance and the decision to offer it up here a quarter earlier than usual. I understand you have better visibility, obviously, with the acquisition coming in and being able to pencil in accretion there.

But I guess with April kind of having a bit of a sine wave to it and maybe ultimately the direction into the more important months of the quarter still a bit of a question mark, is there anything on the cost side that gives you better than average visibility heading into the season that is driving that decision to be a quarter early? I guess, specifically northeast -- Canada (multiple speakers).

Well, no, it is really because we saw that there were three different components to the year's performance. It's the normal organic performance. Then there is the performance that is going to come from Canada. And then there is the performance -- improved performance that's going to come from increasing our equity stake in the first joint venture. Those are three different things, and we thought rather than have you guys sort of worry a lot about what each one does that we would do it for you. And that is all occurring now. [Carrier] just occurred, and we thought we would give the little bit of a window to help you guys figure out your models. We hope we've been helpful by doing that.

I appreciate it.

It is just because there are these three things going on -- the organic Canada and the additional 10% equity in the first joint venture.

Understood. Appreciate it. Thanks, guys.

Ian Zaffino, Oppenheimer & Company.

Great, thanks. Can you tell me what the monthly comps were, or if you could break that out and maybe what they look like in April?

We don't do that. We don't provide monthly comps.

Okay. I mean, just simply giving a little bit more direction than just saying it's gotten better throughout the quarter. I was wondering if -- any detail you could give.

Well, the quarter just started. We are still in the first month of the first quarter -- of the second quarter.

In the year, I meant, sorry.

I'm sorry -- you want to repeat that?

I'm sorry -- I meant the year, not the quarter. So you mentioned the year started off a little slow and then it kind of picked up a little bit. So is April better than March, can you give us that?

Oh, sure. Yes, April started off very strong, then it kind of slowed a little bit. Now I think it is coming back.

Okay, all right. Thanks.

David Manthey, Robert W. Baird.

Good morning. A question probably for Paul. I'm just wondering if there is any implications from the rising price of R-22. And with the inventory situation this year, I'm just -- as you are thinking about the transition to the R-410, will that happen at some point before 2015? It doesn't seem like this is the year, but could it happen in 2013 or is it just going to be a mad dash to 2015?

I wish I knew the answer to that completely. I think it is obviously going to be in place throughout 2012. I think most of 2013 -- I think in the second half of 2013, hopefully -- and this is just my wild guess -- hopefully, we'll start seeing it abate and transition completely over to 410.

Is that -- do you think that the manufacturers will get aligned and sort of figure that out? Because it seems like if one of the manufacturers is willing to defect and still be pumping R-22 out there, even though it is not what is best for consumers, theoretically, that might be the go-to solution. Do you see that as the case or do you think the industry will reach consensus as we move toward that point?

I don't know about the OEMs and what their thinking is. I think as an industry, I think the consensus will start to generate as there becomes more of a shortage of R-22 availability -- of the material R-22.

Right, okay. And second, I'm surprised to hear about the seasonality of Carrier Canada. Could you tell us what percentage of Watsco revenues in the first quarter of 2012 were furnaces and how that compared year-over-year? And then if you look pro forma for Carrier Canada, could you talk about sort of in-season versus out of season, what percentage of their revenues are furnaces? I would have thought it would be a higher percentage.

What do you think, Paul? Do you want to take that?

I think between Barry and I, we should have an answer to that. Furnaces, first of all, are a very small portion of Watsco's first-quarter, second-quarter and third-quarter sales, even fourth-quarter. They represent a very small percent of our total business, even including Carrier Northeast. So it is a good business for us, but not a large one.

When you move up into Canada, Canada is a very high-efficiency marketplace. You're going to sell products that are going to be 90% to 95%-plus gas furnaces up there. So it is a very nice market.

However, when we look at Canada we also have some other product lines; we are in the commercial refrigeration market, the commercial applied businesses there, as well as a fairly robust duct-free split market that is available in Canada. So Canada is a more diverse market perhaps than our US model.

To put it in numbers, Jeff, I mean, the furnace business for Watsco is not more than 5% without Canada, and still less than 10% with Canada. So heating seasonality can change a little bit, but it's not something that is going to change very much.

Keith Hughes, SunTrust.

Got a question for Paul. You had mentioned equipment sales being better than compressor sales -- I assume that is a growth rate in the quarter. Is this the first quarter that you've seen that in recent periods?

Yes.

And if you had to go back in time, when do you think the last time you would have saw that phenomenon?

I wish I had the answer to that, Keith. I do not know. I can go back and look it up.

Fair to say it is a long time. Is that --?

Yes, and I'm sure happy to see it.

So as we look forward, if that continues, with the Delta or the different growth rate between equipment and your other accessories, would they not be closer together?

It should, yes. But as we start replacing equipment, at some point, we are going to start seeing more replacement of thermostats and grills and registers -- you know, all those sort of things -- coming about with some of this old equipment being dropped off.

If you have stronger equipment sales, does it necessarily drive more other HVAC, or do you just need more new construction or bigger ticket jobs coming in?

I don't know. That I do not know, Keith.

Okay. And I guess the comments on your refrigeration sales, which were very good in the quarter, was there anything here that was up on a tough comp? Is there anything here unusual, one time, or if it (technical difficulty), could the growth rate be at this for the rest of the year?

There is no one-timers in our commercial refrigeration businesses. It is just keeping on expanding the product lines, expanding the territory, new branches, very solid growth in all -- just about every one of the market segments.

Okay. Thank you.

(Operator Instructions) Robert Barry, UBS.

Good morning. Is it fair to assume that within parts and supplies, the original Carrier joint venture actually saw growth?

I think we are not going to break out separate companies' performance as it pertains to parts and supply business.

Okay. I mean, even directionally? Because I know that aside from the end market, there was a lot of specific effort going into trying to grow the supplies business at legacy Carrier. So if it is still down, even with that kind of Company-specific effort, that would be kind of interesting, which is the genesis of my question.

I don't think you ought to read too much into this first three months in any of these product categories. I think we are going down a -- you might form some conclusions that aren't going to bear themselves out.

I think it was a fair question -- if some people are experiencing new construction work, how come your parts and supplies aren't going along with it. And our best answer to that is we are certainly not losing share, either in the aftermarket or in the new construction. If anything, we're gaining across the board.

But there is a time delay between the start and the installation of HVAC. But we don't count on new construction. If it comes, it is sort of a plus, and if it doesn't come, it's okay. We've got a huge market and we've still got enormous opportunity to develop share gains across the industry.

Does that segment really have to come back, though, in order for you to get to your target of -- I think it was 10% (multiple speakers)?

Oh, the 10%. Well, you would hope that all the horses are pulling the wagon, and I think it will. I don't think there is anything wrong with our parts and supplies business; I think we are reading too much in the first three months.

On the M&A pipeline, just to follow up, have you detected any change in tone in the conversations that you are having (multiple speakers)?

-- is my begging for doing these transactions having a better effect (multiple speakers)?

Look, these things take time. You know, to get these things going with Carrier, it took me 10 years now. I hope they won't take that long to do some of these other things that we are pursuing.

I would say that the more we establish a record of gaining share for our OEMs, the more receptive others, the OEMs, become to us. As you would expect, if you are performing. And we are performing for all our equipment brands. You know, we get a reputation for that, and I think, yes, to your point, people become more receptive. Does that mean that we have a transaction that we feel warm? No, I think we are still in the pursuit business.

And on that 12% growth in the equipment, could you just break out kind of volume mix-price for that, please?

Sure. Barry or Paul, do you want to take that?

Go ahead, Paul.

Yes, our first quarter, we had -- we saw an increase in 13 SEER product. And obviously, that meant we saw a reduction in our high efficiency product. And it is reflected in the price trends. And the price trends that we would see on something like that would be in the -- probably worth about $30 to $40 per unit.

So it was really all volume?

Yes, right.

Barry, you have specific on that, don't you -- on the unit -- departments?

Yes, we don't really -- it is very simple. The units were up about 14% and prices down 2% because of the change in efficiency mix.

Okay. And then just finally, more of a housekeeping item. When we are calculating that accretion from this Canada deal, I think going forward, we should use a new share count. Is that right? Just add (multiple speakers).

Yes, but don't forget they use -- in our share count, it is an average. So you wouldn't grow it 1.25 million, which is what we just issued. Barry, do you want to tell them how that works?

It is obviously the share could for the year plus the 1.25 million for the eight months that we will own and match up with the earnings that we are getting.

Each quarter, Barry, they take the average -- you want to explain that -- not for the whole year, but quarterly?

Sure. It is an average share count per day for a quarter. So we will have two months' worth of those shares embedded in this quarter's earnings, and then the 90 days for the rest of the year in each quarter.

Great. Okay. Thank you.

Steve Tusa, JPMorgan.

So embedded in the annual guidance must be some sort of a sales increase. I don't know whether you have a view on what you think the industry is going to do or what you guys can do on a same-store basis, if you could just give us a little color on that front.

Barry, do you want to deal with that?

Steve, we really haven't given any kind of specific guidance; it's more of an earnings guidance. If you were still looking at, I think -- if you press me on, it's still a single-digit consequence this year on sales. We like the start. We love the strength in equipment, so we hope we are wrong. But we are still going to be conservative about thinking in single digits now. Obviously, we are managing the SG&A in that light, and let it -- we'll let it play itself out as we get into the season and update you next quarter.

Right, but definitely up -- at this stage?

Yes.

Okay, and just one more question, just on the R-22 mix. Everybody has kind of said it is in the 10% range. That is just a function of what you sell in the first quarter, right? I mean if you looked at March which may be more representative of kind of entering into the season, March is probably a lot higher than that. Am I looking at that the right way?

Paul, do you have a feel for that?

No, I really don't.

Do you know what I mean? Because January, February might be less cooling? I don't know, because 10% is relative to the 20% that it was last year. And I just wanted to make sure that is the reason why.

Well, we saw the same thing, remember, in the fourth quarter, where we had a very low percentage of R-22 in the fourth quarter and we saw the same event happening in the first quarter, which I guess we expected.

Okay. So you think it is going to be around 10% for the year?

No, I don't. I think it is going to be much higher than that once we get into season.

Right, right, right. Okay. So, again, it is about the behavior in the first quarter; it is about what people are doing. And then you get into the regular season and that ticks up to what they did last year? Okay, great.

Yes, between a planned replacement and an emergency.

Paul, but you want to -- or Barry, why don't you -- there seems to be a lot of interest in this R-22. Do you want to talk about the changes that are coming by government and industry mandate within the next early years, and the impact that is going to have in efficiencies, like the regional mandates?

Yes, the R-22 -- I think we mentioned this earlier -- the R-22 goes away by its own accord, hopefully, sooner than later. But as we move towards 2015, not only will we see the R-22 product being eliminated from our menu, but also we will start seeing the 15 SEER product throughout the Sunbelt, which is something that we get excited about.

But explain why that is.

Well, it is the --

The regional mandate.

The regional mandate that the Department of Energy has come up with, which mandates that we're going to have different efficiencies for gas furnaces in the north and different efficiencies for split systems and air-conditioning in the south. And then California, of course, will be a whole other story. But that is all good news, I think, long-term for us for the next two to three years.

What is the difference in price on those?

Steve, I wish I had a number that I could just pull out of my head and give you on that. I think what is going to happen is as time goes on is I think there is going to be -- as volume is being pressed against the higher efficiency product, I think it is going to become more affordable for consumers and more palatable. And so as we enter 2015 and we got the advent of the higher efficiency product, I think you're going to see that the pricing will be right for both the distributor and the consumer.

Right. And my guess is the demand destruction from going from R-22 to our R-410A, which is you have to buy a lot more equipment and kind of fit it into installations, which can be expensive is different, when you are going from a 13 SEER R-410A to a 15 SEER in R-410A. So the actual cost to the consumer -- cost increase to a consumer isn't as dramatic as it would be R-22 versus our R-410A?

Correct, because you are not going to have the replacement coil that's going to be put in. And generally, a number of other components go into a 410 replacement of an R-22 system, which I think I've talked about in the past.

Right Okay, thanks a lot.

(Operator Instructions) We have no further questions in queue. I turn the call back over to the presenters.

Thanks for participating. We look forward to coming on again at the end of the second quarter. Have a great day. Bye.

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