Watsco Inc (WSO.B) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen. My name is Martina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watsco second-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)

I would now look to turn the call over to Mr. Albert Nahmad, CEO. You may begin your conference.

Good morning, everyone, and welcome to our second-quarter conference call. This is Albert Nahmad, President and CEO. With me this morning is Barry Logan, Senior Vice President; Paul Johnston, Vice President; and Ana Menendez who is our Chief Financial Officer. As we always do, first, a cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the Safe Harbor positions of these various laws. Ultimate results may differ materially from the forward-looking statements.

Watsco had a good quarter, establishing new records for sales, operating profit and earnings per share. Our Equipment business continued to show growth in the sales of R410A replacement systems versus the R22 dry charged units and parts repair alternatives. Most of these system sales are at base level energy efficiencies, but we are also seeing continued growth in the 16-plus SEER systems. These are good trends business and for our industry, as consumers are moving toward upgrading their existing systems in recognition of the energy savings and overall value of these products.

We also produced strong growth in sales of commercial products, which grew 20% plus during the quarter. We are very pleased to have this kind of impact with a new product lines that we added last year. Overall, we believe we are gaining market share in the markets we serve and feel that many of the initiatives to improve customer service, product availability and improved contractor tools are paying off. We also reduced SG&A again this quarter, producing further efficiencies for the long term.

Our International business, now about 15% of sales, also grew nicely during the quarter. We have an excellent team in place, and they have been able to increase their product offerings and add additional locations and people to continue our growth in these markets.

We also increased our ownership in Carrier Enterprises, effective July 2. This was the first joint venture formed with Carrier three years ago. Our ownership is now 70%, and we have a second option to raise ownership to 80% in July of 2014. This joint venture has been a huge success for us and for our partner Carrier, and an increase in ownership provides terrific value for our shareholders.

Now, the detailed performance of the second quarter. Revenues grew 15% to a record $1 billion. That's a first for us. We are up 2% on a same-store basis. HVAC equipment sales were up 5%; other HVAC products were down 4% and commercial refrigeration products increased 16%.

Gross profit increased 12%. Gross margin was 23.6%, and SG&A decreased 4%, excluding new locations. Operating income improved 14% to a record $86 million. Same-store operating profit increased 4%, with operating margins expanding 20 basis points to 8.8%. Our diluted earnings per share was a record $1.15 per share for the quarter.

Moving on for the results of the first half of the year. Revenues grew 16% to a record $1.6 billion, and were up 4% on a same-store basis. HVAC equipment sales were up 7%; other HVAC products were down 3% and commercial refrigeration products grew 19%. Gross profit increased 12% to a record $389 million. Gross margin was 23.6% and reflects higher sales mix of HVAC equipment and growth in sales of commercial products, which generate lower gross margins.

Good cost control generated a 2% decline in SG&A, excluding new locations. Operating income improved 15% to a record $106 million, and operating margins declined 10 basis points to 6.4%. Same-store operating profit increased 10 basis points to 6.6%. Adjusted earnings per share increased 8% to $1.43 per share in 2012 versus $1.33 per share in 2011.

For the first half of 2012, we used cash of $60 million versus $42 million last year, reflecting increased working capital during the summer selling season. We expect to generate substantial cash flow in the second half of 2012 and meet our annual goal of cash flow from operations exceeding net income.

Dividends for the first half of 2012 were $41 million, a 15% increase over 2011. This marks our eleventh consecutive year of increasing our dividends to shareholders. In April 2012, we refinanced our credit agreements, adding new availability of capital and greater flexibility in terms of how we finance our business. The $500 million facility has attractive pricing and matures in five years. We have revised our outlook for 2012 for earnings per share. In the range of $3.15 to $3.25 per share, reflecting our view of current operating trends.

Now, as always, I want to remind everyone about our important fundamentals. Our products are significant component in the movement toward energy efficiency, energy conservation and greener solutions. HVAC systems account for more than half of the energy used in US homes, and over 89 million systems in homes are over 10 years old, operating at efficiencies well below current federal standards. Replacement of these systems is inevitable and offers us terrific revenue opportunities and offers cost savings for consumers.

We also continue to build the company, and we'll continue to grow our network by opening locations and by making acquisitions. Our overall revenue, annualized run rate is $3.4 billion, yet our balance sheet remains conservative. We have the capital to invest and continue to look for additional opportunities. Now, with that said, Barry, Paul, Ana and I will be happy to answer your questions.

(Operator Instructions).

Matt Duncan, Stephens Inc.

Good morning everyone. The first question I've got is it relates to your Parts and Supplies revenues. I'm a little surprised to see those down, given what we are seeing in the housing market. I know typically, you have greater content of Parts and Supplies in a new build. Is that really a function of going back to more replacing versus repairing on the replacement piece of the business? Or, what do you think, is driving that year-over-year decline in the Parts and Supplies business?

Good question. I am going to ask Paul Johnson to answer that.

Alright. Hey, Matt. The Parts and Supply revenue was down for the quarter. It's down more on the Parts side, which would reflect, perhaps, a greater replace versus repair situation in the field.

Okay. Paul, maybe if you look at your sales into replacement versus new construction. Do you fee like they both grew in the quarter? Was replacement up and maybe new homes still down? Do you feel like you've started to see any impact on the housing cycle in your business?

We've see some. I've talked to a number of our players out in the field, and they feel like that they're seeing some traction on new construction. But, they all point out to me that, for instance, in Florida, the permitting is up materially on a percentage basis. But still it only represents around 12,000 to 13,000 new permits were issued. It's up 20%-some. It's still a 580,000-unit market for us. It's maybe 2% of the equipment movement's going to go new construction, so we are starting to see it, but it's not big enough, really, to move the ship.

Okay. The last thing, here, and I will hop back in queue. Barry, maybe if you could talk a bit about the accretion of the 10% you bought in the original Carrier Enterprise, what is the annual EPS accretion you get from that transaction?

Well, we have not disclosed separately the profitability of Carrier Enterprise, not to make the calculations for you, so to speak. We've suggested that its margins are very consistent with the overall Watsco margins, and you can make some assumptions and do a computation for the last half of the year on an annual basis.

Okay. Thanks.

Ian Zaffino, Oppenheimer.

Hi, how are you doing? Question would just be on the lower efficiency that you had mentioned. How much of that lower efficiency is R22 or -- what do you mean by low efficiency? Is that R22 or is that just the lowest SEER of 410A?

It's our 13 SEER, but go ahead Paul.

13 SEER comes in two flavors. It comes in R410, and it comes in R22. What we have seen is we haven't really seen much of a jump in the dry charge. Most of what we are seeing in the second quarter was as a reflection of 410A 13 SEER product.

Okay. So basically, year over year, your R22 units are flat, but you have seen an uptick in your -- or, I guess a trade down from higher SEER 410As down to 13 SEER 410As?

Right, and I want to correct you. The R22 sales year over year are down.

Can you give me a magnitude?

Yes. It wasn't a big percent of our business last year, and it's not a material size of our business this year.

Okay, but probably down single digits, not down double digits?

Oh, yes. Oh, my God, yes.

Okay. Then, would you be able to give us a break down of how much was 13 SEER and below or just 13 SEER and then above 13 SEER?

Yes, for us, it's probably around 55% to 60% would be 13 SEER in the balance being above 13.

Okay. Alright. Thank you very much.

You bet.

Jeff Hammond, KeyBanc Capital.

Morning, Jeff.

Hey, good morning, Al. You mentioned the lower guidance. Can you just go through your thinking there? How are you thinking about same-store sales embedded in the guidance, either full year second half? And just, is the guide down really a function of 2Q coming in light or just a reassessment of the year? Just maybe a little help on the guide.

Well, I'm going to let Barry give as detailed explanation as he can, but my sense of it is that there is a problem with consumer confidence out there. We know there is an enormous amount of pent-up demand. I don't think we're seeing any side of that coming in in large numbers, but I know its coming. So, this is just our sense of the present trends. It's sort of spotty. Up one month very strong, and then the next month, it falls off. Barry, can you add to that?

I would echo that. I think the mix that we saw in the first half of the year is a little lighter than we had expected. But yet the movement towards 410A is something that's very positive and probably better than we expected. The 410A system importance, just to add to what Paul said before, is that we also are seeing growth in the indoor systems that go with them. That had not been a trend until this summer selling season. So, we like the good news of that. We like the prospects of that. The mix is probably where it's lighter than we expected, and we want to be conservative in our outlook, given that.

Okay. So, I know you don't give quarterly guidance, but the shortfall relative consensus expectations was similar to your guide down. But, maybe it sounds like that maybe you had a lower internal assumption, and you are baking in some of that mix continuing into the back half?

Well, the reason we don't give quarterly guidance is because when the season enters, and you know this is a very seasonal business, it's very difficult to figure out ahead of time when the season starts and when it ends. For example, this year, this season seems to be beginning later than it did last year, in terms -- it seems to be coming in stronger in July than it was in June. So, that's very hard. If it comes in July, it's a third-quarter event, and if it comes in June, it's a second quarter event. So, we don't provide the quarterlies. But, essentially, I just don't want to leave you with a bad impression. Business, you know, we are in a very strong position. As Barry said, if we are going to be anywhere in our outlook, we are going to try to be conservative unless there's some surprise out there that we are not expecting.

Can you just touch on July terms?

Well, it's certainly an improvement. I don't want to quantify it, but I like it.

Okay. Can you give us early observations of the Carrier Canada business as you get your arms around it and how it performed relative to the expectations?

Yes. It's got its issues. The profitability is not what we had hoped for. We are going to try to work with it with our partner Carrier. In the big picture, we are very, very happy we are there. It expands our market coverage in the Americas, which is part of our strategy. And in the long term, it's going to be a solid asset, we hope. We are counting on support from our partner to achieve that.

Were there any one-time items or purchase accounting in the quarter related to that deal?

I don't think so, Ana? Were there any?

There 's the two month's amortization of intangibles for purchase accounting, but there's nothing unusual.

Okay. Great. I was under the impression that that was a higher margin business, but, you mentioned it having its issues.

Yes.

Okay. I will get back in queue, thanks.

David Manthey, Robert W. Baird.

Good morning. Thank you. First off, in terms of the same-store sales in Parts and Supplies coming in, it would seem like a little bit light. Could you discuss the initiative at Carrier Enterprise relative to Parts and Supplies? I would have thought that would help support that growth rate a little bit. Second, as you are talking about the shift from the R22 drive shift over to the R410A systems, wouldn't that also help support Parts and Supplies given that you need to, potentially, change some piping or ductwork or the inside unit, which I guess would fall under that category?

Yes and no. I'm going to ask Paul to answer in more detail, (laughter). Ductwork normally, that replace when you replace the indoor and outdoor system. But, go ahead, Paul.

Yes, you're not going to get into a lot of supplies when you are just doing a change out of a R22 unit and changing it to a 410A. Basically, we have got a chemical that flushes out the lines set. You are going to use the pad, generally the same thermostat. It's the indoor unit, the outdoor unit. The indoor coil and the outdoor unit will be changed out. That really didn't have as much of an impact on our Parts and Supply business.

Now, as I indicated, when Matt ask a similar question, our Parts sales are what are going down, not so much a reflection of our Supply business. Our Supply business, I think, we will start seeing some legs on that, and that, I think, will start growing. The Parts business is the thing that has been very strong, and we indicated last quarter it was softening and it continued in the second quarter. That's a big piece of our business.

To add to the comment, Carrier Enterprise did see growth in the Supplies business. It's really the Part side of the business where that, where the sales impact is.

Okay. Alright. Where do you capture the inside, the coils or the air handler, where do you capture that sale? Is that considered a System sale or is that a Parts and Supplies, as you quantify things.

It's equipment sale.

Equipment sale? Okay. Alright. Al, when you are talking about the trends in July that you said were better. You are talking about absolute sales dollars? Talking about growth? What are you referring to there?

EBIT growth rates.

EBIT growth rates? Okay. The, just to close the loop on the --

Which, of course, follows revenue growth rates, right?

Okay. On the EBIT, can you discuss your targets over the next few years? I think you said you hit 6.6% in the core business. I'm just wondering how you feel about that and where you see things going over the next --

Well, we have very sharply defined internals goals, which I'll share with you. I think we've done in the past. Our near-term goal, near term meaning into three years to five years, we'd like to get to 10% in EBIT margins with return on sales. We've done it in the past with some of our business units, so it's not like we are trying to do something that we haven't already done in the past. Longer term, once we install some of the technologies that we are installing at the contractor level, as well as our internal business systems, I would like to -- and I know this is going to be a little shocking -- but I'd like to reach the 15% ROS, return on sales. That's after five years.

Alright. But, I guess, we probably just passed the peak of higher-margin parts and supplies, here. We're heading toward systems, which seems like it manifested itself this quarter. So, as we go forward, what are going to the components of that? Is it just going to be --

Internal. Mostly internal efficiencies. Through the use of greater technology throughout the Company. As you have heard us talk earlier, we are reducing SG&A, which I think is -- consistently we're doing that. I mean, I think we can just get more efficient. Gross profit margins, you know, who knows. That the market-determined thing. But, which we have to follow markets, but in the SG&A, and leveraging the SG&A with sales increases, I think that's where we will see the improvements.

All right.

Adam Samuelson, Goldman Sachs.

I asked the first question, I was hoping maybe this some additional color on within the equipment same-store sales growth. I'm not sure if you gave a price mix, volume growth and any color particularly around the mix on the quarter.

Barry?

We did see unit growth. The unit growth is consistent with the overall dollar growth.

Okay.

At 5%. The mix in prices is not something that we separately calculate or separately go through that analysis. But, overall mix in price, we're flat for the quarter.

Alright. That is helpful. Then, any differentiation in the sales growth between the legacy Watsco businesses and Carrier Enterprise? You see the EBIT growth faster than that income? Clearly that has been distorted by the acquisitions of the Carrier Enterprise JVs, but in the core Carrier Enterprise business versus the legacy Watsco is there any differentiation in sales growth there?

We don't do that anymore. We stop doing it about a year, year and a half ago, to try to -- it's one company. We're all in the same industry. We are all competing for contractors, so we are not going to break that -- I'm sorry about that -- performance by units.

Okay. And then in the update to guidance, I think last quarter, you alluded to a $0.13 to $0.15 accretion assumption for the Carrier Enterprise Canada. I believe that also included the pickup of the 10% of the original Carrier Enterprise JV in July. Have you updated that number in the new guides?

Well, again, I have already mentioned some issues that have come up in Canada. But, the outlook that we are giving you is the consolidation of everything we see. We have chosen not to break that out into its pieces. This is everything together.

Right. But, would it be -- your comments earlier, would it be fair to assume it that the accretion this year is assumed lower than maybe you were assuming three months ago?

Yes. That is correct.

Alright. I appreciate the time and color. Thank you.

Keith Hughes, SunTrust.

Morning, Keith.

Hey, how are we all doing? Going back to the first Carrier JV, the when you just increased stake by another 10%. It's been in the mix for some time, now. I know one of the initial -- one of the things you are going to try to do that with that business was make it's mix closer to historic Watsco in terms of the mix of the --

You are right. To add more parts and supplies, right.

Where do we stand on that? Is that done? How is it going so far?

I don't think is done. But, let me ask Paul to give you more detailed explanation

I think when you look at their overall mix, we may be altered or skewed their mix a little bit with some great action that we did with our partner Carrier. That is, we were able to add a number of larger commercial equipment lines throughout the country. As we indicated in the release and Al's comments, our commercial equipment sales are up over 20%, due to that. We probably skewed their equipment by probably 2 to 3 points more equipment than they were before because we've added more equipment lines to them. When you look at there non-equipment parts, they are growing it. They are growing it at a better clip than most of our companies because it's new to them, and they are starting to get into it and getting their feet wet with it. We indicated when we went into this joint venture three years ago that it's not a light switch changing the mix into more of a supply-house mentality. It's going to take us time, and it is taking us time. But, the traction is good.

Keith, the reason we do it is because it enhances the contractor experience. If he can come into one of our locations and not only pick up the equipment but pick up most everything he needs, it saves him time from having to go to what used to be called the ARW or wholesaler, which is not an equipment guy but carries parts and supplies. We like to do it all in one location to enhance his efficiency, our customer's efficiency. That's conceptual things, and nobody can do it as well as we can.

When do you think this will be fully built out? It's been several years --

Oh, wow. It years. I will ask Mr. Paul Johnson who always got my future -- (Laughter). I think it's going to be many years.

To get the mechanic or the contractor to realize that we have got this full brandwith of the product on hand and to switch his buying habits over to buying from us, it's going to take us time. But, it's going to be several years before we are done. It's the same thing we've said three years ago when we got into the JV.

Okay. Just on a separate topic for you, Paul, in terms of suppliers and pricing, I know commodities are down here somewhat. Are you seeing any actions, positive or negative, for price increases or decreases in the second half of the year?

From the equipment side?

Just across the board.

Just across the board. You know, outside of copper and, you know, refrigerant, the two commodities that we sell, it really hasn't been much of a price change going on either up or down this year. It's been fairly flat. Of course, those two commodities have been just going in the opposite direction.

Okay. And R22, there's reports that this price is hiking with the potential regulatory impacts for next year. That come off the top on the R22?

It pretty much -- it went up and it stayed up. We are not experiencing any supply issues, at all, on it. I think the concern on supply on R22 is probably going to land next year, not this year. But, yes, the prices have held.

Okay. Thank you.

Ryan Merkel, William Blair.

Morning, Ryan.

Hi, guys. It's actually Paul calling in for Ryan. I have a question on the gross margin. I'm not sure if it's easier for you guys to talk about it sequentially or year over year. But, can you guys give us another layer of granularity, whether it's the gross margin loss is coming solely from change in mix or is there more competition? And, did you guys see a little more of the rebate accruals, given the condensed timing of inventory purchases?

Barry.

Well, first to answer the last part, we did see increases in the rebates and discounts from purchasing activity. That is in the quarter, in terms of the timing of that. It's relatively immaterial comment, but it's just to answer your question. The gross profit that you see really is a consequence of the Equipment business growing substantially higher than the non-equipment business. As Paul mentioned, the strength of Commercial, which by virtue of the fact that we don't actually even inventory all Commercial products, it's [very] efficient, in terms of working capital. It come at a tighter gross profit for the commercial market. It's really more of a mixed answer than anything else.

It doesn't sound like you guys are seeing increased competition cost for you to cut prices on a per unit basis?

I think that's going on all the time. In a difficult market, and this is been a difficult market for several years, there is always someone that is using price. We have to meet it and beat it with service. We are a service company. I think we are better than anyone else, and we are getting better at it.

Great. Thank you for the clarification, there. My second question is on SG&A. You guys did a really good job with SG&A on a same-store basis, down 4%. Can you let us know what are some of the initiatives going on there and how sustainable they are?

Who wants that one? Mr. Logan?

Sure. The biggest consequence is reducing (multiple speakers) the fixed cost of the business. Facilities is the second highest cost behind people. We continue to see declines in our rent and facility costs. That's just a grind that's been going on now for the last several years and continuing to grind. Those are permanent reductions.

We would not need to add square feet to grow. Those are efficiencies for the future. The rest is simply we have some discretionary spending where our managers are incentivized on producing EBIT growth each year. They manage the pocketbook at the local level, at the branch level. It would be -- the reductions would be in their hands and reducing the overall other costs of the business.

So, is any of the reduction SG&A in the current quarter attributable to lower bonuses year over year?

It would not be material number, necessarily, in the year.

Okay. Thank you, Barry, I appreciate it.

Sure

Steve Tusa, JPMorgan.

Hey good morning. How are you guys doing?

Good.

Just a question on compressor sales. Specifically, you said Parts and Supplies were down. What were compressor sales down through distribution? Paul?

We don't break that out, Steve, but obviously, compressors are the largest component of our Parts sales.

Was it worse than that?

Yes.

Okay. So, I guess -- on the R22 stuff, a lot of these OEMs are talking about that kind of leveling off. You talk about a tepid consumer, but do you see any change in behavior? I guess, for Lennox, housing helped that out a lot because obviously, the builders aren't buying R22. I'm not sure how much housing helped you guys or hurt you guys, or whatever. But, are you seeing any kind of change in -- do you think this is a little bit of a change in behavior, or is there something more technical going on like housing?

I think that we want to really emphasize, I don't want to emphasize new construction, yet. It's nowheres near where it used to be. We don't base our strategies on new construction, when it comes we enjoy it. But, we base ourselves on the replacement side of the industry, which, we enjoy and think we do it better than anyone else. When housing becomes significant, you know, we will enjoy it. But, I wouldn't say that we are there now.

Right. And then, one last question. Just again on the pricing side. A lot of these guys are showing significant -- the OEMs are showing pretty significant spreads and benefits from price cost. Do you think the discipline in the industry, which has been helped by copper and steel over the years, does that kind of fade in '13, or is there any push back, incremental push back, where commodity prices are now?

Paul, you would have of the other view of that.

I would have no idea, Steve, if there's any real pushback on that. There are was some initial pushback on the R22 pricing when that moved up. Copper -- gosh, we have seen over a $1 swing, now, in the last six months on copper. It's all been on the downside, so there really hasn't been any pushback on that. I really wouldn't know.

Okay. Great. Thanks a lot.

David Manthey, Robert W. Baird. Hi guys. A quick follow-up, here. In terms of the shift from between repair and replace, my question is if a compressor costs a couple, few hundred dollars and a system would be over $1,000, potentially for a new R410A system may be closer to $2,000, for you, if there was a one-to-one shift going on between repair and replace, wouldn't you have seen a much stronger same-store sales on the Systems side than you did? I'm just wondering if you can square that up for me?

Go ahead, Paul.

You would presume that, that there would be a bigger shift. But basically, all you've got is you have got an outdoor unit and you've got a coil, and a coil is not that expensive. It's not a high-ticket item.

Right. But, what I am wondering is if the theory is that to this point, consumers have just been repairing existing systems, the sale to you of a repaired compressor, a few hundred dollars, versus if the consumer decides to replace that entire system, which might be a ticket to you for $1,500 or $2,000. I'm just trying to justify if the consumer's actually just making that shift, shouldn't you have seen a much stronger uptick in the same-store sales of systems relative to the downtick you saw in Parts and Supplies?

I do not think we would have seen that. When you buy a compressor, you are also generally getting into the motor, you are getting into a lot of other components that you are going to be replaced at the replaced at the same time as the compressor is pulled. Obviously, there is a higher margin that comes with the compressor than we get with the equipment.

Let me add a comment. Just with some data, so we can develop it. It's a good analysis. The parts business, as we said, is down for the year. The question is if that converts into equipment sales, what does that mean and what opportunity? The equipment business year to date is up 7%. I think there is -- that conversion does provide dollars. It does provide revenues for the Company. Of course, this is the trend that we have seen now for two quarters. It needs to sustain itself, and we certainly optimistic about it, but I think what you suggest is going on.

Robert Barry, UBS.

Morning, Robert

Hey, guys, good morning, Actually, I just wanted to follow up on the answer to that last question, in particular, Barry's comments. It just suggests, and I don't want to put words in your mouth, that the upside potential from a significant shift back to replacement is maybe somewhat muted. If the trade-off -- I realize some trade-off between roller parts but higher equipment, but it doesn't sound like it's that dramatic?

Well, it's not, yet. It's on the margin, now. But as I said, this industry has been below its historical rates of production in the United States. I think we've gone from 7 million or 8 million central cooling systems to around 4.5 million, 5 million. I think what you are expecting to see and what the prior questioner was -- I think was very well questioned -- is that that's ahead of us. These are just marginal changes, right now. It's not massive changes. I think the large changes are ahead of us, not now.

Yes.

And when they come, I think you will see exactly what the previous gentleman was mentioning.

I guess the follow-up on that, I'm trying to resolve what you posted in same-store sales, or maybe more accurately, in the equipment same-store sales growth, versus what we saw in the Hardy data or out of Lennox, or the orders that Ingersoll. I guess I was a little surprised that in that context, that 5% wasn't a little higher.

Yes, but the regional demand, you have to look at as you enter the season, which is something I was saying earlier. Not only does it sometimes the season start, say, sometimes as early as May and sometimes as late as July, but, you have to break that further down into regional demand. There's no question that regional demand as the season came in, from an industry perspective, was greater in the Midwest and the Northeast. That's obviously where some of those other brands our strongest. We have very little, if any, participation that's ahead of us, still, in the Midwest, and our penetration in the Northeast is very small for now. So, I would see that they would have at the beginning of the season some pretty dramatic results versus us.

But, we are seeing some of that now as the season moves into our regional markets in July. But, I don't want to raise too many hopes. I just think that this is a very uncertain time. Consumers are still -- one day or the other they have confidence. It's just rocky out there. We are trying to be conservative.

Also, more importantly than anything, we are very long-term oriented. We want to continue to build this great company. We don't want to take our eyes off that. We are doing that with our strategy. Additional locations, additional product offering, more efficiencies in the whole organization, highly motivated organization and constantly improving the friendliness and the ease of doing business with our contractor customers. I think it's just timing that we are talking about.

I also just wanted to follow up on the other revenue. You mentioned that the Parts piece of that was down, more. Was that was the Supplies piece down as well? Not as much?

Not as much.

The Supplies piece, why would the supplies piece be down? I get that the Parts piece because of the shift from repair to replace, but especially in the context of the housing, why would the Supplies piece be down?

I think we have already covered -- the housing is not a big piece of our business. Even with the percentage uptick it has, it's not going to have a remarkable impact on our sales, to start with. We hope it does, sometime. Like Al said, we'll be happier than can be with it.

The non-housing Supplies [peaked], I guess then.

I think when Steve asked the question also, we talked about copper's down $1 a pound. Refrigerant R22 is up, 410 is down. So, you have a got a lot of different pieces that are moving on the supply side besides the ductwork in the grills and registers that you see there.

Got you. Finally, on the Canada business. I think, Al, you commented that the profitability hasn't been what you hoped for. I was just wondering if you could expand on that, just when given we are so close when you just finished the due diligence. Is there an opportunity to adjust the terms or the performance or that additional (laughter) --.

(Laughter). You are good.

I'm trying to be hopeful.

I know you are. I just can't go into that. You know, there's a long-term view and a short-term view. It isn't what we thought it was. We have alerted our partner, and we are in discussions.

Okay. Thanks, guys.

Jeff Hammond, KeyBanc Capital.

Hey guys. Just a couple quick follow-ups. Can you just talk about how you are thinking about the dividend policy, the same or different, you know, if we do see a tax law change?

Sure. That's an easy one. It is our expectations to continue the trend we started 11 years ago to have increasing dividends.

Okay. Great. Can you just talk about how you see your inventory levels, relative to demand, your want or need to replenish, and just what you are hearing in the field about channel inventories?

Sure. Paul, you've got a good view, or Ana, either one.

Our inventory is basically flat when you take out the Canadian inventory and the Mexican inventory that we didn't have last year. Our inventories are right in line with sales. So, we are very happy with that. We have seen no supply issues on any product supply, anything, that we have experienced so far year to date. The inventory is something we are managing very closely against what our sales is. We are not reaching forward.

Okay. Perfect. Thanks, guys.

Josh Pokrzywinski, MKM partners.

Josh Pokrzywinski, close enough there, operator. (Laughing)

Don't pick on the operator, she's a Canadian.

I don't want Canada to leave a bad taste in your mouth, so I won't follow up on that any further. On Barry's earlier comment about unit growth being plus 5%, does that include the commercial, which I understand is a smaller piece, but it sounds like it was a materially -- should I interpret residential as being more like up 3% to 4% on a volume basis -- .

That would be just our Unitary Residential business, Josh.

Okay.

On the benefit of that commercial [enter].

Okay. I guess I'm a little surprised, then, that the price mix combination is flat. It seems like some of the OEMs have pointed to, maybe, a bit more drag on the mix side, and that seems to be the case for you guys, as well. Are you guys picking up a lot of additional pricing from, non -- I guess you don't want to go into specific suppliers, but is there a lot of price increases that continue to come through in 2Q? I guess that flatness surprises me.

I mean, there've been no price increases that have come through in any kind of individual basis on vendors, Josh, no.

Okay. So, I guess it all boils down to underlying volume activity was, maybe, a little bit slower than some of the OEMs saw, and some of that was the regional difference that Al talked about earlier. Then, migration from repair to replace. So, I guess the bottom line is the season got off to maybe a slower start for where you guys are. What has changed into July in your region? Just more equipment failure, better weather? Kind of help me walk the -- .

While, the season has started late in July, and we are seeing it in the demand in the regions that we operate in. I mean -- .

The regions that you were -- the season would have started earlier just because it gets warmer?

No. Actually, Josh, if you want to look at it from a temperature point of view, in the markets that we serve, the temperatures were lower up until July, is that not correct, Paul?

Yes, we've -- our big markets --.

I don't want to talk to much about temperatures other than generally saying -- .

Just generally I would say that's true.

Demand that is coming from temperature increases in the season, and our principal markets, were below last year in terms of temperatures. I don't like to give it all to credit as the temperature because really the season comes and it goes. It comes at different months of the year, but it always comes. And then it hits different regions at different times of the year.

Okay. Fair enough.

We have no further questions in queue.

[Look at the Q], and we look forward to talking to you in the third quarter. Bye, now.

This concludes today's conference call. You may now disconnect.