Watsco Inc (WSO.B) 2012 Q3 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference operator today. At this time I would like to welcome everyone to the third-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. Albert Nahmad, you may begin your conference.

Good morning, everyone, and welcome to our third-quarter conference call. This is Albert Nahmad, President and CEO, and with me is Barry Logan, Senior Vice President; Paul Johnston, Vice President; and Anna Menendez, Chief Financial Officer.

First, the cautionary statement, as we always do. 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.

Watsco had a good quarter. We established new records for sales, operating profit, earnings per share and cash flow. Trends in our HVAC equipment business are similar to those discussed in our last call. On the plus side, we saw growth in the sale of R410A replacement systems versus the R22 dry-charged units, and we saw growth in the sale of 16-plus SEER systems, the more efficient systems.

Partially offsetting this was a higher sales mix of base level 13-SEER systems. In other words, equipment sales were strong at the high and low end of our product offering, with a decline in the middle. We believe this reflects some of the uncertainty consumers are feeling about the economy.

Longer-term, the trend towards consumers upgrading existing systems to more efficient and environmentally-friendly products versus patching up their old systems is what is important.

We would expect the sales mix toward higher energy efficiency systems to improve with the economy, along with the enacted EPA regulations that will raise minimum energy standards for many of the products we sell. This year, we believe we've continued to gain market share in the markets we serve and feel that many of our 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. SG&A as a percentage of sales for the quarter was at its lowest level ever.

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

This quarter also reflects increased ownership in Carrier Enterprises, 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 big success for us and for our partner, Carrier.

Now, the detailed performance for the third quarter. EPS increased 17% to a record $1.19 per share. Operating income improved 15% to a record $86 million. Same-store operating profit increased 3%, with operating margins expanding 20 basis points to 8.3%. Revenues grew 12% to a record $1 billion, and were up 1% on a same-store basis. HVAC equipment sales were up 1%, other HVAC products were down 4%, and commercial refrigeration products increased 16%. Gross profit increased 11%, and gross margin was 23.8%. And SG&A decreased 4% -- decreased 4% including new locations.

Now results for the nine months. EPS increased 12% to a record $2.61 per share. Operating income improved 15% to a record $191 million, and operating margins increased 10 basis points to 7.2%. Same-store operating profit increased 4% to $172 million, with an operating margin of 7.2%.

Revenues grew 14% to a record $2.7 billion for the nine months and were up 3% on a same-store basis. HVAC equipment sales were up 5%, other HVAC products were down 4%, and commercial refrigeration products grew 18% in revenues.

Gross profit increased 11% to a record $632 million. Gross margin was 23.7%, reflecting a higher sales mix of HVAC equipment and growth in sales of commercial products. Continued focus on cost control generated a 3% decline in SG&A, excluding new locations.

Cash flow for the quarter was a blockbuster at $124 million. We expect strong cash flow to continue into the fourth quarter as it is a seasonal period for working capital reduction. We expect to meet our annual goal of producing cash flow that equals or exceeds net income this year.

As reported earlier this month, Watsco is paying a $5.00 special dividend along with its $0.62 regular quarterly dividend on October 31. We consider this a terrific reward for owning Watsco shares given the state of the economy and the uncertainty surrounding federal tax policy. We expect our balance sheet to remain conservative, with a debt to cap ratio of under 25% after payment of the dividends, with debt to EBITDA of under two times by the end of the year. In other words, we will maintain the capability to invest large sums of capital in our business, and we are seeking substantial opportunities that do just that.

As we stated in our press release, we expect to pay a more moderate dividend in 2013. We will decide once we know more about the government tax policy -- that's the federal government tax policy -- and a general state of the economy post-elections. Please note that our EPA calculations for 2012 will be reduced by an estimated $0.38 in the fourth quarter related to the payment of the special dividend and is nonrecurring.

Excluding this impact, we have revised our outlook for 2012 for EPS in the range of -- to the range of $3.00 to $3.10 versus $2.74 last year.

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

(Operator Instructions) Matt Duncan, Stephens Inc.

Good morning, everybody. The first question I've got for you, Al, on the dividend policy going forward, I know it is probably still preliminary, but do you have any thoughts around what sort of quarterly dividend you might be paying in 2013 if the dividend tax policy is allowed to change?

We really don't know the answer to that. You were right when you couched your question. We have no idea with the uncertainties of federal tax policy, and we have no idea whether this economy is going to continue to grow, even though it is growing slowly. And we are a pretty conservative company, so we know we want to pay dividends, but we just don't know -- or even can start to imagine at what rate. We want to -- we do want to continue being a dividend-paying company.

Okay, I guess what I'm getting at is do you anticipate too very much of a change in your dividend yield? Right now, it is around 3.5%. I just don't know if you guys are thinking about changing that materially or maybe just a little bit, given the tax policy change.

I don't know (multiple speakers).

Okay.

(multiple speakers) because we just don't know.

Fair enough. The other question I've got, and I'll hop back in queue, is it appears as though you are still seeing the market shift towards replacement and away from repair, given the 1% growth in equipment sales but the 4% drop in other HVAC products. A, is that still happening? B, if it is, why do you think that is occurring right now, and do you think the increasing cost of R22 is factoring into that equation at all?

That's a great question. I'm going to go to our expert, Mr. Johnston.

Wow, those are three big questions, Matt. The answer to the first one is is it shifting away from replacement -- is it shifting towards replacement from repair. From our viewpoint, what our data shows, yes, it is. During the quarter, we continued to see what we saw in the second quarter, and that is we saw replacement units coming out, although they were on the low end of the 13-SEER spectrum for the most part or very high SEER at 16 and above. That was a trend that we continued to see in the third quarter.

Compressor sales remained soft for the quarter, so that's another reflection that that is the case and that continues to be the case.

Why is that continuing? I think a part of it is -- I'm speculating here -- would be the age of the product that is out there in the field. I think people do have a concern about R22 and its availability, plus the cost of it, particularly among the contractors more than the consumers. And I think there was a general shift by the contractors in general moving the consumer to a decision to go with 410.

Okay. Thanks, Paul.

Robert Barry.

Good morning. You lowered the outlook. What was the driver of the lowered outlook?

Our sense of the economy and the industry within the economy, and what we are seeing on a day-to-day basis.

So it was a lower revenue outlook than versus what you had last quarter?

Yes.

Okay. And then I just wanted to drill down further on the parts and supplies decline. Is the higher cost of refrigerant a tailwind for the other HVAC equipment?

Paul?

Describe what you mean by is that a tailwind.

Is it (multiple speakers) puts and takes driving it, is it one of the benefits? Is it helping?

The higher R22 cost or sale price to the consumer and to the contractor, yes, that does help drive consumers away from the R22 replacement more towards the replacement of 410A equipment, yes.

I guess what I was getting at is it seems like the higher cost of the refrigerant, which I think you sell, should be helping parts and supplies. And I thought that (multiple speakers).

(multiple speakers) very, very small piece of it.

Okay, and I assume that there is still some (multiple speakers).

It is a very small piece of our business, you know.

Okay, is there still some benefit also from adding more parts and supplies at the Carrier properties, that's still a factor?

We have a full complement -- we have a full complement of parts and supplies available at the Carrier facilities today. It is a matter of them being able to get the sales generated down through to the contractor, to get the contractor in there to recognize that Carrier is a parts and supplies outlet. Generally, it's more supplies; carrier is an excellent parts -- I'm sorry. Go ahead.

I guess where I was going is I'm trying to figure out given what seemed like these two tailwinds -- maybe they are smaller than I thought -- why that parts and supplies is still down. I'm wondering, do you have a sense if a consumer decides to replace instead of repair and you lose that compressor sale or the parts sale, how much you are kind of picking up on the equipment side? Because it seems like it is kind of a net headwind for you guys, that you are not picking up as much on the equipment side as you are losing on the parts side.

On the replacement side, there is not much supplies that goes into a replacement unit in sales. Generally, it is the unit itself, and it is some other indoor equipment that goes with it. But generally, you are not replacing ductwork and grills and registers and wiring and all that sort of thing when you put in a replacement unit.

Okay, (multiple speakers)

(multiple speakers) as far as new construction.

To ask more simply, what is driving the decline in the parts and supplies? It seems like -- and it seems like it is accelerated.

No, it has continued at approximately the same pace it has been at. What is going to make it grow again is going to be obviously an increase in residential new construction and commercial new construction. And that really is the driver behind the supply business, and the supply business is a big piece of what Watsco has.

Okay, thank you.

Ian Zaffino, Oppenheimer.

Just a quick question on the follow-up on the last one, talked about the new construction. How do you actually think about the business? Because I know last quarter, you had said that there really isn't much of a new construction play here, and now you are kind of indicating that parts are at least partially new construction. Can you kind of give us an idea, and maybe by just kind of product line, what portion of it would be new construction versus just kind of standard replacement?

I still don't think that new construction is having an impact on our Company. It is just still very small. Eventually, it will, of course, if it returns to previous high levels. But it is not a big deal yet.

That doesn't mean we are not going to enjoy the benefit of it as the starts increase, but more important as the completions increase. But can you add more color to that, Paul?

Yes, it -- new construction, for the numbers, the percentages are great, as you know, especially when you look at the permit numbers.

The percentage of growth, yes (multiple speakers).

Yes, and where we look at our key markets in the Southeast, Texas, California, the numbers of new permits is definitely up. We hope to see some benefit of it in the future. It is a bright lining for us that we look forward to it occurring.

As of yet, we just haven't felt a material impact in our results on the supply business. Generally, the products that we sell in the supply business would occur later on during the construction cycle, when you put in the ductwork, and you are finished, you put the grills in and you put the air-conditioning and the furnace or the air handler in. So it is something we look forward to.

Okay. But I guess by product line, you probably see maybe the biggest increase on the supply side, because there is not a whole lot of replacement on the supply, where you would see kind of a less of a proportional increase on the unitary side, but maybe from a dollar of contribution -- of bigger contribution from the unit side because of the higher ASP. Is that kind of -- right? Okay.

That is kind of the right line, yes.

Okay. All right. Thank you very much.

David Manthey, Robert W. Baird.

Good morning, guys. First off, I'm wondering if you could talk about what next operationally for Watsco. It seems like going forward, acquisitions, just given your scale, can't possibly have the same magnitude of impact. And --

I wouldn't conclude that.

No?

No.

Okay. Well, let's put that on the table for right now. Then second, your EBIT margin target, where you talked about 8% in the past going ultimately to double digits, correct me if I'm wrong, but it seems like that somewhat faded into the background. I haven't heard you talking about that much lately. I'm just wondering in somewhat concrete terms how should investors think about the Watsco growth and margin story over the next three to five years.

I don't think we put our double-digit goal in the back burner. I'm just saying that given the demand of the industry and our participation in it, we believe we are gaining share in the demand but the industry is not growing much. That even in spite of that, we are getting more efficient; as you noticed, our EBIT margins are improving, even in this dull market. That once -- if you say three to five years, I cannot imagine this industry demand isn't going to climb at a rate higher than it is now. And I think that is the push we will need to get into double digits EBITDA margins, in the three to five year period that you are referring to.

Okay. And --

We are hitting record margins now.

Right. Could you talk about how you plan to outgrow the market? I know you said that you felt like you were gaining share within your markets. And outside of whether or not you believe in a reversion of customer behavior driving above-average industry growth, could you talk about what areas you plan to gain the most share in, if it is just hand to hand combat in the equipment side or more (multiple speakers) or what?

We do all of that, but we've got a very conservative balance sheet. We like to acquire additional territories, or within territories, we like to acquire businesses that have locations that we can add to the density of the market so that we have greater customer service because we have more locations. And that has always been our weapon, is add locations, high-density locations and then add additional product.

And we like to do that through acquisition, preferably. And that is why I'm saying we are always in the market, very hungry for the largest transactions that we can find. There is no transaction that is too big for us when it comes to distribution assets in our industry. And I might say we are probably the only ones that can say that in the industry because of our scale today.

But it is the same old thing. More locations, more product offering through the locations, and then having a high-skilled, highly-motivated organization to gain the share through those locations. And as I said, no one has our scale so we can do this in a fairly unique way.

Okay. Then last question, given the change in outlook on the dividend policy, I'm wondering does that change your inclination towards a share repurchase? Or maybe in broader terms, if you could just tell us what you plan to do with the cash. Obviously, this quarter, year to date this year, if you are growing free cash flow at 100% plus of net income, you are piling up a tremendous amount of cash. And if you're not paying it out in dividends or let's say that some of these larger acquisitions don't materialize, what is your plan?

I would not want to mislead you that while we have done stock repurchase in the past, that is not something that we would -- I think we have a preference for additional dividends rather than we do for stock repurchase.

But you said it right. We would rather use our capital to expand the business, but historically, we've always had more capital than we need to expand the business, and then we return that to the shareholders. And I think that would be our preference as well going forward.

Al, let's just say that those don't materialize. You were talking about above-market growth and expanding margins, and I suppose that means an increasing level of cash flow, at the same time you're talking about reducing dividends. If the big deals don't materialize, does the cash just build up on the balance sheet, or how do you (multiple speakers)?

Well no, don't forget, we are saying we are going to pay a more moderate dividend. Because we just paid a $5 million dividend to help our shareholders who could be facing a higher tax rate on dividends. That is the reason for that strategy. It is not -- it isn't anything else.

That doesn't mean that after a period of time after the special dividend, we couldn't substantially -- I don't know how long that would be, so I don't want to be quoted -- but at some point in time in the future, we would like to change that word moderate to more meaningful dividend distributions. But not for the first couple of years.

Jeff Hammond, KeyBanc Capital.

Just one last thing on the dividend. Is it an oversimplification to say if the tax law doesn't change, we are not cutting the dividend?

Boy, you guys are good on these questions. I wish I could give you answers that we know we are going to have, but we don't. We don't know what the economy is to look like. We don't know what the tax law is going to look like. There is a lot of uncertainty out there.

I think when things -- we are telling everything we know. We don't know what we are going to do. We know that we wanted to pay this approximately two years' of dividend ahead of time -- that's the $5.00 -- and just to help out our shareholders who might be facing higher taxes.

But the proper thing to do and the responsible thing to do is to get into the new year, is to see what all the circumstances are. You know we like to be dividend payers. We've demonstrated that -- because we think we can do both, invest in our business and continue to scale it, as well as paying a pretty good dividend rate. That is really what we like to do.

But given the uncertainties now and all the things I've told you about, we paid $5 worth of dividend up front and now we will see what is going to happen. But we do like to be dividend payers. And we like to be dividend payers that increase their dividend every year. Does that help?

Yes.

Al, I just want to add some color about some of the previous question, just reflecting on it. Whenever we felt that we had excess cash, our big game hunting that we do on the acquisition front seems to have always occurred. That doesn't mean it keeps occurring. But go back to 2004 and 2005, we had a very large deal, 2007, a large deal. 2009 began the Carrier acquisitions, which have lasted over the last 3.5 years.

So at a point in time where we've ever felt, gee, what are we going to do with our capital, we've always had opportunities and glad that we kept conservative in those periods to take advantage of those opportunities, and never ever really reached deep into a highly-leveraged situation.

So I'll just add color to that, that we are only 10% of the North American market. There is big game hunting going on every day in the Company, and that capital that we've secured for ourselves through the years to do what we've done is in place for what we are seeing going forward.

Just shifting gears, last quarter, you mentioned some initial issues with the Canada business. Can you just elaborate on kind of what was going on there and if those issues are kind of lingering or getting resolved?

The issues have been partially resolved, but there is more to go.

Okay. And what are you -- what are kind of the downside surprises that you are finding?

As I mentioned in a prior call, it's the profitability of the business.

Okay. And then, Al, you mentioned kind of puts and takes within the mix. Can you just give us what unit -- on the equipment side, what units were versus price/mix?

Paul.

What units were versus price mix? As far as what our unit -- are you talking about our unit movement versus our price (multiple speakers)?

Of the plus one in equipment, were units up (multiple speakers) --

(multiple speakers) pricing. I think that is what you are asking, isn't it?.

Is mix negative -- net negative?

Yes, it is. We saw a mix shift down to more 13-SEER, even though it was more 410A 13-SEER from the prior quarter. But it was also that we have different classifications of 13-SEER. You've got a fully-featured 13 SEER and you've got what we call a Cube 13-SEER, and we are seeing a lot more of the Cube 13-SEER, the low end of the 13-SEER.

Okay, and then last question (multiple speakers).

Somewhat of an oxymoron, I know.

Last question on this R22 and some of the consternation and the reason -- all the reasons that demand is lower. How are your R22 inventory levels, and do you worry or does the industry start to worry about any kind of obsolescence if this trend kind of continues to happen?

Good question.

We don't worry about (multiple speakers).

Paul is right on top of that.

We only follow that every day. Our R22 inventory is kept at an absolute minimum.

For that very reason.

So it is not a concern to us at all. So that is something, like I say, we watch every week to make sure that our companies only carry the amount required to meet what they've got in limited customer demands now. So we are very happy with our position.

I can't speak to the industry as far as what that does to obsolescence. But generally speaking, I guess somebody will always buy it, but we are not going to stick our neck into it.

Okay. Thanks for all the help, guys.

Ryan Merkel, William Blair.

Good morning, everyone. Just want to follow up on the question about the equipment line, the volume versus price mix. You didn't quite answer it. I don't know if you have the information or if you could just answer it a different way -- what percent of the equipment mix was at the 13 level versus 14 and above?

Paul, do you have that?

Yes, I do. For us, at the 13-SEER level, it is a little north of 50% of our business.

And is it fair to say that the higher price point of the complete R410A system is driving people to the lower-SEER, lower value lines and maybe even perhaps window units?

Oh my God, I wouldn't compare it to a window unit, no. Material difference there in the price of the product to install that (inaudible).

Would I say -- I would -- and it would be just a guess on our part, but, yes, I would say definitely that if the consumer is faced with a repair versus replace and they are concerned -- and the contractor has put the concern in their head, as they rightfully should, that they should replace it with a 410 as opposed to spending more money on a 22 machine, I think a lot of consumers would migrate down to the low end of the 13-SEER, to the baseline 13-SEER 410A machine.

Okay.

And then it just seems that the growth in the industry has been weak really the last two years. We had the one good year in 2010 because we had the tax writeoff. But what -- everybody on the call is probably disappointed in the growth of the industry -- but what changes it? Is it better GDP growth? Is it house prices going up? When do we get back to this kind of 5%, 6% growth in HVAC distribution?

Well, you've heard it over and over again, probably wondering whether it really makes any sense, but we think there is an enormous amount of pent-up demand because of what you just stated. And when that gate opens up -- Paul, do you have what would cause that gate to open up?

We've analyzed and studied this 16 ways from Sunday, trying to figure out what would be a leading indicator for it, and frankly, it is employment. It is that basic and simple. As more people have jobs and have full-time jobs and have confidence that their job is going to not be terminated, consumers will open up and start spending money on this product again and start looking at the product as something that is not a luxury but a necessity of life.

The other thing we track, of course, is consumer sentiment. And if you look at consumer sentiment, it's back in the 80%s again, thank God. Last year, we were looking at 60% consumer sentiment. So those are two great things, I think.

Looking at new home construction, new home construction has got to double to get us back to normal. So that is a long road, it's a road that we welcome and we hope it starts to happen. But we are not going to hold our breath that that is going to be something we can control.

Okay, and I got to sneak one last one in here. Could you just comment on the weather in the quarter? I know you don't want to blame weather, but from what I understand, it was a bit more rainy, a bit cooler, and some of the OEM results in essential regions were better. So here's your opportunity -- did that impact things?

I can tell you are a friend.

Weather, you know, when we look at weather, we look at prior-year weather. And when you look at it on a national basis, it was a little cooler than it was last year, much above normal, whatever normal is. But just looking at it from last year, it was down like 2% on a (inaudible) cooling days basis.

Yes, it was wet in Florida. We had some wetness. But that is something that we always look at as delays demand; it isn't something we stand behind and say that is really what drives our business.

Okay, got it.

Ryan, I think part of the answer, too, is that still to this day, 80% of what we do is in the Sun Belt. It is going to be hot, it is going to be consistent year-over-year, and I don't think -- that is the primary reason why weather can't be either our benefit or our excuse.

And the volatility of that, I think, is latent in the market in some of the northern parts of the country for next year in there. But I think for us, it has always been consistently in the Sun Belt, and that has been a key message for us for many years now.

Got it. Okay, thanks.

Josh Pokrzywinski, MKM Partners.

Hi. Good morning, guys. Just to the extent that some of the new housing recovery that we've seen so far seems biased to some of these national builders, is that a benefit to you, having your scale, or do they typically go --

Oh, sure. No, no. I mean, what these builders do, very cleverly, they negotiate with the guys that produce the product to get a better price. And then we, the distributors, participate in the program. But it creates a demand for us when the OEMs to do that. For example, if Carrier or Rheem or whatever else we represent, they will negotiate national contracts with a national builder, and we do the fulfillment.

Has new housing been a tailwind? Are you guys seeing that in your markets, or is that taking place outside of the Watsco zones?

It is just nothing that we want to say this is a big deal going on. We read the newspapers like you do and see the news, and the markets are signaling a big change. Well, one day they are, and another day they are not. So there is even uncertainty about housing.

But all we are saying is it's too early for us to feel an impact, and when we do, it will be meaningful. But who knows when that is? We don't like to raise expectations on housing, because we are conservative. If it comes, it will come --

(multiple speakers) the analytics are -- sorry, Al.

Go on, Barry.

Josh, the analytics are very clear. Permits and starts are up 30%, 40%. Completions, which is (multiple speakers)

It is a small number.

-- through September was up 13%, and that is 80,000 homes, 80,000 homes in a 5-million unit industry. So it is nice that there is 80,000 more, but it is just not material to what is behind us. If we impute and have fun with math on what is in front of us, it is pretty interesting.

Understood. And kind of going back to maybe some of these industry dynamics at the OEM level, it seems like Goodman has been pretty aggressive on the low end the past couple years, and obviously, they are a big relationship for you guys. To the extent that maybe they force the hand of some of the other OEMs to look at that low end more seriously, somebody like a Lennox or Ingersoll, which traditionally was a little less prominent down there, do you think you guys have maybe lost a little bit of share and that some of these other distributors -- I'm sorry -- some of these other OEMs that you don't really care had more to catch up on the low end?

I'll let Paul answer that more thoroughly, but I can tell you that the other OEMs are as competitive as Goodman. What they don't have, the other OEMs -- well, it depends on which ones we are talking about -- is as good a distribution as, say, Carrier does or Rheem does or Goodman does. Of course, those are the three major lines that we represent.

But people like Ingersoll and York are not as strong with their distribution. And I think that is why we gain share and they may or may not. I don't know. Paul, do you have a view on that?

I agree with that. And Josh, as you know, they are reporting their shipments. We report our sales. When we report a sale, it is actually something that is going to be installed. It is out of inventory.

And the OEMs, with the exception, some small exception, unless they are shipping to their own company-owned branches, they are shipping to a distributor who puts it in inventory. And you don't know if it has actually been sold through the channel.

So what we do is we look at our market share over a long period, and the only numbers I have are numbers that reflect through August, because that is all AHRI has published. And basically what I look at there is the industry is at a dead heat from prior year. It is flat, up a 10th of a point, and Watsco is up mid-single digits as far as our unit movement is concerned.

And when I look at it for the third quarter, I could only guess what the third quarter is going to end up being. But basically, there was a pretty good bump in gas furnaces in the quarter in shipments. I don't know if that reflected sales. I would hazard it wouldn't probably reflect a lot of sales. But among the residential products, residential air-conditioning cooling products, I'm going to guess it is going to be up 1%. And I would say Watsco is going to beat that number by a little bit, not much, but by a little bit. So definite answer is no, we are not losing market share, in my opinion.

I guess the angle that I am coming from is that maybe some of these other guys who weren't as prominent on the low end where the market seems to have gone had more catch-up room and (multiple speakers) than everyone grows at the same rate. I guess in your opinion, does that happen?

Sure. Yes, I mean, I don't want to name names, but there are some of these brands that you are hearing about that are gaining -- have revenue growth going on currently. Well, they are coming off a very low performance that their comparisons are against.

Sure, understood. And then one last one. On R22, obviously very early to call what the rate of decay is from here. But if you guys had to handicap what the mix of that could look like in 2013, just based on what is out there now with refrigerant allocations and the feedback from contractors as we worked our way through the season, do we get down to 10% or less at R22 next year?

Yes, I would definitely hope that would be the number. The deterioration we saw was quite remarkable this year. If that trendline continues, it would obviously be 10% or below next year.

It's on its way out.

Yes, it is a dead horse, in my opinion.

Okay, that's helpful, guys. Thanks a lot.

(Operator Instructions) Sanjay Shrestha, Lazard.

On the refrigeration side, the commercial refrigeration, even though it is only 4% of your sales, but that was up pretty strong. Is there any readthrough there as to what is happening to the end market or was there anything specific in the quarter, anything we can glean from those numbers?

Paul, do you want to deal with that?

Yes, we continue to add territory and products there. That is a growth initiative that we started years ago and we just continue doing it. And so a lot of what you are seeing there is just the continuation of adding more products and more territory that we handle that under.

Okay, got it. Well, one -- two --

There are a few -- go ahead. I'm sorry.

Sorry. Go ahead, Barry.

There are a few anchor OEMs in that business, too, and, as Paul suggested, we are getting more territories and it's very exclusive territories and it has been terrific growth for us. So it is something we want to keep investing in and do more of.

Got it. On sort of the residential side, your 1% growth -- and I hate to kind of come back to that point -- but when we are then looking at some of the equipment guys, we are talking about high single to low double-digit growth, granted on one side they are playing catch-up. But is that number also skewed a bit by geographic representations that you guys have, and that is why maybe your number is 1% and therefore you are losing no market share or gaining market share, and maybe it is something as simple as that. Is that what it is?

That could be part of it. We really don't know what their share is and where they are -- we have estimates as far as where they are stronger -- stronger in the Midwest, obviously, in the Northeast, than they are in the Sun Belt.

We don't participate in the Midwest, and have a small participation -- a growing participation in the Northeast. We don't participate in Midwest yet, and we are building a larger presence in the Northeast.

Okay, great. Two final questions then, guys. One, on the acquisition front. Al, when you say there is no distribution outlet that is too big for you guys to potentially go after, so two-part question on that.

One, are you in sort of active discussion at this point in time? And two, when you refer to that, what is sort of that buying power you think that you guys have in terms of going after this opportunity as a part of your long-term strategy of growth?

I'm not going to identify any specific because I think that's going too far. But Mr. Logan is, at my request, constantly in contact with sellers, shall we say companies we want to buy. And it is just impossible to predict when we get a great company -- we always seek the best companies -- and when we are going to have a transaction. But the ones we are looking at in our current shall we say portfolio are -- they would move the needle a little bit.

Someone said it earlier -- you have to do transactions that move the needle, at least you'd like to. And at a $3.5 billion rate, which is what our present rate is, we understand that. And the ones that we think we might be able to do something with would move the needle if we get them. It is very if. There is valuation, there is culture, there's all kinds of things. But we are a very hungry for more transactions.

Okay. That's fair enough.

We are very ambitious; if we can reach the size company four times what we are now, I would be very happy.

That's great. That's all I had, guys. Thank you so much.

Keith Hughes, SunTrust.

My question has been answered. Thank you.

(Operator Instructions) Steve Tusa, JPMorgan.

Paul, what were the compressor sales like in the quarter?

Pretty much similar to what we had in the second quarter. They were down in the 20% range.

Down 20%?

Yes.

Okay, on the -- I guess on the furnace stuff, and you guys don't do I guess a ton of furnaces, but you were talking about the industry stats. And I'm just wondering if you have a view on this upcoming changeover in, I guess, May of 2013. It is going to be kind of a very delicate situation for the distributors and the contractors to kind of balance, and what we've also heard is that the new furnaces are going to cost a lot more to install.

So do you have any kind of prebuy going on here where the contractors are going to try and push the lower cost, the older furnaces, on people this winter, given that the cost is going to go up so much next year?

Yes, I would say it is definitely going to happen. What we are hearing is that the EPA -- or the DOE has ruled that it is going to be date of installation, is what the rule is going to be basically based on. It is not going to be if you have the inventory, you can always go ahead and install it.

The idea of this particular regulation is that you can't install the lower-efficiency product after May of 2013. So that could create a bit of a bubble, if you will; if they want to replace that furnace at the lower price, they would have to do it before May, so that could have an impact (multiple speakers). But it is going to be very sensitive -- but, Steve, it is going to be very sensitive to -- you're not going to want to be left with any inventory.

Right, so you want to -- I guess you -- did you think that maybe some of that was just some of the recent furnace numbers that people are kind of getting ahead of this and planning a little bit, and then that is going to -- obviously those orders are going to drop off as the contractors or distributors get their complement? Because they are not going to want to be left holding the bag, obviously.

I don't have any regional data yet for the quarter. All I've got is the national, so I can't give you a definitive answer on that. Do I hope it is that? Yes, I hope it's that.

Okay, and any dynamics around price that were interesting in the quarter or any kind of commodities coming off here and the OEMs that put up such massive price-cost benefits here in the last couple of quarters? Anybody now looking to push back a little bit on price, and have you seen kind of the normal behavior from the OEMs as far as warning you guys about what they are going to do with price here in the fall and in the winter.

It has been very quiet.

Is that normal?

It's been very quiet as far as any sort of pricing action.

Is that normal, or (multiple speakers)?

I guess I would have anticipated a little bit more action around pricing by now, but there just hasn't been to date.

Right, okay, and (multiple speakers).

I would say -- just to add to that, I think this is one of the few years in our careers where there is basically no pricing action in a given one year's time.

Interesting. And then just one last question. I guess the margins have been okay. At what point do you feel like you are maybe cutting too much in some of these markets and hurting service levels? How much more room is there to get efficient on the SG&A side?

That's a never-ending process, and no, we don't -- we get better at things, we don't get worse at things by getting more efficient. We don't cut service. We sell on service.

So I would say that it is an ongoing process and it is not anywhere -- it is going to go on forever, as it should. We should get better at what we do and we should get better at what we do with less cost. And there is no end -- I can't tell you that is over in a year or two or five, because I just think that we are always going to be doing it. And there is also technology. Technology, which we are very focused on, will even accelerate the efficiencies as we go down the road.

Right, okay. Thanks a lot.

There are no further questions at this time.

Very good, great. See you next quarter. Bye now.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.