Watsco Inc (WSO.B) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Watsco, Inc. Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Albert Nahmad, Chairman and Chief Executive Officer. Please go ahead.

Good morning, everybody. We're having a great day here in South Florida. Welcome to our fourth quarter and year-end earnings call. This is Al Nahmad, Chairman and CEO. And with me today is A.J. Nahmad, who's the President of the Company; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President.

As always, let me start with 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.

As I said, we're having a great day in South Florida, primarily because I'm pleased to report that Watsco delivered another record quarter and another record year. 2017 sales, income and earnings per share reached record levels and we generated cash flow that exceeded net income. We also raised $248 million from the sale of company's shares under our ATM equity program and paid off almost all debt. We now have the balance sheet to make virtually any sized investment in our industry. And as all of you know, we believe our future is bigger than our past, so we're going to need that capital.

Given our performance, healthy balance sheet and continued confidence, Watsco's board approved a 16% increase to our annual dividends to $5.80 per share effective in April. Before I get into specific results, let me also say that Watsco's 2017 -- let me start that one again. Before I get into the specific results, let me also say that Watsco's 2017 total shareholder return was 19%. 19%, that's consistent with a 25-year compounded annual rate of growth.

Now let's turn to fourth quarter results. Revenues grew 6%, driven by a 7% increase in HVAC equipment sales. Operating income increased 6%. Operating margins were consistent at 6.4% for the quarter. EPS increased 47% to $1.19 on net income of $43 million including tax reform benefits. Excluding tax benefits, EPS increased 11% to $0.90 per share. Operating cash flow was $117 million. We reduced debt at -- by $263 million during the quarter to $22 million at year-end.

Now looking at the full year. Revenues grew 3%, including a 4% increase in HVAC equipment sales. Operating income increased 2%. Operating margins were consistent at 8.2%. Earnings per share increased 13% to $5.81 on net income of $208 million, including tax reform benefits. Excluding the tax benefit, EPS increased 8% to $5.54 on net income of $199 million. Operating cash flow was a record $302 million. These results include further investment in Watsco's industry-leading technology platform as well as 150 additional customer-facing employees to expand sales and customer service capabilities.

Now on to the technology. The central theme of our technology strategy is simple. We are convinced that when our customers win, we win. So our investments are focused on helping our customers be more efficient and make it so good to do business with Watsco that they only want to do business with Watsco.

A few examples. For HVAC contractors, time is truly money and they are constantly on the go. So our technologies deliver more mobile-enabled information and solutions on any form factor anywhere on the planet. Our customers do not have business hours, so our e-commerce platforms are available for information and order processing at all times of day and night. In fact, in 2017, over 25% of e-commerce transactions were outside of conventional business hours.

Customers want products in minutes, not hours, and certainly not the next day. So you're building and deploying technology that improves order fill rates with speed and accuracy. HVAC contractors often require technical assistance, so we have mastered over 650,000 SKUs in our product information system, which delivers that expertise via easy-to-use mobile apps. These are just a few examples.

In terms of scale, we serve over 250,000 contractors and technicians from 560 locations and execute over 7 million sales transactions a year. That's why we stress this is a long-term mission. We've made progress, but we're constantly working to further enhance our customer experience and our internal operations. Said simply, we are having a great time and know that we are truly transforming our marketplace.

This morning's press release summarizes many of the important measurements we used to determine our progress. We look forward to providing more insight at our Investor Day on March 16, here in Miami. It will be fun and then -- it will be a fun and informative day.

With that said, A.J, Paul, Barry and I are happy to answer your questions.

(Operator Instructions) The first question comes from Jeff Hammond of KeyBanc Capital Markets Inc.

Yes. So SG&A, it looks like it ticked up here a little bit and was above my expectations. Anything in there in terms of stepped up investment or onetime expenses around maybe the equity deal? And just on top of that, can you just talk to us about how you think technology spending run rates through '18?

Barry, you want to take that? At least the first part of it.

Sure. Well, first, there is no onetime thing that's worth explaining in the quarter in terms of the SG&A. The reality is, as we said, we've spent -- we've added about 150 people, actually 154 people, to be exact, to be part of the capacity -- adding capacity to our business. It has a cost, and that cost, obviously, is intended for a long-term benefit. And just a reminder, in the fourth quarter like this, that type of incremental spending gets exposed in terms of it being a slower, smaller quarter. But in terms of the long term, looking at 2018, it's important that we make those kind of investments.

A.J., do you want to deal with the technology part?

Sure. As far as spending for technology, clearly, technology and profit improvements are at the forefront of our strategy. So I don't expect any material slowdown in spending. And if there are opportunities to do more that has great ROI potential, we will invest.

Okay. Great. And then congrats on the equity raise and certainly, the balance sheet is in great shape now. Can you just talk about the pipeline for deals? It's -- other than the Sigler piece, it's been pretty quiet. Just talk about pipeline and likelihood we get something done here over the near term.

We don't have any crystal ball, as we always say. We are active. We do believe we offer great companies an opportunity to join us. We have a great record in doing that. And all I can tell you is we're prepared and we have a great balance sheet to do considerably more transactions. We do want to make them and we expect we're going to make, I just can't tell you when. I have a question for you, though, Jeff. You there?

I'm here.

Tell me, why is it that you and others put out estimates and you ignore the estimates that we put out? And then for some reason, you expect the company to meet your estimates rather than the ones we put out. Why is that? Happens all the time.

Yes. I mean, we're just trying to take the industry data in what we think that the market is going to grow at.

Don't you think we know the industry data better than anybody else? Don't you think our information is probably better than yours or anybody else's? So now listen, don't you think when we put together our estimates, we have a much higher quality way to look at things? I just don't get it. So I'm going to ask you to look more carefully at our own estimates in the future, if you don't mind.

But you really just -- you didn't give -- like you're not giving guidance today, so do we -- can you...

No. No, but we gave guidance. And when we did, nobody paid attention. So anyhow, I don't want to get too much into this. Let's move on. Anybody else?

The next question comes from Matt Duncan of Stephens.

You guys have any estimate for how much storm recovery may have helped sales? And I would expect that to be a nice tailwind for you in 2018 as well. So do you have any view on how much that may be helping and how much it might help this year?

Paul, you want to take a shot at that?

Yes. I'll take a shot at it. It did give us a little bump. It's -- I don't think in the grand scheme of all of Watsco, it's really a material event. And I guess, I always look at it, if you get a bump from that, it's...

Did you say material or immaterial, Paul?

Immaterial. It's not a material bump to Watsco. We saw it in South Florida and we saw it in South Texas.

Okay. And then the second question I've got, just curious on the timing, I guess, of selling stock under the ATM. Now it sounds like, obviously, you guys are always active on the M&A front and larger deals. Really, you can't control the timing on it, it's the seller that does. Should we read anything into the timing of when you sold in the equity? Or was this really just you're going to have a clean balance sheet if the right thing came along?

Yes. I think that your look at it is correct. We are very conservative in terms of our balance sheet. It always happened and always will be. And frankly, I didn't even know about this ATM product until late last year. And when we heard about it, we decided it would be a good thing to do. We may do it again from time to time. As I said, we -- we're not in the business of buying back shares because we want the capital to do transactions and to fund technology. And technology may escalate depending on what happens to the Watsco Ventures. They have R&D projects that eventually might or might not require a lot of investment. We just like conservative balance sheet, so it's the timing. It's had to do, more or less, when we find out this is a kind of thing that can happen in ATM. I didn't know about it.

The next question comes from Ryan Merkel of William Blair.

So I know you're not giving guidance for '18 at this point. But just conceptually, should we think about better SG&A leverage in 2018? Because in 2017, there wasn't any operating leverage and I would just think you're going to get more benefits from technology and the sales higher. So is that the expectation?

Shall I turn that over, Mr. Logan?

Sure. Well, certainly, the long-term track record says that there is a measure of operating leverage that comes. And this year, it did not, to your point. Obviously, that's a factor of sales, again, what you said, and I would expect there to be a better pricing environment this year. None of us can tell what the season looks like, but pricing is one of those things that should help the equation, should it play out the way we expect it to. From the spending point of view, you're right. If you spend money, you expect a return. You expect productivity or you expect sales and profitability. And those investments were made this year with that intent. So I would expect so, Ryan. We'll tell you in July how it went because we will be getting into our season at that point. But certainly, our expectation and some other optimism, certainly, points into that direction.

But I would also say from a point of view 50,000 feet, I mean, look at the record. 25 years compounded total shareholder returns of 20%. Sometimes, a seasonality of the business will change impact on a short-term basis. But we're a very stable business, with a very strong balance sheet. And I wouldn't get too upset about fluctuations in one number or the other. Just -- because we know that this is a business that will always be stable for us, anyhow. Because what we do is very necessary to provide and comfort with our products during -- when the climate is hot or when the climate is cold. So we take a long-term view about that and we emphasize our record of total shareholder return. So we're not that focused on next month or next quarter. We're focused on something beyond that. Very secure that ours is a very stable business with a strong balance sheet and it's, probably, the best selling organization ever created in the industry.

Yes. I understand all that, Al. I just think I'm trying to set the right expectation for '18.

No. I was just saying that in general, I wasn't picking on you. I'm sorry.

No. So that -- I just want to make sure that we have that in our models correctly, that's kind of what I'm getting at. But moving on, gross margin is flat year-over-year was a nice result just given the mix headwind from equipment. So maybe just talk about what you're doing to offset that mix? And then is that sustainable, do you think, in 2018?

Paul?

Yes. Yes, part of the mix issue that we saw last year was a greater increase, obviously, in the equipment sales and a not so great of an increase in non-equipment parts and supplies. And we have put a tremendous effort into the parts and supply business going into 2018, and a lot of the customer-focused people that we hired are totally focused on that and not just equipment. So like we said earlier about we make investments and expect a pay back, it's our expectation that we're going to see a lift in our parts and supply business which has always been a positive for our gross margin percentage.

The next question comes from David Manthey of Baird.

First off, on the analyst meeting coming up. Without previewing too much, I'm sure we can expect to hear about industry trends and technology and so forth. Without giving everything away, any chance that we're going to hear about a new pillar here? Something brand new that we haven't heard about before.

Well, let's ask the head of that operation. A.J. Nahmad.

Boy, we just haven't focused on it yet. We might unveil some new things at that conference. We haven't got that far yet, to be honest with you.

But I think also, A.J., correct me if I'm wrong, you're going to have some of the leaders, who are developing some major initiatives there, connect with the crowd that's there so that you can see not only what the goal is but who's going to, hopefully, deliver and be able to ask questions of them.

Yes. That's exactly right. We like to show up our smart people that are really engaged in the discussion.

All right. And second, Al, you mentioned in the potential Watsco Ventures investment -- and I know that it's -- there's optionality there, but how big would you -- a big investment in Watsco Ventures being if something really attractive came?

Well, why don't we go back to A.J. Nahmad without -- don't raise false expectations. Just call it the way you see it.

Yes. I mean, that's where I was going with it. These things are so speculative. But there are a couple that could be big, potentially, make an impact on the industry type big. And I think we had this conversation on our last call. There's not a day where we're going to write one check that's tens of millions of dollars. This is a much more of -- really, a lean startup approach where we'll put things out in the market and we'll see what works. If there's product-market fit. And if there is, we'll invest us some more and reach new hurdles and so forth. So it'll be more of a -- much more of a slow and steady opportunistic investment as opposed to making some giant leap.

The next question comes from Brett Linzey of Vertical Research Partners.

I just want to come back to the price comment. Maybe you give a little bit of color on Q4 price realization versus volume. And then what's your expectations for price realization in 2018 as a lot of your vendors are out with price increases?

Paul?

Yes. We started to see a bit of the price increase that we've rolled out in the fourth quarter. It was late fourth quarter when we started pulling it out. So it had a small impact on the fourth quarter. Most of the price increases became effective, however, in December, January, as we said at the last call. We're always optimistic on price increases, but probably a low single digit is what we think we'll realize out of this increase, on the equipment side. A little fuzzier when we get to the parts and supplies, which direction those are going to go.

Okay. Great. And then maybe just back to the other HVAC products, up 4%. It was really the best quarter you've had in 4 to 5 quarters. Are there particular product categories that drove that? And then maybe just an update around that parts and supply initiative. Are you putting more organizational muscle around that? And then maybe what are your targets in terms of percent of revenue that you would expect into 2018, 2019 for that piece of the business?

Good luck with that one, Paul.

Yes. Well, you know...

I mean, we're not going to identify products that are going to do well and we don't like competition to know what we're up to. But go ahead, Paul.

Yes. It's just an emphasis on looking at what customer needs are following through with what we've already put in place with our technology, where we're able to accept orders online 24/7, as well as being able to have more people out there who are talking to customers about what their needs are. The individual programs, I would rather not disclose, obviously. And as far as the target for what our end result is, hopefully, much greater than this year.

Yes. And I guess, is it more of a focus from an incentive standpoint? Or is this just -- and maybe, Paul, a little color...

The way we work is we look for opportunity. And if we think we have an opportunity, then we're going to now act on it. It's not very complicated. We look at that all that time, opportunity and certain -- I mean, we do business with a thousand vendors. And from time to time, we look and see where we have opportunity, we design a program and we pursue it. What Paul is trying to -- his goal is to increase margin. And parts and supplies do that -- well, I should say, not supplies, but parts do. And so we think there's an opportunity, and we'll see what happens. But we prepare plans, promotions and we motivate our selling organization to service the contractor better with parts and we hope it produces higher margins.

The next question comes from Steve Tusa of JPMorgan.

Mr. Tusa, as they say in Miami, c?mo est?s usted?

I'm not sure I understand what that means, but thanks. Thanks.

It means, how are you, Steve?

Thanks. Hopefully, you're going to treat me a little bit nice than you treated Jeff.

No, you do the same thing. You don't listen to our own guidance, you make up your own and then this is what happens.

Yes. So first of all, on that, I mean, what I'm backing into from the first 3 quarters relative to the guidance you gave on the third quarter. You are, I think, even if we kind of round up, I think, a couple of pennies were added to the year-to-date number, if you round up, you're still at the lower end of the range. So...

That's okay. This is our range. It's our range. That's what we said it would be.

You missed the midpoint. And by the way, we're trying to do our own -- I mean, if you just want us to kind of use your guidance, I'm not quite sure what we're here for or what our...

No. What I'm saying is, why don't you pay more attention to the guidance. Since we know more about the industry than I would say anybody in the industry, we have the broadest distribution.

Well, then why -- then this guidance...

I mean, Steve, we're not getting anywhere with this discussion. I spoke what I felt and you do whatever you want to do. I'm not going to....

No. And then -- I'm just defending Jeff because I think Jeff does a really good work and I don't think either of us, any of us...

Well, the opinions are divided, shall we say.

Okay. On that front, your incremental margin this year has been low single digit, that's just math. 15% is kind of what -- is that a number, historically, that you've done? Should we be returning to that in 2018 and 2019? Or are we still kind of in this low single-digit incremental margin outlook?

Barry?

Well, Steve, again, the size and timing of investments is never a straight line, right? Investments are made for future benefit. Maybe the people we hire today want to benefit for 2 years. But long term, that's what we should do. That's what a company should do to continue a long-term track record that we've established. Now parsing that and splicing that in quarter-by-quarter increments is your job, I realize. At the same time, it's -- there's a reality of when the spending comes in at both the size and scope of it. Having said that, culturally, we expect our leaders in the field to generate higher profitability than sales growth rate. No question about it. And the 15% benchmark that you're asking about is the same benchmark we expect from our leadership. How that plays out, and if it plays out, we're very conservative in our outlook sitting here in February. But that, certainly, the intent is to have better operating leverage over the next couple of years.

Yes. And I'm not talking about quarters, I'm just thinking about over the long term. So definitely not thinking just about quarters, but 4 quarters does make up a year. So it's a -- just interesting to follow the progression. And we have 0 issues with you guys investing as long as it can be kind of broken out and we can incorporate that into our models. So we appreciate that. Are there any, in kind of reloading for the -- on the acquisition front, is there any loosening up of any of the distribution that you guys are looking at from the OEMs? Or is this still mostly the independents that you're looking at?

Well, we certainly wish the OEMs would joint venture with this. I guess, we -- we're accused of being too persistent because I'm constantly -- we're constantly asking for joint ventures since we've had such a great success with the Carrier joint venture, both at the manufacturing level as well as the distribution level. But generally speaking, in the acquisitions, it feel -- I believe that because we've got such a lead and such a big emphasis on digitizing our company and improving our service to the contractor, which in turn makes them better and more efficient and attracts them more and more into Watsco, I think that other distributors who face what's going to occur, we believe, digitize in our industry is the future, the digital economy. They will see that it's perhaps a good idea to talk to us about how we might share some of that technology, how we might share some of our capital. We do, as you know, buy and build. If we buy a business, what we're used to -- and it's not cutting cost, we?re interested in growth. So we fund growth, we take -- if it's a private company, we take the liability of the owner who has to sign and guarantee loans and grow. We take that away. We just fund it. Anywhere he wants to, more branches, more people, more products. That's what's worked for us. That's why we became the largest. So I think that the evolution to a digital economy will bring more opportunity, and that's why we keep our balance sheet strong because these things can be of any size. Of course, we always prefer those that are doing well so that we can do and even better. And we -- whether they're smaller or bigger, we just think it's going to happen. I just wish I could tell you more about the timing. I don't know, but we're active.

The next question comes from Robert Barry of Susquehanna.

Did you say how 1Q is tracking or could you?

I'm sorry?

How 1Q is tracking?

No. Every time we try that then -- I mean, 1 month can be good, and then it softens. I mean, this is a climate-based business, right? And I'm -- without getting into trouble, I'm going to say, we started off very well. But what will happen the rest of the quarter, I just can't tell you. Anybody that says they can is fooling themselves. You don't know.

Fair enough. I also...

Although I would say that in terms of share of market, I think that we, eventually, will significantly increase our share of the market because of our ability to invest in branching, our ability to invest in increasing product offering, our ability to invest in more people to service the customer, our ability to invest in technology. So that's our view. And it's always -- I would keep saying, it's all long-term orientated.

Listen, actually, picking up on that comment, Al, and this is also a question about the Analyst Day. I'm curious if you think, at the Analyst Day, you'll be in a position to make a more explicit link between your IT investments that have been going on for a few years now and what they can actually mean for the top line and for the operating margin?

Why don't we ask A.J.

Yes. I think as far as where we are with that today, and a lot of the data that we shared in the press release, it points to a lot of the technology being adopted and getting into our organization, and starting to scale in the organization. And there are -- there is some inherent value in that. And as far as maximizing the potential value and capturing value that these technologies create, we're still very much in the first inning. And on Investor Day, that's probably a good idea and we should try to connect those links a bit more concretely for you.

And we promise to have good weather for you.

Yes. I mean, the weather was not very good last year, so that would be good. But yes, perhaps, even maybe in parts of the business where the adoption of the IT is more advanced, you can say, "Listen, it may not read out everywhere, but at least in these branches we have seen this much impact on growth or op margin." I think that would be helpful.

Yes. You got to remember, our products end up in the hands of -- about 250,000 persons that are technicians, engineering people, people that are out there installing and repairing. And that's a huge audience to take on new stuff. And that's why we don't like to pin ourselves down to when they will, because we know it's going to take a while. But we know that we're the best ones doing it and we know that eventually it's a damn good investment for the shareholders. I'd like to -- I hate to think what would happen if we weren't doing this. Who might come along and disrupt us? Well, we're very concerned about -- and we correctly, I think, fear the Amazons and people like that. What that causes us to do is to think even harder and to think how to help our -- it's all about the contractor. We're not interested in products as much as we are in services to the contractor. Our technology is focused exclusively on the customer to help them do better and of course, our -- that also helps us operate better. Some of the technology helps us operate better.

Fair enough. Logically, it does seem like it would be. Just one other quick one following up on the earlier comment about the other HVAC products growth. To what extent was there some benefits from the hurricane rebuild in that number, do you think?

Who would know that? Barry?

Yes. Robert, first, there is a retrievable business that was lost from some of the closed doors in September. So that's just business that flowed into this quarter. And as Paul mentioned, gave us some measure of that. In terms of sustained benefit of some kind, it's not something we can certainly go out and give you a number or even know the number. But safe to say, there is a measure of benefit that will creep in. But it's not material in my mind, and it will probably take all through this year to play out. But it's not a reason to be overly optimistic about it because it's, again, only happen in certain regions of the country and will play out, I think, over a long period of time.

The next question comes from Josh Pokrzywinski of Wolfe Research.

Just a question zooming out a little bit over the last few years on margins. Al, Barry, whoever wants to take it, it's kind of maintained at this low 8% level since 2015.

8.2%.

8.2%, is it? Okay. I mean, I'll give you credit on...

When we started it, the industry was 3% or 4%. So we pretty much doubled it.

I'm not taking anything away from the progress, it's more on kind of -- it seems like it syncs up when some of the investments really started to ramp up. And I think Barry's comment earlier about '18 being a return to something more of a normal incremental, at least, that's the ambition. Should we think about then as being -- these investments being kind of 3-year paybacks? Is of that when see the return?

No. It's hard. It's a great question. But again, we don't want to mislead anybody. It's not going to produce margin increase. We don't know what it's going to produce. We just know it's essential. It's essential that we help our contractors. It's essential that we focus on the digital age. It's essential that we block any serious competition from us. Do we think it will help margin? Eventually, we think it's going to be terrific. We think -- we hope it will get into the double-digits eventually in margins. We actually feel that way, but we can't call when. I know that, that's what you're supposed to ask, but we'll try to answer best we can. We don't know. All I know is our record, long term, has been very good. And I don't expect it to slack off. I've said it openly, I think our future is bigger than our past, especially because we're getting this technology in place that's going to make, hopefully, help these contractors with what they do. That's our focus, the contractor.

I guess, maybe this is a better question for the Analyst Day. But I guess in -- if that's the mentality, how do you know when the investments are working?

Well, read the press release.

So there's margin aspiration type to it. It's a little harder for us to see it, actually.

Yes, but read the press release. It may give -- it doesn't give you a numerical, but it should give you a sense that it's being adopted. But it's a big field to adopt, 250,000 more or less people out there. Yes, does it show our -- can we point to a margin change because of that? We did not do that in the press release because it's very difficult to measure at the moment. But I wanted to give you guys a sense of what is actually occurring, that the technology is being adopted. If something is not good, it would not be adopted. And it's being adopted. And so hold on is all I can say and respect us for our track record. Our 25-year track record. We think we know what we're doing. I mean, I'm going to have a little fun with this now, but you know that our 25-year track record is better than Warren Buffet's. How about that? We're ranked higher than he is.

He has a lot of capital to put to work, but I definitely appreciate it.

25 years. Yes, total shareholder return. You guys care whether it's a lot of capital or little capital, I mean, that's our record. And we have been ranked higher than that. I know you're trying to get some specifics for your models, but we're trying -- we're doing the best we can. It's very difficult to predict some of the things you want us to. But we'll do our best, how's that? Barry could do that offline.

Just switching over to some of the comments about the at-the-market offering. I mean, I tend to think of that as more associated within the industries that have pretty big difference in timing between cash flow and project cost. You guys are very cash generators, that's always been the case. I guess, I'm kind of surprised to hear that this is something you could look at more often.

Yes. Well, because...

I mean, I'm engaging in your comments about not a lot of big, big bets. So we're -- what's the...

No. No. We didn't say we're not going to have a lot of big bets, we said just the opposite. We're hoping to have a lot of big bets. We're hoping that we don't -- that we won't -- we don't like a lot of leverage. That's our culture. It will be now, it will be in the future. But we know that there are opportunities, and we think some big bets might come along. And I want to be ready for it. Even when we do the big ones, I don't want to have a lot of leverage. We're just not like others in this industry. We don't believe in buying back shares to improve earnings per share. We believe that we should have a balance sheet to do whatever comes along, not only in the acquisitions field, but also in technology. We want to be ready if something breaks through that nobody's ever heard of to fund on the R&D side of our business. And certainly, on the acquisition side, we want to be ready. And we have a very big appetite for large deals.

The next question comes from Robert McCarthy of Stifel.

I think my questions have been answered.

Okay.

The next question comes from Chris Dankert of Longbow Research.

Just kind of want to put a finer point on something here. I know you guys are pointing to -- of long-term investment and the comments that you're seeing a lot of opportunity. I guess, what does that mean? Or is there any plan to add additional heads in '18? Or do you kind of like what your employee count looks like right now?

Paul, you're the operating person.

Yes. We had people at the individual branch in operating level and we have that decision-making process. If our people in the field see that they need people to satisfy customer needs or to move into an opportunity, which has presented itself to them, they will add those people. Very, very hard to predict. At our level, we're not micromanaging, the people that are going out there and talking to customers. That's something that we push out to our field operating people who actually know what they're doing.

Got it. Got it. And at a high level here, I'm really zooming out. I guess, the historical replacement demand growth number we've seen in the past is somewhere in the neighborhood of 4%, give or take, I guess. Based on data you guys have, is there any reason to suspect change in that number? Any other dynamics that we should be aware of on our side of our phones?

Barry?

Sure, Chris. Obviously, there's only 3 variables in our sales. It's the number of units we sell, the price we sold at and then the mix that allows for selling higher or selling it at better prices. And the consumers behind much of that dynamic, how many units, at what price and at what mix. So again, we're sitting here in February and we can say those were all positive signals in the fourth quarter. And I think, so far, in '18, how that plays out in the summertime is a bigger variable. But I would expect there to be some continuance of what we've been seeing given how the consumer is going.

The next question comes from Walter Liptak of Seaport Global.

I wanted to ask a follow-on on the branch adds. I guess, in the e-commerce number it looked good at 25%. Is there a point at which you get enough e-commerce where you can get more productivity out of the branch, people and maybe start allocating resources?

Well, in our minds, we haven't executed and we're just beginning the thought process. We think we may accelerate branches, have more. We think there's territory that can use it and we like having high density. It's a wonderful thing to help the contractor with. The closer the supplies and the technical support and everything else that he needs. We think we might be spreading that out. But as I said, that's just a thought now. We're not ready yet for that. But we are -- have been closing branches from time to time that didn't work out. But I think we may start accelerating our footprint, spreading it out more.

Well, that sounds great. What timing do you think you would see on something like that? What geographic region would look good?

Gee, that's a little early. It's a good question, but it's a little early.

All right. Fair enough. And I wanted to ask a question about working capital. And the receivable cash inflow looked better than I thought. But the inventory, usually draws down a little bit. It looks like you may have invested in inventory over...

Yes. Yes. That's a good question. There is a specific on that. Barry?

We do -- in price, in -- let's put it this way, we do want to take advantage of our balance sheet at times with buying inventory that will allow us to use price and basically take advantage of opportunity. We've done that. We did that in the fourth quarter. The inventory that's reflected is higher than what it otherwise would have been. But that's -- again, using some of our balance sheet to hit the 2018 season with, we won't tell you how much or who, but that's part of the strategy of using our balance sheet.

This concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks.

Thanks for listening, and hope most of you can make it down to Miami in March, and we'll try to bring you more into the loop regarding technology. Bye now.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.