Watsco Inc (WSO) 2007 Q2 法說會逐字稿

Good morning. My name is Laurie and I will be your conference operator. At this time, I would like to welcome everyone to the Watsco Incorporated 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)

Thank you. I will now turn the call over to Albert Nahmad, Chief Executive Officer of Watsco. Please go ahead, sir.

Good morning, everyone. Welcome to our conference call covering Watsco's operating results for the second quarter. My name is Al Nahmad. I'm President and CEO, and with me on this call is Barry Logan, Senior Vice President.

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

Now, our revised guidance published last Friday and the press release this morning explain what we are experiencing in the marketplace. Tough comps, late and lower summer temperatures and housing issues impacted us in the quarter, and these factors may impact us most of the year.

On the other hand, our second-quarter performance this year exceeded our record 2005 second-quarter performance. We are generating significant cash flow and have once again boosted the quarterly dividend rate to reflect our confidence and to share our cash flow in a very direct way with our shareholders. The new quarterly rate is $0.40 per share versus $0.33 per share and will be reflected in the dividend payment in October.

Other important highlights include on an industry basis, unit volumes continue to be below the historical 4% to 5% unit growth. However, unit trends improved some during the quarter and a tough comp should have a lesser effect as we end the year and head into 2008. We will comment on price trends later in this call. Also on a positive note, sales mix of HVAC systems above 13 SEER continues to improve, representing 15% of unitary equipment sales versus 9% last year.

Now for the numbers. Earnings per share from continuing operations for the quarter was $0.88 per diluted share on net income of $24 million versus $1.03 on net income of $29 million. Sales decreased 7% during the quarter. Twenty-three new locations added $11 million in sales during the quarter and were slightly profitable.

Gross profit margin declined 60 basis points during the quarter. We believe that most of this gross profit margin decline is due to higher-than-normal profitability last year in copper-related products, such as tubing, fittings and line sets. To a lesser extent, a shift in equipment mix towards value offerings and lower rebates due to reduced purchases also impacted margins. We believe these factors will remain in place during the third quarter.

Sales of unitary products, which is 29% of our quarter sales, declined 10%, reflecting 8% higher pricing and an 18% unit decline during the quarter. As we said earlier, the trend in unit sales appears to be improving as we move towards 2008.

Our performance in SG&A improved since the first quarter, with SG&A down 5% for the quarter. And if the 23 new locations are excluded, SG&A declined 8%.

Operating profit was $40 million, with an operating margin reflecting lower sales and gross margins, as well as the impact of new branches. On a same-store basis the operating margin was 8.5%.

Interest expense declined 65% on lower average borrowings and higher interest income. A record $26 million in operating cash flow was generated in the second quarter compared to $19 million of cash used last year. This is a $45 million swing. Cash flow should continue to be excellent during the remainder of this year. Our balance sheet remains very strong. Average daily borrowings declined 56% and our debt-to-total-capitalization ratio improved to 5%. At this point, we can probably fund almost any size acquisition or other opportunity.

And now for the results of the first half. Sales were off 6% to $842 million, with the gross profit margin down 30 basis points. SG&A is down 2%, and excluding the effects of the 23 new locations, declined approximately 6%. Operating profit was $58 million on operating margins of 6.8%. Same-store operating margin was 7%. Interest expense declined 56% on lower average borrowings and higher interest income.

Now, before we move on to questions, please let me remind everyone about our tender offer to acquire the ACR Group. ACR is a fine HVAC distributor with 54 branches and $240 million of revenue during its last fiscal year. We think highly of ACR, its place in the industry and its organization. We will do everything we can to support their expansion plans and provide additional opportunities for customers and employees. The tender documents have been mailed to ACR shareholders. The initial expiration date of our offer is midnight August 3. If everything goes well, the closing should occur shortly thereafter.

We updated our earnings guidance in our press release dated July 20, 2007 to $2.70 to $2.80. That's $2.70 to $2.80 per share for the year, reflecting our current thinking.

Now at this time, we will we pleased to answer your questions.

(OPERATOR INSTRUCTIONS) Ian Zaffino.

Thank you. Good morning. Wanted to just drill into ACR a little bit more. Can you guys kind of elaborate on -- and I know you may not really want to talk about this that much until the deal closes. But as far as giving us any sense of what you intend to do there and what type of financial impact you should see, if not this year, maybe next year.

Well, I will take a shot at an answer. We intend to support its growth. We are very good at this, we are very experienced at doing that. We've bought successful businesses in the past and we helped them grow the business. We help the capital, we help them with vendor relationships, we help them with individuals in the Company that are very good at growth. But it will be a separate subsidiary, as all large acquisitions of Watsco are. And it will hopefully follow the historical trend we've had in the past of contributing to increasing earnings.

As I said it's a fine organization. We really appreciate the leadership in place at the subsidiary levels that they have, and they are in markets that we know. And they sell -- distribute products that are very keenly aware of and who their vendors are and that sort of thing. So it is a very positive thing for Watsco.

Great. And then second question would be embedded in your guidance, what type of unit volumes are you looking for? I know you said they are getting better or they appear to be improving. If you could put a little meat on the bones, that would be great.

I don't think we've added that information to the guidance. This is our best shot, based on many different factors. And don't forget that the unitary product is only 29% of our overall revenue.

Thank you very much.

Jeff Hammond.

Good morning. Okay. Just want to hit on, I guess, with the ACR Group acquisition pending, can you just quantify what you think your balance sheet capacity is to do additional deals. And then also just talk about management capacity to take on additional opportunities, should they come to fruition.

I think that is a terrific issue. Let's take the balance sheet. I don't think we've ever been stronger. We have a large stated net worth and essentially no debt. And how far can we leverage that? Well, if you go up one-to-one, it would be $500 million worth of debt. And certainly if we went that high -- and I don't see any reason to do that right now -- we could acquire almost anything that we are in contact with.

And we only want the best companies, and we certainly are able to finance anything that we've been in contact with. As you know, Jeff, that is part of our overall strategy, is to acquire great companies and then help them build what they already have. So I see unlimited capacity to do that.

And in terms -- another great part of your question is so how do you manage that, what is the organization? Well, this is what we really are so good at, and we have been doing it since 1989. We buy a great company -- we're very good at retaining first the leaders and the organization so that they get in the spirit of growth. This is our specialty. And they bring with them the level of leadership that we need. And as I said, this is something we've done over and over again and excel at it. So I don't expect that to change anytime going into the future. We'll keep that model; it works well for us.

And as I said, overall, the thing is that we're only 7% of the industry. So we have a lot more growth ahead of us through acquisition, as well as, when necessary, by opening new locations to expand our share of the overall market.

Okay. And then just in terms of the earnings revision downward and kind of how 2Q played out versus what you had originally thought, what do you think surprised you the most?

Okay. I will give you a little bit on that. June was a surprise, and June is the most important month of the quarter. And it is for the reasons that we've stated; we are not commenting anything beyond what we have already said, because that is what happened. You know, the comps were tough and the season in terms of temperature was late and there is some impact of housing.

I would go even further to say, Jeff, that July doesn't look much different. And that is why we stated what we said earlier in this conference call. These are some of the factors that we see playing itself out during the rest of this year. But all of that to me suggests that when things normalize, we're going to have one powerful company here.

And your $2.70 to $2.80 would reflect a pretty challenging July.

Yes.

If you look at the guidance for the full year, you have, I'd say, a little more of the earnings in the second half than what you've reported in the first half. What would support a better second half versus that first half?

Why don't get your good friend Barry Logan here on that?

Good morning, Barry.

Hi, Jeff. Well, first, it is our best shot, and the rest of the summer is in front of us. And July, August, September are all large months for us. So it is our best shot for what we see going on now for the rest of the summer.

Very clearly, the comps have played havoc with the numbers. The reason we even cite 2005 is just to go back in time and do a sanity check on what the earnings were two years ago before the spike in same-store sales last year. And certainly housing is a lot worse two years later, and our numbers are better two years later.

So as the comps do ease, we would expect some growth to occur later in the year. And in our own guidance, we certainly have some growth in the latter part of the year.

Okay. But, do any -- I guess as you think about gross margin -- I mean, how should we think about gross margin, some of this, I guess, comparisons that you had last year with copper tubing, etc.? I mean how does that flush out? Is there anything you can do there to make up for some of that?

As far as -- sorry, Al. Go-ahead, Barry.

Go ahead, Barry.

As far as the third quarter goes, we studied this very carefully. And the copper impact is -- there is more than half of what we saw in gross profit change. And we do see that affecting the third quarter and flushing itself out by the fourth quarter. It is something we can go to vendors and gain their support and push our -- especially our supplies vendors very hard. But it is something that provided some profit last year that just is not repeated in part of the guidance for the rest of the year.

I would say that higher copper prices affect us completely different than they do at OEMs. We are able to pass on higher copper prices right to the contractor and sustain higher prices and higher margins. The OEMs, on the other hand, have a much more difficult time with rising copper prices, Jeff. So that is one thing I wanted to signal to you.

We are not an OEM when it comes to those commodity prices; we can deal with higher prices a lot better. And last year what made it different was that there was a combination of tight markets worldwide, and that drove the copper prices. And we enjoyed some very healthy sales and very healthy margins from copper, the kind of copper that we sell. We don't put it into the equipment; we sell the copper tubing that connects equipment.

Okay, thanks, guys. I will get back in queue.

Michael Cox.

Good morning, guys. My first question relates to the ACR Group transaction. I was wondering if you could discuss the potential to raise their operating margins. I believe they are considerably lower than your (multiple speakers).

Yes, good question. Yes, we sure hope so. We've always done it in the past. We haven't ever not succeeded with a large acquisition, for the organization that comes into the fold to be able to take advantage of many of the things we can help with. And we certainly expect margin expansion from -- and so do they, by the way. We've talked to them -- to the leadership there and they are very excited about margin expansion.

Are there any low-hanging fruit items you could call out specifically, either (multiple speakers) power synergies or something of that nature?

It is too early to give you those specifics. We just -- we don't own the business yet. We just know -- we've had enough conversation to feel really good about it.

Okay. Could you provide us a cash flow outlook for the full year following the strong performance here year-to-date?

Well, as you know, we had $114 million in cash flow over the last 12 months. I think we disclosed that. And Barry, do you have it for what it might be for the calendar year?

Yes. So for the -- the past history culture-wise is to have cash flow from operations exceed net income. And clearly this year, we sea that as the minimum guidance, if you will, which if you take our $2.70 to $2.80 and multiply it times shares, that would be a cash flow guidance for the year.

Okay. And --

Something that we certainly think we can exceed that metric this year, given what is going on.

Okay. My last question is on the gross margin. I was thinking about seeing some compression here in the quarter. Is that purely a reflection on softer volumes or is there something in the pricing environment there as well?

Well, that is what we explained in our comments. We talked about the unusual profitability with copper products we sell last year, and this year is more normal. And we talked about [a move] in the equipment mix, which is, as I said, only 29% of our revenue toward the value offering. And also, when you are doing less revenues, you are buying less, and therefore your rebate income does impact your gross profit margin. And in aggregate, all those things contributed to a 60 basis point decline in the second quarter.

Okay, great. Thank you very much.

David Manthey.

Good morning. Touching on a previous question here, I'm trying to understand in the second half of this year, you're looking for a higher level of earnings than in the first half. If that is the case, assuming that the year typically in terms of revenue looks like a bell curve, could you talk about what is going to drive the higher level of profitability? Do you see it as higher gross margins or are you taking actions on SG&A or how should we think about it?

Well, we have taken actions on SG&A, as you can see from the performance of the second quarter. But we know that late in the third quarter last year, business fell off. That extraordinary unit gains that were going on -- I said extraordinary because it all happened as a result of the federal mandate -- they were not normal demands for units. But that started to fall off in the last month of the third quarter and it continued through the fourth quarter.

So if the unit demand normalizes, we should see revenue growth. And our pricing discipline is pretty good and our operating expenses, as demonstrated in the second quarter, we're doing a good job with that. So that is why we think that we will do what we said we would in the second half.

Dave, if you go back to 2005, it is all a crystal ball conversation at this point. But you go back to 2005 and you can see the type of performance in that year suggesting that the second half can certainly be a lot stronger than the first half. I wouldn't get too caught up in the statistics of that. It's trying to reflect of talking to our entire organization about what is going on and what they see for the rest of the year, and reporting that as part of our guidance is not something we do here. It's something we do throughout the organization.

Got it. Okay. Just to clarify in the guidance so I understand what is in and out of it. I assume that the guidance is excluding the $0.06 loss at Dunhill.

Yes.

And then, I believe that that would also -- you are assuming modest accretion from ACR when that finally comes in --

Yes.

And finally, with Dunhill, could we see a gain or a loss next quarter on the sale? And would that be in or out of the guidance?

No, that is already reported, the loss. There is nothing further to report on Dunhill. It happened at the end of June.

Oh, it did?

Yes.

The $0.06 is a loss on the sale of Dunhill?

Operating as well as the loss on the sale.

Got it, okay. Great. I think that is all I had. Thanks a lot, Al.

Aren't you glad to see us divest staffing? I think you've been after me for about five years.

It has been a long time.

Keith Hughes.

Thank you. On your equipment suppliers, are you starting to see any downward pressure on price from equipment suppliers, given what is going on in homebuilding and the weather issue in the industry right now?

I think you've hit it right on the head. Homebuilding, there is competition. The OEMs are competing fiercely for that. It is a shrinking market for them. I don't think that necessarily flows to the replacement business in that that demand by consumers is "I need it now. And I'm not in the market to negotiate a price; I just have to have my air-conditioning system work."

However, there is a trend by consumers to go towards the value side of the equipment offering, which tends to lower what the consumer is paying for. In other words, every tonnage of equipment has the good, better and best, and they are moving towards the good. We do notice that trend.

So it is not a change in the SEER rating; it is a change in brand as much as anything.

Yes, brand within the brand.

Brand within the brand. Okay.

Every OEM has a tiered offering today, for the most part. And it's a sales mix change within vendors, in many cases.

Your accessory providers, are you seeing them push down price to try to gain share among distributors?

Well, we're their largest distributor. And in many cases, they will come to us with growth programs, and that is one of the nice advantages that we have. Which, by the way, will be increased with the acquisition of ACR; they will be able to participate in that. There are over 600 manufacturers, Keith, and they try to gain share and sometimes they use price. But there is no panic out there. Nobody is falling off the log or anything like that.

All right.

We all know what is going on this year, and we know that things are normalizing and '08 we think is going to be pretty good.

All right. Thank you.

Jeff Germanotta.

Good morning. Two questions for you. The first one has to do with your rate of internal reinvestment. You opened 29 branches in the last 12 months. How do you see that the second half of this year and going into next year, in terms of pace and number?

Well, I think we are very focused on ACR. And we are also doing smaller transactions, which I'm not able to quantify for you. And then I would say just a handful, Jeff. It's really the acquisition -- we are finding in a sense that when the industry is going through a very unusual down period -- I mean, this doesn't happen hardly at all -- that owners of businesses are more receptive to us.

And so we will be doing a little bit more transactions in the smaller ones. And hopefully, if we get lucky, even very large ones that we are very eager to bring into the family. So that is my focus right now. Although the subsidiaries themselves I would say are opening -- I would say less than five between now and the end of the year.

And looking at next year?

We don't have those plans yet, Jeff. They come later in the year.

And you touched on my second question, which is the acquisition pipeline. It sounds like you are hoping to do smaller transactions over and above ACR this year, and--

Yes, and I hope to do large -- my number one desire is to do the larger transactions. And we certainly have the financing capability to do that and we have a great reputation. There are great companies out there, and they know us and we are hoping that they reach a time when they want to do something with us. We are certainly eager and we certainly know how to keep the business that they have built over the last 40 or 50 years, keep it intact and grow it, and that works to our advantage.

Has the pricing dynamic for acquisitions improved at all in this soft market?

Well, by the word "improved" mean are prices going down? I would say that we don't negotiate in that fashion. In fact, because I'm eager to grow the network, we are willing to pay more and are offering more. So, I'd take the contrarian point of view -- even if the industry is not doing well, as long as I can do business with the best quality companies, I'm pretty accommodating when it comes to evaluation.

Thank you very much.

(OPERATOR INSTRUCTIONS) Curt Woodworth.

Good morning. I guess in terms of thinking about acquisitions and your desire to buy the best companies and the balance sheet that could support a pretty dramatic amount of acquisitions, why would you not be buying back what could be the best company in the industry, which is your own?

You can't help yourself, can you Curt?

No.

Well, it is sort of a philosophical difference probably with people that feel that way about stock repurchase. I believe that Watsco has three priorities, and first one is to invest in the business. And we do that by making acquisitions or adding new locations and adding product. All of those take investment -- (inaudible) and working capital when you add product and when you add locations. And so that is our first priority and it comes ahead of everything.

The second priority is we watch how we feel about the future and our cash flows. And we have always enjoyed good performance in that area and we like to pay increasing cash dividends to our shareholders, because in that fashion they share directly with what we are doing. And that is why you saw us boost dividends again. And it is a nice way to reward shareholders directly.

And then thirdly, we have the stock repurchase that we do from time to time. I think we've purchased $100 million since the beginning -- since 2000 in stock. It is something we do from time to time, but it is not the high priority, nor am I suggesting it's going to become a higher priority. I think the first two priorities are where we are probably at now.

Okay. You know, you commented that June was more difficult than you anticipated. In terms of volume, what was June down? And you said July is looking --?

I don't think we've disclosed -- we don't disclose month-to-month. It is just that June was an important part of the second quarter -- it is the most important month. And somebody asked me what was our surprise, and that is when it came. But we don't disclose the monthly figures.

What was your quarterly volume decline this quarter -- like 16?

7%.

7%?

Yes, sir.

On volume?

On dollars.

Unit volume, Curt, or unitary --?

Yes.

Again, you've got to segregate the business. It's about 29% is unitary. Just disclose it more out of just a bellwether type of thing. Units were down 18%.

Okay.

And, Curt, don't forget to differentiate us from the OEM. The OEM is primarily manufacturing the unitary product, and of course many of them do the commercial offering. We are 29% of unitary product and then we have all these other things that are very useful in the aftermarket, that homeowners and businesses need to install and to repair and replace their cooling and heating systems. So we are a much broader-based product offering than most factories. And I think that is an advantage.

So the reason I say that is, as Barry has stated, it's only 29% of our revenue that we do in the unitary, and that seems to get the most attention. And we understand that. But I like what we are doing. We've got a business model here that does business with well over 600 manufacturers and they cover the breadth of the industry, of the $26 billion overall market. That $26 billion market, by the way, somewhere between $10 billion and $11 billion is the equipment, and the rest is the non-equipment, which is the part I'm referring to.

And does the non-equipment have more exposure to the aftermarket, in your opinion?

Yes, yes.

Great. And just one last question. In terms of the guidance -- and, again, kind of the contribution of earnings being higher in the second half. Is it fair to assume or think generically that gross margins are going to have to be higher in the back half of the year relative to the first half? Or are you thinking it's more of a top line leverage issue?

Barry, you want to take a shot at that?

Sure. Well, you know, Curt, as we said, in the third quarter, we would expect to see lower gross profit given some of the things that are going on (multiple speakers).

Gross profit margin.

-- gross profit margin, and simply --

In the back half relative to the first half?

I would say in the third quarter. In the fourth quarter, some of those dynamics ease in the fourth quarter.

I don't think he's comparing it to the first half, Curt; he's comparing it to the same period the prior year.

Okay, I was comparing it to the first half. Just thinking --

I understand (multiple speakers). If I compare it to the first half, I would expect some sales growth versus the first half, and gross profit probably to look a little bit like the first half --

Okay.

-- because we already have some of these things going on in the second quarter that will affect the third.

Got you.

And the fourth quarter typically -- especially given last year's fourth quarter -- typically is somewhat stronger because you have a heating season in those numbers and not necessarily something you see in a first quarter.

Okay. Great. Thanks a lot.

Jason [Kass].

Hi, guys. It's Jason Kesselman. I had a question for you -- kind of just more a big picture. The last couple of months, obviously, there has been a lot of movement in the industry. You guys, with your acquisition. I think Trane bought in -- some dealers in California. And obviously, the announcement of Goodman Global.

Just wondering how you see the industry playing out and what opportunities or kind of threats you see as kind of the -- it seems as though there's some consolidation, both from the OEMs, and at least one large OEM that might change ownership.

Well, it's a good big picture question, and we don't know anything more than you might already be aware of. I mean, we know about California and we are the -- one of the OEM's largest customers has changed brands. And we know that one of the largest customers of another manufacturer was asked to change brands.

And those are very unusual events, and we thought about what it means to us. Is it a threat, is it an opportunity? And it's a bit of both. We don't want price erosion while these two manufacturers try to compete with each other in the West. But on the other hand, it's going to be somewhat disruptive to contractors, and we are pretty steady company; we've got a great organization out there. And they will be defending themselves and providing high levels of service, which is what they compete on.

So from the point of view of the West Coast, it's hard to say one way or the other, but I don't think of it as a threat. I think of it as I just explained it. We don't want a price war, but we are ready to defend ourselves with our service.

In terms of what is going on with manufacturers, you know Johnson Controls came in and bought York. I don't know about the other manufacturer, who is going to own them. What does it mean? I guess we will have to see -- if we find out who buys this manufacturer -- and on the equipment.

My thinking is for us, the best way that we can defend ourselves and grow and make it prosperous for our stockholders is to continue to build a network of branches in the United States. No one is going to be a threat to us if we continue to add branches, because branches are important in the aftermarket, in the replacement business. Contractors want to have convenience of locations. We should have somewhere in the neighborhood of 450 locations sometime in August, when we complete the ACR acquisition. I don't -- you know, that has never happened before.

And we think we are just beginning to add locations, one way or the other. So the volumes we build is service confidence, high density of locations with a full offering of product and a terrific organization supporting the contractors. I think we are going to -- no matter what comes, we will be fine. Long speech.

Is there any way for you to participate in the consolidation?

At the distribution level, we have been. Is that what you're asking?

Yes.

Yes. We are doing some of that through the acquisition of ACR. And I think today we've purchased 56 distributors. So we are participating. We are probably the number one participant.

Okay, thank you.

[Jamie Donnellon].

Hey, guys, how is it going? I have a question regarding your acquisition strategy. I mean, to what extent does geography play a part in your acquisition criteria? And are there any, I would guess, holes in the U.S. that you could say that you guys are trying to fill in, as you look at potential acquisitions?

Well, I like you second part of your question a lot because it gets me excited about the opportunity. There are all kinds of territorial opportunities. And even in the territories where we already have a presence, there is huge opportunity where we already have a presence. And our territorial preference has been historically in the Sunbelt. And there are fundamental reasons for that. It is very dependable in terms of summer weather. And also the opportunity that we've had to make significant acquisitions have primarily come from the Sunbelt.

Now, north of the Sunbelt is a potential down the road. I mean, it's sort of opportunistic who's available to acquire. We wouldn't discriminate against a distributor north of the Sunbelt, but our focus has been the Sunbelt. And within the Sunbelt, there is enormous opportunity ahead of us. So we are going to be pretty busy.

Okay, great. Thank you.

[Michael Novak].

Hi. I have a couple of questions. The first one is how likely do you think it is that you will be able to acquire the distribution assets of some of the OEMs that have those internally right now?

Well, we certainly would like to. And if you can help us, by the way, it would be nice. We have always been persistent in OEM distribution networks. The argument is that we can do a better job. First of all, it takes a lot of money to provide a high density of branches and to have a wonderful organization supporting it. A lot of money and a lot of good leadership skills.

And so we really believe we bring value to the OEMs. We've done it twice before with two other OEMs, and the businesses they sold are considerably larger than they were when we bought them -- I mean, four, five, even ten times larger. So we have a record in doing that. And so we're persistently at the OEM's door. Now, the OEM, of course, he owns it and he has to decide what he wants. And we will be there at the door if he ever decides to divest -- and we will build it.

From an OEM's perspective, how strategic is it to own distribution in terms of helping you balance your production runs, manage pricing, that sort of thing?

Well, that is something obviously you have to ask them. We believe we can provide any and all of the things that they need, they feel they need. I mean, one of the things we first did when we first got started in this business, we started with Rheem in Florida. And we had a terrific relationship with that OEM. We bought their largest distributor in Florida and we provided whatever they needed and they helped us. And we went from last place in the brand to first place. So we are very good historically in working with OEMs.

But in terms of your direct question, I suppose you need to ask them. And if you can persuade them we can do a better job, I would appreciate it.

Okay. In terms of the comparisons that you have for the winter season this year, how much were heating systems down last year?

Barry, do you have that?

When we got to the fourth quarter last year, we had a smaller fourth quarter in '06 than we did '05. And part of that was about a 10% to 15% decline in heating systems. So that is something we saw last year that was unusual then. And if it's a more typical season, it is something that should help our fourth quarter. But not until then.

And Barry, of that 10% to 15% decline, how much of that is attributable to new home construction?

I don't really think the homebuilding irritated until the beginning of '07. There was some irritant to the fourth quarter, but it really became more so once we got into '07.

Okay. And when you talked about the 18% decline in unitary products, how much of that is attributable to new home construction?

The math would say about 8%, which is about a 30% drop on a quarter of our business.

Let's see -- in terms of the SG&A, was there any reversal of bonus accrual, or how much did bonus accrual drive the strong expense control?

I will -- Watsco is a company very much into incentive compensation, and they up and down with revenues. I mean --

What you have to imagine is every salesperson's paid off of gross profit, every branch manager is paid off of his branch profit. (Multiple speakers)

All leadership is paid off on EBITDA growth.

-- and I'm working my way up to the leadership. So, virtually every employee has some type of performance-based pay that they benefit from as the numbers head up and that they participate in as the numbers are softer.

Well, I know it's a tough environment, but an 8% operating margin in this environment is pretty good. So appreciate the good work.

Thank you.

(OPERATOR INSTRUCTIONS) Holden Lewis.

Good morning. This is actually Sean Williams in for Holden. Just wanted to follow up on the unit shipments. The numbers that I am looking at coming out of the OEMs -- looking at the ARI data -- shows fairly significant improvements in April and May. Is there just some lag that is going to follow through the distributors, or how should I be thinking about that?

We hope so.

I am just concerned about maybe some inventory build out there in the channel that's not flowing through down to the distributors.

I can't comment on the inventory at large. I can comment on our inventory, and our inventory is down versus last year. If you take out the new stores, it is down another $15 million, if you look at things on a same-store basis. And our plans for working capital is to reduce inventory throughout the rest of this year and have a very strong cash flow year. But as far as inventory at large, it is hard to say.

All right. Well, thank you.

At this time, there are no further questions. Mr. Nahmad, are there any closing remarks?

No, I just enjoyed it very much. Thanks for your interest in our Company. Speak to you at the next quarter. Bye-bye.

Thank you. That does conclude today's Watsco Incorporated second-quarter earnings conference call. You may now disconnect.