Watsco Inc (WSO) 2009 Q2 法說會逐字稿

Good morning. My name is Justin and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings release conference call. (Operator Instructions.) Thank you. Mr. Nahmad, you may begin your conference.

Good morning, everyone, and welcome to Watsco's conference call. My name is Albert Nahmad. I'm President and CEO. With me is Barry Logan, Senior Vice President, and Paul Johnston, Vice President.

First, our normal cautionary statement. 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.

Most importantly, we announced on July 1st the completion of our transaction with Carrier Corporation to form the joint venture Carrier Enterprise. This is a transformational event for our company.

Now, following along those lines, our first step is to work through a transition period to establish Carrier Enterprise as a fully independent company. We are also excited to get started executing the many opportunities identified over the past several months. 2009 will largely be a year of executing this transition, followed by 2010 being the time when our broader growth and profit enhancement initiatives will take shape.

The joint venture adds customers, products, markets and brands to the Watsco family and, most importantly, and I can't emphasize this enough, a great organization. We love the spirit and the chemistry of the Carrier Enterprise team and see substantial growth and profit opportunities in the years ahead. Watsco will begin to include Carrier Enterprise's results beginning in the third quarter.

Just to summarize the size of our network, we are now operating in 505 locations across 34 states and Puerto Rico. We have 4,500 employees serving over 50,000 contractor customers throughout our footprint. Watsco's pro forma revenues for 2008 were about $3 billion.

We remind you often the Watsco focus is long term. And to say we are excited about the long-term prospects of our business is really clearly an understatement. As for the short term, it remains a difficult environment. We continue to feel the effects of the economy and we experienced a later start to the cooling season versus last year. However, trends in July are a little better, while the top-line pressures continue.

Sales in the first half of 2009 were impacted by an unprecedented price move in certain commodity-based products. We expect this to diminish throughout the rest of 2009 and have no impact over the long term. We are also experiencing unprecedented market conditions in the Western United States and we continue to take actions to improve the performance in that area of the country. We consider these trends to be short term in nature and are not impediments to our long-term growth outlook -- for our long-term growth outlook.

The long-term growth rates for the replacement market are well documented and it is a fact that the immense installed base of air conditioning and heating systems will wear out and break and, ultimately, need to be replaced with more energy efficient solutions.

An important aspect of this quarter's performance is the continued growth in sales of high efficiency and more environmentally friendly air conditioning systems. We experienced higher unit sales, increased pricing and higher selling margins in this product category. We expect this trend to continue and accelerate once replacement market demand returns to normalized levels and the pent-up demand begins to hit the market.

A reminder -- high efficiency drives higher pricing and higher margins, something that is good for Watsco and for the overall industry.

Our ongoing profit enhancement initiatives accelerated during the quarter in reaction to market conditions. There is no doubt these initiatives will provide earnings leverage once overall business conditions stabilize and begin to grow.

So far in 2009, cash flow exceeded net income and we certainly expect to achieve this important metric again for the full year.

Operating cash per share over the last 12 months was $3.46. We remain vigilant toward cash flow and maintaining a great balance sheet.

In April we raised our quarterly dividend 7% to $0.48 per share. Watsco's has now established a track record of increasing dividends and has paid a dividend for over 30 years.

Before we get into the specific results, I want to highlight our financial position. We are currently in a net cash position, even during our peak season for funding working capital. And our $300 million credit facility is largely unused, giving us flexibility to evaluate almost any strategic opportunity.

Now, on to the second quarter specifics. Sales for the quarter were $405 million, down 21%. Equipment sales declined only 15%, while other HVAC products declined 28%. And our refrigeration business declined 15% during the quarter.

The commodity product impact, as well as the weak Western markets, about 21% of our total sales, represented about 44% of the Company's quarter sales decline. Let me put that another way. It represents -- both issues, the commodity prices as well as the very weak Western markets, represented 21% of the total sales. And that in turn accounted for 44% of the quarter's sales decline and cost us in earnings per share $0.28 for the quarter.

Gross profit was $101 million and gross profit margin was 24.9%. There are some pluses and minuses in gross margin this quarter. First, selling margins for air conditioning equipment were up 10 basis points in a very difficult market environment. This speaks to the improving mix towards higher efficiency units.

The impact from commodity-based products cost us 53 basis points. This impact is expected to diminish during the second half of 2009.

Changes in sales mix were more pronounced this quarter. Equipment sales have a lower margin when compared to our non-equipment products, and during the quarter there was a greater movement of our sales mix towards equipment products. This shift accounts for 19 basis points of gross margin.

SG&A was down 17% on an adjusted basis, an improving trend over the last quarter. SG&A reflects the continued result of our cost reductions in response to the top line pressure and is down over $32 million over the last 12 months. This is in line with our profit enhancement targets set during the first half of 2008.

We continue to focus on cost disciplines and we estimate SG&A savings this year for our base Watsco locations, that is to say without the joint venture, to be in the range of $35 million to $45 million.

Operating profit as an adjusted -- on an adjusted basis was $27.4 million on operating margins of 6.8%.

Earnings per share on an adjusted basis was $0.61 for the quarter and net income was $16 million. Adjustments to earnings per share are discussed in our press release.

Now, for the six month period ended in June. Sales were $696 million, a 22% decline. Equipment sales decreased 18%. Other HVAC products declined 27% and our refrigeration business declined 16%.

Gross profit was $175 million and gross profit margin was 25.2%. Gross profit margin is flat for the year, excluding the impact of the commodity-based products.

SG&A declined 14% on an adjusted basis and operating profit was $26 million on operating margins of 3.7%. That's 3.7%.

Interest expense declined 32% on 51% lower average daily borrowings.

Operating cash flow so far this year was $28 million, exceeding our net income.

Debt ended the quarter at $20 million. That's our fixed long-term debt, which is all the debt we have. And the debt to total cap ratio of 4%. As I mentioned earlier, we are in a net cash position and we are able to evaluate almost any investment opportunity.

We are going to defer our earnings outlook for 2009. Trends have improved somewhat, but I believe they have higher -- and I believe we will have higher earnings per share in the third quarter versus the second quarter.

We also want to get a better sense of Carrier Enterprise's effect on our results. Our expectation is that Carrier Enterprise will lag between $500 million to $550 million of revenues in the last half of the year.

As a -- I should say -- let me start that again. An amended 8-K filing is scheduled in September that will show disclosures related to Carrier Enterprise's historical performance. I know everyone wants that analysis, but we will wait until the data is public to have those discussions.

We want you to note that we are planning an Investor and Analyst Day in early November. I think we've picked November 5th. And we'll have key managers, including Carrier Enterprise's senior team in attendance. This will be a great opportunity to communicate the opportunities we see looking forward beyond 2009.

With that, Barry, Paul and I will answer your questions.

(Operator Instructions.) And our first question comes from Michael Cox. Your line is open.

Good morning. Congratulations on the quarter, guys.

Thank you.

My first question is on the West Coast operations. I was wondering if you could give a little more detail of what is being done or what can be done to improve the performance there relative to your expectations.

Barry?

Michael, how are you? Good morning. Well first, it is a general market condition, first of all, in terms of looking at the overall market, knowing competitors and listening to feedback. So, it's just simply a market that is more acute than others. And for us, when we speak about the West, just to put it in context, it is California, Arizona, Nevada are the three states.

So, a combination of factors. First is reducing costs further, which is happening; reducing costs more acutely also than the rest of the Watsco markets. Secondly is to get the vendors more excited, more definite in terms of providing programs and something of a catalyst for the market in terms of getting some market share. So, that's something that is probably again going on a little more intensely than typically.

And -- but primarily, Mike, it's trying to retain the gross profit margin in a tough environment, which they're doing; trying to reduce costs proportionately; and again, getting vendors to be more active in terms of getting share and helping us get share in the marketplace.

Okay. That's helpful. I know you're early on the integration here of Carrier, but I was wondering if you could provide any sort of ballpark figures for charges that you might expect in terms of either restructuring or severance or something of that nature in the second half of the year.

Well, the nature of the charges will be really transaction costs, Mike. There's really nothing that we presently see in terms of needing to reorganize or reshuffle the Carrier Enterprise network. It's something that's been in place. It is in place.

We mentioned during the call that really the next six months, closing out this year, is really a transition program that migrates them to an independent entity and us the primary activities. The rest really is transaction costs, which we'll detail, again, once they're all accumulated and something we'll make public with all the other historical information.

Okay. That's helpful. And my last question is on -- just looking historically from an earnings progression standpoint, so about half your profits have been generated in the first half of the year. As we're trying to, I guess, look at a bit of a framework for full-year earnings here, and you commented third quarter will be a little bit above the second quarter. Should we be thinking of the full year breaking out similar to what we've seen historically, where about half the earnings -- and again, this is all ex-Carrier, should be about half the back half and half front half?

Well, indirectly you're asking us to give some guidance, Mike, which we'd rather not do.

That was good, Mike.

What we can see --.

Yes, these markets are pretty volatile and I would hesitate to say more than what we've said.

Okay. That's fair. Thanks, Al.

Yes.

That's it.

Okay. Our next question comes from Matt Duncan. Your line is open.

Justin, you need to state what the organization is they're with.

I'm sorry. The organization is Stephens.

Yes.

Good morning, guys.

No, I knew that but I wanted everybody else to know that. Hi.

Hey, guys. So Al, you made a comment about the July business. I just wondered if you could give us a little bit more detail. Is July, in terms of sales change, is it tracking similar to what you saw in the first half of the year or is the rate of decline kind of lessening?

Yes. It's the later -- the latter, I should say. The rate of decline is improving. I mean, we started -- at the worst time we were down 25% on comps then it went to 20%, and now it's coming in below that, probably in the -- it's very early, but I would say in the 15% rate of decline.

Okay. That's very helpful. Thank you for that. If you look at your sales in the quarter, and kind of look at it from a replacement versus new construction perspective, can you give us any color how much you think your sales for new construction were down versus replacements?

Barry?

Yes, Matt, I can give you a sense for that. It's -- the new construction's down about 35% to 40% during the quarter. And if we impute that into replacement for the quarter, it's about in the 10% range.

Okay. That's helpful. I appreciate that. Looking at sort of the mix of equipment, 14 SEER and above. And then also, if you look at 410A versus R22, how are those both tracking right now?

Well, that's the underlying story that actually we feel great about. The -- above 13 SEER products, 14 SEER and above, is now about 26% of our unitary equipment sales. And that overall category is up about 25% year-over-year.

This is a huge long-term positive for the Company.

Sure. How much of that right now do you think is being driven by the Federal Tax Credit for 16 SEER and above? Is that certainly part of it, you believe?

It's part of it, but it's only -- right now it's a small part of it because 16 SEER is still a pretty exclusive category of product. There are a lot of utility rebates that begin at 14 SEER. A lot of the 410 products, 410A new products, if you want them you have to buy them in 14 SEER and above category. And it's just something the contractor also wants to have something new to sell. So, much of that category is growing. It's not just 16 SEER driving it. That's probably only a small piece.

Okay. Then the last two things, just a couple of housekeeping items then I'll jump back in the queue. What was depreciation and amortization in the quarter? And then, also, share count for the quarter on a diluted basis and how much did the accounting change add to share count?

Okay. Well, that's about 9 questions in 15 words. Depreciation for the quarter -- well, it's really for the first half of the year is $3.4 million. So, I'll ask you to do the math into the quarter, Matt.

Okay.

On the share count, what I may do is just give this information to each of you rather than recite in a -- in the conference call.

Okay.

Just a small -- it's a small table that reconciles it.

Okay.

And I'll -- it's something I'll post on the -- on our website so it's there.

Okay. Thanks.

Okay. Our next question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is open.

Hi, guys.

Hi, Jeff.

Yes. Just wanted to kind of go through the -- just help me understand the disparity between the non-equipment and the equipment. And as you look at the July trend, are you seeing kind of improvement on both equipment or non-equipment or is it -- how's that fleshing out?

Well, the commodities that we spoke about earlier have a large impact on that question. And commodity prices have firmed. So, that's why we've stated that we believe that, through the end of the year, whatever impact it had will start to wash out or almost be washed out. That's a big part of that. And of course, just to a lesser extent, the non-equipment goes into new construction and that's why that's soft.

Okay. And then I know you don't want to give formal guidance on Carrier, but if you just take what you think the business is going to do and you don't count on any -- if you just take the math of what the business pulls in, excluding transaction costs offset by the shares issued, I mean, is it out of the gate accretive, dilutive, neutral? I mean, can you just at least directionally give us a sense of --.

Barry, are you prepared for that?

Sure. Jeff, I mean again, transaction costs, if they're excluded from the equation, we see some accretion this year in the plan. And 2010, again, will be a plan developed for next year later this year. I can't speak to 2010. But yes, we do see some accretion in their plan for -- relative to the shares that have been issued, if we exclude the transaction costs.

Okay. And then just quantitatively, with the deal having been closed and you having spent some time, where are you seeing some clear opportunities from a synergy standpoint or where they could be more efficient?

Well, I think first the -- it's a sales growth opportunity is our first priority and that's -- again, we've spoken a lot about it. Carrier's spoken about it in terms of having a more well-rounded offering in all locations to serve customers with every day. It's a sales opportunity, as we've talked about even this quarter. The gross profit margin on that side of the business is higher. So, it's both sales and margin opportunity, first and foremost. And then that traffic --.

You're talking about the non-equipment addition.

Right. It's traffic created by selling those non-equipment products also brings in more customers to buy equipment as well. It's really a nice spiral in terms of what can happen to what we see in these locations. We've had additional meetings. We've had vendor excitement. We've had a lot of momentum going. It's something that has to play itself out over the next several months. But that's the number one opportunity that we see.

Synergy. We don't really use that word. It's really a matter of having their team examine Watsco's business units that have considerably higher margins. There are 50 things that Watsco companies do that they do. It'll be a chance to compare and contrast and, frankly, save money. And again, those opportunities have to play out over the next several months. And that's part of our planning going into next year is to start to prioritize those. And as I've said, the transition process itself also has to occur and, in that process, there'll be some cost savings as well.

Okay. And then just getting back to the 2Q to 3Q trend, any notable change in that Western US dynamic as you move into the third quarter? And how much do you think weather's really -- I know California's been abnormally cool. How much is weather kind of playing into that versus just economic weakness in your mind?

Well, I think it's been weak all year with or without weather. So, I think it is just simply a market condition, Jeff, more so than --. The weather's probably an irritant at this point. Fundamentally, it's been probably the weakest market economy that we've seen.

Okay. Thanks.

Jeff, on your other point, your first question, just to give some data around it, if I take the 28% and examine it for the commodity versus non-commodity type products, the 28%, 20% of that decline is just in those three product categories. The commodity price category. The rest of it, non-equipment is down 8%. So, it really is the falling knives with these few product lines. And we think, again, that much of that pain is behind us.

Our next question comes from Ian Zaffino of Oppenheimer & Company. Your line is open.

Good morning.

Good morning. Thanks a lot. I just wanted to talk to you -- I think there was a comment that third quarter EPS would be higher than second quarter. Is that just a function of Carrier or is that a function of underlying demand?

No. Our comment is we believe -- it's very early in the third quarter and we're just seeing a lower rate of sales decline. And we are hoping to exceed earnings per share of the second quarter without any impact of Carrier.

Okay. And that --.

The Carrier joint venture, I should say.

And that'll be from a seasonal impact or just underlying demand impact?

Just underlying demand.

Okay. Alright. That sounds pretty good. Thanks a lot.

Our next question comes from David Manthey of Robert W. Baird. Your line is open.

Good morning, David.

Hi. Good morning. Al, to follow onto that last comment you just made, the year-to-year comparisons are getting easier. But if you're saying that the absolute level of earnings is expected to be -- or hoped to be higher in the third quarter versus the second, that would imply that either costs are lower or revenues are higher or both. When you look at dollar trends in sales, are you seeing those improve or are we just talking about year-to-year comparisons?

No. Year to year. Well, in the sense -- we generally -- our history is that earnings per share in the second quarter more or less equal earnings per share in the third quarter. And we believe that the third quarter -- I mean, this is so early. This is just conversation for now. It's not a forecast. That earnings per share will -- could be higher in the third quarter rather than just be equal to the second quarter. And that's just fundamentally all the things that we're doing on the revenue and the cost side. I mean, I'm basing that primarily on the basis that the rate of decline of revenues is now smaller.

Got it. Okay. And then quickly on Carrier. When you talk about selling more non-equipment products, it sounds like it's a fairly low-hanging fruit situation.

Yes. We would agree with that.

I'm wondering, historically, why Carrier didn't sell more. Was it an incentive issue? Was it availability --?

No.

Why didn't it sell more?

I don't want to answer for them, for Carrier, but I can perhaps add to the knowledge that you have by reporting to you what we -- the feedback we're getting from the managers of the joint venture, the people that run the regions. And not only are they highly skilled, they're highly motivated to get into this business because they know that customers will enjoy the benefits of having them provide more of what they need, not just the equipment side. Carrier was in the non-equipment side, but not to the extent that we can (inaudible).

So, the enthusiasm we're getting from the leadership at the joint venture is just very satisfying. And the vendor reaction, because many of the vendors at the Carrier joint -- the Carrier people have not been using are now available through our good offices.

I mean, there's just no -- nothing but good news in this area of non-equipment assisting the joint venture to sell -- not only to create more revenue and earnings, but also to sell more Carrier equipment. It's just a convenience factor that contractors enjoy. We've learned that throughout the years before we got into the joint venture. That's one of the reasons we've performed so well over the years, we offer everything. Or try to offer everything the contractor needs in one location.

Okay. Thanks. And then the last question relates to the costs that have been taken out here. And what I'm wondering is, can you talk about fixed costs that have been removed versus variable costs that are just flexing down with the lower volumes? And the main reason for the question is, when I look back historically over more than a decade, it's hard to find a quarter or a second quarter where SG&A is lower than the first quarter. And so, I think it's speaks to the work that you've done. But could you talk about the fixed cost part of the equation?

Well, I'm going to let Barry answer most of that, but let me start off by our philosophy. And I repeat this as often as I can. We don't consider in distribution to have any fixed costs. The first thing people say is, well, you have leases. Yes, but when you have markets like this, you go to the leaseholder and you say we need your assistance. And even though we have a lease that says the rate should be this, we want a rate that's lower. Sometimes they'll provide it and sometimes they won't, but at least we're there asking. So -- and payroll of course if a flexible cost.

So, I don't know of any fixed cost. We don't like to think in terms of fixed costs. We like to think in terms of costs that go up and down with our business. Which is rather unique and it's also a cultural thing, which I'm trying to get throughout the entire organization. I think we're doing that with some success.

Does that make sense, what I just said to you?

It does. It does, yes. But as it relates to then the costs that have come out here with your new business plans, as all the division heads are thinking about it, are we talking primarily those things? I mean, I'm sure there's a million things, but it's labor, it's --.

Well, labor and lease is -- and lease expense are the two largest costs in our distribution business. The biggest buckets. But there are a series of other things, but these are the two that make the biggest impact. And this is -- we govern ourselves primarily locally. And when local leadership sees the trends that are going on in revenues, first, they're motivated to -- let me get rid of this -- they're motivated to do something about the revenue and gain some share.

In addition to that, they're motivated to be more efficient, which causes them to look at the labor costs. And as I said, these lease costs are passed on to the divisions who then -- or to the subsidiary who then contact landlords and try to work something out. And then the branch managers, all the way through the regional managers, are all focused on trying to maintain margins and trying to gain share to offset some of this industry loss.

So, it's -- I think that the key to our success is the local empowerment. We just ask people to react to what they see with their own eyes. And as a result, you see this sort of an SG&A drop. And you're very -- it's a very good point, that's unheard of to drop from a slow quarter to -- as you move into your seasonally larger quarter, but that's why it happens.

Alright.

It's the way we -- the culture that we have here.

Great. Alright. Thanks, Al.

you bet.

Our next question comes from Keith Hughes of [Sentra]. Your line is open.

Yes. You had talked earlier about going into the transition period with Carrier. What kind of things will you be working on the next six months in the transition?

Go ahead, Barry.

The -- some of the fundamental systems, Keith, are borrowed from UT and Carrier, payroll system, HR system, IT system. Basically, the back office is embedded and has always operated with some measure of entanglement with Carrier and UT. So, part of the program is to simply maintain the continuity of that so that customers and employees see an invisible transition at the closing date. And it gives us time to gradually bring together those systems independent of Carrier and UT.

So, what I've just said in 60 seconds has taken an immense amount of planning and an immense amount of work to go through. And it's been worked on now for about the last two months prior to close and is being carried out now and will take until the rest of the year.

Again, the key thing for us was to keep continuity, to keep some measure of invisibility to the process. And time and careful planning is playing out now.

Is it going to work such that you, as you said, get the back office stuff done by the end of this calendar year and then go on to more strategic things in 2010?

Well, the strategic part of the merchandising and product and that type of planning is going on at the same time. It's really almost a different part of the organization that can imagine and think and dream about those type of opportunities. Again, prioritizing them, get the inventory in place, getting the salesmanship in place. Getting the merchants in place that buy it and restock it also has to take place.

So, that's going on simultaneously, Keith. We're not -- there's no one waiting around for that. That's really two separate teams, essentially, that are working on that type of a process.

Alright. Thanks.

Okay. Our next question comes from David Cohen of Midwood Capital. Your line is open.

Thanks. My question's been answered.

Okay. Thank you. Our next question comes from Jeff Germanotta of William Blair. Your line is open.

Germanotto. Germanotta. They killed your name, Jeff.

Yes. Well, I'm used to that. Just a -- most of my questions have been answered, too, but I have just a couple quickies. Al, you just closed the biggest transaction in Watsco's history, yet you have a great balance sheet, great cash flow, plenty of bank availability. That would signal that you're still on the hunt for other opportunities.

Oh, you bet we are. It's funny you should state that because, in my mind, the way I think is the longer this industry drives along and doesn't perform, I mean, this is the first time this has ever happened over this long a period of time, the more opportunity we're going to get. And I'm so happy that we have the balance sheet, the financial strength to deal with any size transaction.

So the good news is, when markets go bad this long, Watsco can make some tremendous investments, starting with the joint venture with Carrier. It gives you a feel for how we -- what I'm thinking about. And I'm looking -- we're looking for and are ready for bigger thing. Not necessarily bigger than a joint venture, but big transactions. And we certainly can afford them. So, I don't close my eyes to investments at all. We do what we can with the markets that we have, but this is the time to make investments.

And just one more kind of follow-up to the Carrier transaction. You had $1.1 million of transaction costs in this past quarter. I'm inferring from some things Barry said you might have a little bit more. Are they -- could they be of comparable magnitude? Do you have any sense of what we might see in transaction costs in the third or fourth quarter?

I'd like to make a pitch here for a minute. When we were first in contact with United Technologies about this transaction, we interviewed several investment bankers and they each wanted -- interestingly enough, they each asked for the same fee, a contingency fee to do this and it was $5 million. So, we -- I turned instead to our own Barry Logan, who had no fee. And these are legal fees and accounting fees in the $1.1 million. And the question is, what else is there left, Barry? Do you know?

Well, there --.

Or do you have a feel for it?

Yes. There are bank fees related to an amendment that was needed to provide for the transaction. And there are some fees that we're paying for the software licensing that has to transfer. We wanted to keep the same software, keep continuity, but there's a charge related to that that will come --.

What magnitude would you guess? In aggregate. And be conservative. Whatever you think it is, add something to it.

In the $5 million range.

Another $5 million.

So there's another $5 million to come in the second half of this year?

Yes.

Okay.

Some of which are joint venture expenses because they're tied to the joint venture. Most of what we've booked relates to the Watsco transaction, the Watsco side of the transaction and executing the transaction.

But those will be $5 million of non-recurring items flowing --.

Oh, yes.

Flowing through the income statement in the second half of this year.

Yes. Did I speak too fast, Barry? Would you agree with that?

Yes.

Yes.

Well, thanks, fellows. We look forward to hearing great things from the core business, as well as the new business.

Thanks.

Okay. Our next question comes from Matt Duncan of Stephens. Your line is open.

Hi, Matt.

Hey, guys. Just a quick follow-up. I'm wondering if you can help us with the seasonality at Carrier Enterprise. I guess with an 80/20 split on the equipment side, it's going to be even more pronounced than the base Watsco business in the second and third quarters. But maybe help us a little bit with how that's going to look from what you know so far.

Paul, we haven't heard from you. You want to take that on?

Sure. I think from a seasonality standpoint, they're going to probably mirror Watsco in a lot of ways with the new construction being behind us as far as both at Watsco as well as Carrier. They basically have an overlapping footprint in the majority of the original Watsco. So, I don't see a material difference.

Paul, does the higher piece of equipment not make it even a little bit more second and 3Q strong, given that that's when most equipment's being sold?

In the case of Carrier, I think what we're going to find is we're going to have a higher percentage of the high-efficiency equipment. At least that's our hope right now. We haven't been able to sit down and make sure that the management team is ready with that, but it's a premium brand of equipment which should have a higher balance of high-efficiency sales to it, especially as we get into the third quarter.

Matt, what we're going to do is, again, our 8-K is going to have -- and circle financials for years and quarters, and there'll be a very specific set of data that we'll be providing to kind of show not just revenue seasonality, but earnings seasonality as well. So, I would love to email that out to everybody, but it's something we'd rather have made public when it's public for everyone.

Okay. I appreciate it. Thanks, guys. That's it.

Just to add something you didn't ask, but the Carrier seasonality I believe has brought them to a loss in the fourth quarter traditionally. Is that not true, Paul?

That's right.

Yes. And that's a big opportunity for us because when I first started doing this with distribution, we used to have that same experience. And we developed the revenues and the efficiencies to the point where fourth quarter was a profit. So for -- the way I think about things, that's a big opportunity for us, is to change that seasonality of the joint venture so it's profitable and not a loss.

Okay. That's helpful.

I don't know if we do it in '09, but certainly we're going to do it as time goes on.

Our next question comes from Bill Gresh of JPMorgan. Your line is open.

Hi, Bill.

Hey, it's Phil Gresh. How you guys doing?

Oh, yes.

So, just I guess a little bit more specifically on the non-equipment products at Carrier. I mean, maybe this is for Paul as well, but how are the negotiations proceeding there or how quickly do you think some of those products actually get in the store? Is that something that happens in the third quarter or is that -- how does that rollout kind of happen in your view now that you've had a little bit of time to dig into it?

It's going to happen in the third quarter. And what we've done is we've met with each one of the business units --.

Now Paul, don't raise too much of these expectations. Be careful.

Okay. We met with these business units and what we're asking them is to --.

You're talking about the Carrier business here.

The Carrier business units, to find out what types of products that they would like to have and what type of products would work in their particular marketplaces. And we're going through that process and we've been bringing in the various manufacturers and vendors who supply those products and have them sit down and meet with the Carrier teams to determine what the rollout schedule would be. So, that process has been underway for the entire month of July.

But I think -- given them of the spirit for it, I think --.

It's wonderful. The spirit of the Carrier management team has just been incredible. They are anxious to get going. I think they want to go faster than anybody in this area and that's what's really been exciting, is to see them grab hold of it and are asking for things from the Watsco team, as well as some of the Watsco subsidiaries who are lending a hand as far as getting involved in the process.

Got you. So this company --.

I'm missing a meeting right now with one of our vendors out in West Miami, where they're sitting down and having their conversations with the export group.

That came with Carrier. Yes.

So, is this something that you think will be rolled out to kind of all locations with a small subset of products, or is it some of the locations with some products. I mean, how are you thinking about that?

That would be -- that's going to be driven by the Carrier management group, how they -- how fast they can roll them out and in how many locations.

Our management system is that we provide the opportunities to the leadership of the subsidiaries and they have to see what suits them to their market and to their organization. And that's why Paul is saying that we cannot give you a for sure that it'll be everywhere and to what extent it'll penetrate. It depends on the local conditions and the decisions made by the local management. We provide a lot of flexibility there. There's no way we edict to branches what they must or must not sell. That's just not in our thought process.

Other than --.

They must sell Carrier equipment, that's a mandate to the joint venture.

Right. Okay. Thanks for the additional color on that.

Yes. You're welcome.

I just wanted say a lot of the questions that are anxiously being asked can be more answered when we have our Investor Analyst Day. That's why I put it on the calendar to give everyone a better sense 90 days into this versus 23 days into this, just what the momentum is and what the progress is.

I really do hope that all of you will come. November 5th. And the leadership of Carrier will be -- of the joint venture will be here for that. You'll gauge the enthusiasm yourselves.

Anyone else?

Yes. I'm going to apologize in advance if I mispronounce your name. The next question comes from Karthik Srinivasan of Giovine Capital. Your line is open.

Good morning.

Good morning.

I just had a question just on this SG&A reduction that took place in Q2 versus Q1. I know you guys talked about it, at least in at a general level, but just on the labor side, what kind of cost reductions are you guys driving in the business? Is it headcount related? Are you cutting back on commissions to your salespeople? Can you just give us some -- I guess a better understanding of what's transpiring on that expense item?

I can answer. The -- first there is -- there are headcount reductions, but that's not the end-all and be-all for this. There's a lot of compensation in our company that's tied to simple performance. We don't cut commissions. Commissions conform themselves to whatever the sales and gross profit generation are. So, some of the reduction are dollar-for-dollar and variable expenses. Incentive compensation would be very similar. But all branch managers, for instance, get paid based on performance of their branch and that incentive compensation adjusts itself also.

In terms of rates of pay, there have been some changes to salary, some changes to number of hours worked and that type of thing, just the blocking and tackling that's going along with the environment. But over the last two years, if you forget just the last quarter, if you look at the last two years, most of the SG&A reductions have really been, as Al said, getting as many costs to be variable as possible and maintaining --.

All of them, Barry. All of them are variable.

And maintaining that discipline throughout this environment.

Yes.

There's nothing been -- there's not been any kind of massive decision making. Again, this is something that's really happened at the grassroots local level; not a restructuring, not a layoff, not a broad-based program; something that happens in the field branch by branch.

We're still only 16 at headquarters.

But is the incentive compensation reduction, is that a permanent decisions or --?

No. That's all performance based.

Okay. And those performance targets change on an annual basis? Quarterly basis?

Well, the subsidiaries do their own performance-based systems for their branch managers or salesmen and whoever they feel should be in an incentive system. We incentivize the leaders of the subsidiaries and we do that annually. And it's all based on growth.

Alright. Thanks.

So, if there's no growth, obviously there's no incentive.

Okay. And sir, at this time I show no further questions.

Well, terrific. We look forward to seeing you on November 5th, as many of you as can come. And we'll have a much better picture for you how the joint venture is developing. Thanks for attending. Bye-bye.

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