Watsco Inc (WSO) 2010 Q1 法說會逐字稿

Good morning, my name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to the first-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Albert Nahmad, you may begin your conference.

Good morning, everyone. Sorry about that delay, the call operator couldn't get it straight. But we are going to talk about our first quarter of 2010.

My name is Albert Nahmad. I am the CEO and with me is Barry Logan, Senior Vice President, and Paul Johnston, who is the Vice President.

As always first let me provide 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.

Now on to the quarter. We delivered strong earnings growth and higher margins in the first quarter despite destructing weather conditions in certain of our markets. Sales trends improved, selling margins increased, SG&A was lower and as a result operating margins expanded by over 200 basis points.

Sales increased to 75% to a record $510 million. This includes $226 million added by the Carrier Enterprises locations. Same-store sales were down 3%. Now that includes a 5% increase in HVAC equipment and it also includes an 11% decline in other HVAC products and a 1% decline in commercial refrigeration products. So obviously the business is stabilizing and the sense of it is that the worst is over.

Gross profits increased 65% to a record $123 million. Gross margins was 24.1% versus 25.5% in 2009 reflecting the lower margins at Carrier Enterprises. On the other hand, if you look at the same-store gross margins they improved 50 basis points to 26.1%. So on a same-store basis we are now traveling at a record level, we have never had the 26.1% level before in gross margins.

SG&A day expenses increased 50% to $114 million and as a percentage of sales declined 22.3% versus 26% in the prior year. Now same-store SG&A declined 8% versus a year ago. The 8% decrease in SG&A in comparison to the third -- sorry, let me do that again. The 8% decrease in SG&A day in comparison to the 3% decline in same-store sales is a testament to the profit enhancement initiatives we have implemented without sacrificing our high customer service levels.

I want to talk to about Carrier Enterprises here for a few minutes. As for Carrier Enterprises sales were flat compared to the prior year on a pro forma basis. You will see some of this information attached to the press release.

There was sales growth in residential equipment and [non-equipment products] which are offset by a decline in commercial [sales], sales of commercial products. Carrier Enterprises' gross margins improved 200 basis points and SG&A declined 8% leading to an EBIT of $4.2 million -- this is in the first quarter now -- versus a loss in the first quarter of $4 million last year. Now that is a profit swing of over $8 million over the last year.

Carrier Enterprises, to sum up, added approximately $0.03 to Watsco's earnings per share in the quarter. So as you can tell Carrier Enterprises is very much improving, not only its revenues but improving its margins and its profits.

Watsco's consolidating operating income was 8.9 -- Watsco's consolidated operating income was $8.9 million in the first quarter versus an operating loss last year of $1.6 million. Diluted earnings per share was $0.13 on an adjusted basis or $0.10 on a GAAP basis compared with an EPS loss of -- that is a loss of $0.07 on a GAAP basis last year.

A reconciliation of adjusted earnings per share to GAAP EPS is included in the table of the press release.

Cash flow used in operations was $6 million reflecting inventory added for the upcoming selling season. Debt was $47 million and cash on hand was $74 million and our debt to cap ratio is only 6%.

A reminder that we raised our quarterly dividend 8% in April to $0.52 per share for the quarter. This will be our ninth consecutive year of raising dividends to shareholders.

One of the trends we have discussed in recent calls is the movement toward higher efficiency, environmentally sensitive HVAC systems. We have experienced over 60% growth in 14 SEER and above products over the last two quarters. That is a wonderful trend and I just don't see anything stopping that for years to come.

Tax credits have helped the equation but consumer awareness, enhanced selling skills by our contractors -- they are getting smarter about this -- utility rebates, and various OEM-sponsored incentives as well as the payback offered by lower energy bills are also factors contributing to this growth. And given that air conditioning and heating systems are the biggest user of energy in the home, of which there are over 110 million homes in the United States that use these systems, we are confident our products will be relevant and vital to the energy conservation efforts throughout our market in the years to come.

Suffice it to say we are excited that we are the largest player in this industry and can greatly benefit from all these opportunities mentioned above.

As for acquisitions, on April 1 we completed the acquisition of the Bill Voorhees Company, a company with revenues last year of $14 million. We still are looking for investments. Obviously we could have handled much bigger investments and in a position -- probably the only ones in the industry that can do any transaction of any size.

In terms of our outlook, we expect strong earnings can be achieved in 2010. We are going to be cautious about giving specific guidance because this is just the first month and always the lowest seasonal month. We are going to provide guidance after we have better visibility into the replacement market, but I must tell you we are very encouraged by what I see in April.

Strong revenue growth in April and I hope that sustains itself from this point on. I think in the first quarter, as I mentioned, in the prior conference call we saw some ups and we saw some downs and you saw the result. But in April it's very strong growth and we are hoping that continues.

With that we will be happy to answer questions.

(Operator Instructions) Matt Duncan.

The first question I have got is when you look at the 11% decline in the other HVAC, the parts and supplies business for the organic piece of the business, how much of that do you think is due to construction being down and the heavy use of those products in construction versus the impact of weather in the quarter and the ability for your contractor customers to get to their customers to perform work?

Very good question. Paul?

I think it's a combination, Matt. First of all, Happy Earth Day to everybody. Today is Earth Day so that is a good day for Watsco.

But when you look at the dynamics of the 11% decline I would say it's probably a mixed bag between new construction continuing not to recover. As you know, there is about a 60- to 90-day lag between a permit and actually seeing delivery of a lot of the products that we would sell into a home.

Another factor though that is impacting the other sales is the commercial business. Our refrigeration markets are recovering but one part of our refrigeration market which isn't recovering is some of the supply parts and supply components that go into building a new supermarket. So I would say it's probably 50/50 between new construction related and also the commercial aspect of what Watsco does sell into.

Okay, that is helpful. And then I don't know, guys, is there anyway you can quantify the impact that you think the adverse weather conditions had on your sales and earnings for the quarter?

I don't think so, Matt. In that first quarter -- don't forget we are sensitive to almost anything because it's our low point in the year. Generally, weather wouldn't have any kind of an impact like this when we are in a normal quarter, but suffice it to say certain markets, large markets, had different weather patterns.

But I wouldn't pay much attention to weather in the first quarter. It's not going to be a factor throughout the rest of the year unless it really changes materially in major markets and I don't expect that.

Sure, okay. And then just a point of clarification on the EPS adjustment, the $0.03 adjustment. Is this the same accounting adjustment that you guys were adjusting for last year?

Barry?

Yes, it is, Matt. The last year's first quarter as reported was $0.04 and restated for the new accounting it was a loss of $0.07.

Okay. So do we need to keep adjusting going forward then or since it's anniversaried, since we are now comparable to the year before, do we need to stop adjusting this out of our estimates?

I think the first quarter this year is the last time we will see a reconciliation. The accounting was fully implemented in the second quarter last year and it's in last year's second-quarter numbers.

Okay, perfect. That is very helpful. The last thing I have got before I will jump back here is with regard to Carrier Enterprise. I know this may still be a little bit of a difficult question to answer in terms of expected cost savings since you have gotten some vendor contracts there from before you guys bought them that may not have run up yet.

But in terms of the actions that you have taken so far and the things that you can quantify, do you have a feel at this point, Barry, for what your annualized cost savings may be from those actions?

There are two costs in the business. Cost of sales is in the gross profit line, obviously, and Carrier Enterprise has shown an expensive expansion of gross profit, especially since those programs did take effect, the inventory is turning, and as inventory turns that profitability flows through the business. So we are seeing that after nine months and it's a very good progression.

It's not something we would rather give out in terms of data but a lot of progress has been made in a short period of time.

The SG&A is the second bucket obviously. As we said, their SG&A is down year-over-year. I would say that is not reflecting yet the full picture of what can be saved in terms of the transition program that has been implemented to move away from the Carrier [UT] integrated platform per se. That work is ongoing and it will reflect itself really more so in the second half of the year and into next year.

Okay. Thanks, that is helpful. Appreciate the color.

Ian Zaffino.

Hi, good morning. I found it interesting in the comment about looking for additional acquisitions. Is this going to be kind of a return to smaller deals or you set the bar pretty high with Carrier so what are the thoughts there?

No, we, fortunately, have the financial strength to do any size deal. This just happened to be one that was a natural fit for one of our subsidiaries and we were able to do it quickly. But I think your point and ours as well is the bigger, the better.

And as I say we are the only ones that can do sizable transactions in this industry today and our wish will always be to do those large deals.

Okay. But if you look at your pipeline is the pipeline just primarily small ones or are there any elephants out there?

Certainly they are both elephants. And what did you call the second ones?

Smaller ones, I guess. Minnows?

Small elephants, yes. Every transaction that we do, by the way, adds to the network and adds to the overall goal of having the largest and most efficient, well-servicing network to the HVAC contractors.

Okay. All right, thank you very much.

Keith Hughes.

As you look at your business here in April and at the end of March were you starting to see the accessories business start to head towards what you are seeing on the equipment businesses? Is the gap narrowing?

Paul, do you want to take that?

Yes, I think we have seen that. It's a little too early to tell exactly what that is going to be.

The magnitude of new construction really is what hits. If you take the average new home build with one split system in it, roughly half of our sales to that home or half of the products that are sold into that one home would be non-equipment. And when you get into a straight replacement unit of an R-22 unit it's in the 10% to 15% of the value add is non-equipment to do a replacement.

As you move up to a 410 replacement, into the higher efficiency replacements, we get up to around 25% of the value-added content is non-equipment. So new construction is definitely the driver. We are going to expect to see some value relief obviously as we get into the season and start replacing 410 units and not replacing R-22 units. But it's really going to take a recovery in commercial and residential construction.

And copper inflation, is that influencing the numbers here at all?

Yes, of course.

It does.

Steel, copper, that all inflates it. But I wanted to differ a little bit with Paul in the sense that -- I mean it would be nice to have a recovery in the housing but it's not relevant to the statements I made earlier about having a terrific year.

We are sharply higher in April and that to me has very little to do with new construction. It's just all the things that you all know about the replacement and the upgrading market. It has been deferred quite a bit during this recession but we are starting to see that business recover and recover strong.

Now I don't know if we are still bouncing around the bottom, I believe we are not. I am not certain of it but I sure like what I am seeing now. We are talking about double-digit growth rates in April.

Okay. Final question, from the equipment suppliers are you starting to see price increases responding to their inputs going up?

Paul, you would know.

No, we have not seen price increases from any of the OEMs yet.

Okay, thanks a lot.

[Steve Tewsip].

How did you guys drive the accretion you did at Carrier on the lower sales base? Could you just maybe walk through how you got there?

Barry?

Sure, Steve. Well, again, there have been three big components to the strategy and the challenge of the team at Carrier Enterprises first is to make more money. That sounds very simple and basic but between incentives and performance-based mindset I think the simple challenge to pay-for-performance and focus on performance has had its benefit. That happened in the last six months of last year and it's in the numbers that we published and it's a continuation of that.

Second, becoming part of Watsco's overall purchasing environment. Not so much for every product but for the products that they are selling on the non-equipment side, we see higher margins, we see rebates, we see more profitability that is flowing into the top line and the gross profit line.

And as far as the SG&A, again, it has been mostly further blocking and tackling on their part to lower SG&A but there is more to come on that side of the business too. So it's really a combination of the three factors, Steve.

Right. So I guess when I look at that performance in the first quarter, these things -- you should be able to lever and benefit from these things in more of an accelerated way as we move forward. So when you look at the $4.2 million it's not only weak seasonally but maybe doesn't load in all the benefits you are going to get in the back half of the year. So is that --

I couldn't agree with you more. What Barry didn't mention directly is that we have a very highly motivated organization in Carrier Enterprises and they are really driven to perform. You just saw the first part of it during the low part of the season. You are going to see a heck of a lot more as the year progresses.

So if we take the $4 million of profit is that in your plans less than 10% of what you think they can do this year?

This is your model again?

I am just trying to get an idea of what is the difference between normal seasonality and actually the benefits that you are bringing to bear from a Watsco perspective on to the Carrier Enterprises business.

Barry, (multiple speakers)

Because normal seasonality for you guys is kind of like 13%, 15% of our profits in the first quarter.

I understand, Steve. No, I think if you look at the historical numbers we published for Carrier Enterprise their seasonality of earnings is far more acute, meaning the first and fourth quarters are far less, than us. They have made progress with that in the first quarter.

And as far as the rest of the year goes and then the season again I think their earnings potential is probably greater as a result.

Right, okay.

Than comparing it to Watsco historically.

It's pretty hard to quantify that, Steve. Our experience is not through a whole year yet. But I think that you will see seasonally from a dollars and points view, of course, is that the obvious higher margins, higher sales, higher everything. This organization is motivated not only to earn more money but to also gain share.

Right. So if I look at the historical operating profit of Carrier on a quarterly basis, you guys had $8 million more in profits this quarter. I guess my point is you should be doing that on a quarter-to-quarter basis over the next several quarters. That should be kind of the minimum I would think.

Well, we won't comment on the specific numbers but we do think we will be doing better quarter over quarter.

Got you.

How much better that is something we are not going to try to quantify.

The pricing and mix, those are big contributors. How much did those contribute this quarter at Watsco and Carrier? Could you maybe give a little bit of detail on that?

The only thing we specifically track, Steve, is the equipment side of our business, the unitary equipment side of our business. Just to give some comparison, in our base business units were down 3%, price index was up 8%.

Okay, got you. And then one last question, if you are not going to give guidance now what is the forum to give guidance? At what point during the season will you have the confidence that April is a little bit more than a blip?

And I guess I just want to make clear that when you are talking about April being up double-digit is that -- I am not sure how hot it has been down there. I mean is that -- that is a change in consumer you are seeing?

You are asking all the right questions but we don't have answers for this. There is a lot of volatility out there, although there is less than there used to be. So all that we can give you is our sense and our sense is that maybe the bottom is over.

But like I said in January, there was revenue growth and then in February and March there was lack of revenue growth. There was decreases in demand. But now in April, we have a very strong April and it is a sense. We have no evidence and we can't predict what May will be or June, nobody can. We just have a sense that maybe we are leaving the bottom.

Okay. But I guess my (multiple speakers)

That number is not because the volatility has been too great.

Yes, absolutely. So I guess my point is you would not plan to give guidance really until maybe the second quarter or are you not planning on giving guidance at any point this year?

We will take a look at it. If our sense proves right, we have a strong April and a strong May and June, we will consider whether now we have enough stability and some of this volatility is gone to do what we normally do. Provide the guidance that you are looking for.

Okay. Thanks a lot.

We will have to play that by ear until we see it develop.

All right, I appreciate the color. Thanks.

Jeff Hammond.

Good morning, guys. Maybe just to go at the Carrier dynamic a little bit differently, you guys -- it looks like on a pro forma basis the Carrier JV did about 3%, just under 3% margins in 2009. If you take your cost savings, what you are seeing starting to roll in in terms of better pricing, and what you think the business can do from a growth, what is a reasonable margin expectation for that business for maybe all of 2010?

What is reasonable or what would we like? We would like to achieve in year 2010 somewhere between 4% and 5% as a starter, but we are very ambitious for the following year. We would like to get to 10% in the next two or three years EBIT margin for all of the Company including Carrier Enterprises. And that should come by share gains and more efficiency and higher margins.

Okay. And then you mentioned that --

We are trying to move all of Watsco to 10% in the next couple, two, three years.

Right. And then if you look at the base gross margin, I think you said 26.1% best ever. Any nuances in there? Is that a sustainable number to think about going forward?

I hope so. Not only hope so but I hope we can even improve that. You want to comment on that either Barry or Paul?

I think where we are at right now we are seeing a lot of stability in a lot of the commodity pricing with the exception of steel. But also when we get into the other non-equipment side we are seeing -- not seeing any price dilution out there. We haven't seen erosion in pricing.

And in this environment right now I think with everybody's inventories being adjusted in the field I think we can sustain it.

Okay. Then on the copper side, because it seems like on the way down it gets squeezed, so as we get reinflation in copper are you starting to get a benefit from that reinflation?

Well, certainly but I don't want us to be thought of as a copper company. We are a company that solves the problems of the use of electricity. Half the electrical bill of -- most of these 110 million homes they use electricity and we have products that many of them are not aware of that could substantially reduce their cost of power and conserve that energy. That is what we like to think of ourselves not as a commodity house for copper.

So I don't ever think about it in that sense. Sometimes copper has an impact a little bit here and a little bit there but it's not the way we think. We think about how to penetrate those homes with higher efficiency equipment, with indoor air quality, and environmentally clean products.

We got all the stuff that people talk about as they develop the need because their machines break or because they simply want to upgrade what they already have as they get these consumer messages. That is the business we are in.

Right. I appreciate you guys aren't a copper company. I just am trying to understand the dynamics within the quarterly --

It's not a material dynamic. It's behind us. The deflation in copper occurred and it had the impact that it did, but I don't think of it as something that is going to have a material impact going forward. I think more revenues will.

Right. And as you think about -- you have really clamped down in this recession on the cost side. As you think about getting a turn are their temporary costs that we should think about coming back that maybe tempers --?

That is a great question, that is a great question. We are trying to motivate -- trying. We will motivate and are motivating all the leadership in all of our organizations that we are not going to go back to pre-recession spending levels. The reason is that we are an efficient company, can be even more efficient -- we don't think we are done with efficiency.

And if they are going to achieve this 10%, which they all believe they can. There isn't a single one of our field managers that don't think they can get to 10%. They are going to have to continuously reduce cost of doing business, and of course that means avoiding what you are talking about, is coming back and adding costs that previously were there.

That is what we have talked about in terms of the motivation. People are motivated to grow their revenues in the organization. They are motivated to grow the revenues and grow the margins. We hope, and your question is an excellent one, that that motivation will mean that they will follow the efficiency and improve the efficiency. And by the way, we are reminding them of that constantly with that message.

And I am very optimistic. I think we are going to get our 10% because people want to get it. They know how to get it over time.

Okay. And then final question on April, do you get any sense that some of the weather challenges that you experienced in the first quarter are having a positive effect in April? I am just trying to understand.

Clearly the April results are strong. Maybe what is -- is the underlying tone that things are clearly getting better or is this maybe just some ketchup in there as well?

You ask all the great questions. Barry or Paul do you want to take a guess?

It would only be a guess. I don't think anybody 20 days into the month of April really knows if it's -- I don't think it's totally weather related. It hasn't been that hot.

But the purchases of higher efficiency equipment. That is a little bit more than weather and a little bit more than normal things. People are finding out about high efficiency products. We are growing that part of our business at very high rates, extremely high rates. 60% was it, Barry?

Yes.

And that is just a trend that is beginning now. As that consumer becomes more and more aware that is going to -- it doesn't matter what the weather is. It doesn't matter what, generally speaking -- well, it matters something about discretionary income. But for the most part these are machines that are required.

I love the spreading of the idea that there are pieces of products out there that can help homeowners save money.

Great. Thanks, I will jump back in queue.

They are demonstrating that by buying at a very high growth rate these high efficiency machines. Hope we helped you, Jeff.

Scott Davis.

Thanks, good morning. Guys, just want to clarify a couple things. I mean, one, the margin that you earn on a R-410A unit is it apples to apples higher than the margin that you earn on R-22? I mean I understand you are selling more equipment so it has a revenue benefit; you have to put air handlers, change up air handlers, etc. But do you actually earn a better margin on that apples to apples?

Well, we just talked about that.

Yes, but it's not clear.

So, Paul, Paul Johnson, can you answer the question?

Yes, we have a higher margin on a replacement 410A than we do a replacement R-22.

Okay. That is helpful. Then the second thing, I know, Al, you mentioned that there really isn't anybody else out there that can do M&A like you guys. But Carrier did seemingly sell a piece of their distribution business to somebody else out there. I can't recall the name of the company, maybe it was West Coast, something out on the West Coast.

Yes.

Can you give us some color into is Carrier just concerned about having more of its distribution in your hands and wanting to diversify more fully, or was there somebody else who came at just a better offer?

I suppose you would have to ask Carrier that but I could tell you unequivocally that they liked our joint venture. I don't think they would deliberately not show us opportunities for any sort of fear. I think it's the opposite. I think they will be showing us opportunity as they develop.

The California situation has its own story that has absolutely nothing to do with our partner not wanting to expand what we are doing.

So I guess I just don't understand. I mean, what is in it for Carrier then to sell that business to somebody else and they don't have --?

Maybe they sold it to someone that is adjacent to them. That can provide economies of scale that might help. California businesses for everyone is not good and if you attach it to somebody that is already out there or adjacent to it, it might bring more economies and help the financial performance.

Okay, fair enough. Last question, what is your sense, you guys have been through regulatory changes in the past and when you think about R-410A is this something that catalyzes all the HVAC installers out there to replace versus then repair and really help you pick up unit volume in units?

Absolutely. You got it.

I had a guy even out at my own house who was trying to tell me I needed to get rid of my R-22 stuff. So is there any sense of understanding -- is this energizing the industry? Is there --

Yes.

The answer is yes.

All these mandates help the industry.

Okay. The only reason why I am questioning a little bit is it's not clear in your first-quarter numbers. And I know obviously it's seasonally weak, but it's not clear in your first-quarter numbers that you really benefited from that in any way, shape. But it sounds like you are starting to benefit from that in April. Is that a fair assessment?

Well, I think we benefit in the first quarter but from an impact point of view, yes, the second quarter will be much bigger.

But I must say to you, this is a very interesting question, philosophically, the federal mandates. I want you to understand that federal mandates, although it makes it more difficult for the factories to make them because they have to do all those changes and catch up with the federal government's mandate, on the other hand they help us because we are the ones that have to get the mandated product into the hands of the contractor who ultimately brings it to the consumer.

And all these mandates are always meant to do a couple of things. One is to improve the efficiency. In other words to use less electricity or less gas for furnaces, or in the case of refrigerant gases that they are changing. To pollute the environment less. And those are trends that were started several years ago and they are going to continue.

Every time there is a technological change we love it because we get a chance to reeducate our contractors who in turn have to reeducate the consumers. And we can tell you with certainty that there are more mandates that are coming. They are already talking about changes in refrigeration beyond the 410.

Yes, for sure.

All that is good for everybody. Nobody hurts from it other than the OEM who has to stay up with that. But from the point of view of the economy or the consumer, everybody gains from it; cleaner for the environment and user of less energy.

Plus, Scott, I think also what happens with the change in regulations it increases the consumer awareness that they have an air conditioner or a furnace in their basement and that they become more cognizant of what they are going to do. So I think that is helping us with the consumer education aspect of this.

Right.

And I would definitely recommend, Scott, that you change out your system.

I can definitely assure you that I am not changing out my system.

You have got to go to a 410.

Sorry, it's not hot enough in New York.

Oh, you are in New York. This works mostly in the south belt.

Yes, if I lived down there I would change it up.

Scott, it's Barry. I want to be very specific about the 410A being also something that has long legs to it. We are selling more systems today than we did a year ago. Meaning both components to the system, indoor and outdoor units, have to match. They only work together. They don't work with the old systems so an integrated system has to be sold as a replacement for that to occur.

And that is in the face of the change this year. Eventually R-22 refrigerant is going to be limited in such a way in a few years that basically all existing systems will be very difficult or very expensive to service or maintain at all.

R-22 system.

That is the exact sales pitch my guy was giving me. (multiple speakers) I hope it works for you.

Good luck. Thanks, guys. That is all I have.

[Kyle Omara].

Hi, good morning. I guess on the equipment side, setting aside the choppy trends that we saw in the volume base of the first four months of the year, if this is a more normal year can we expect equipment sales in the mid-single digits for the year if we are in fact seeing a recovery and things improve as we move through the selling season?

Well, of course we don't know that but I can tell you what the major compressor manufacturer says. He would concur with that number.

Okay.

Because they have teams of people that focus on this and they help to plan a lot of production. He is in the mid-single digits, but I can't give it any credibility one way or the other.

Okay, that is fair. Then just thinking about gross margins here as we move through the selling season. I guess given the [dynamics around] 410A change out and higher margin there, how should we think about going forward through the selling season and just on a relative basis to the first quarter?

(technical difficulty) positive. But have you got a more specific answer to that, Barry or Paul?

My answer would be to look at the last three or four quarters progressively for the equipment side of our business, 410A and specifically [the equipment side of our business]. As Paul mentioned there is some pull-through of additional other products.

But in the fourth quarter our equipment was up 1%, in the first quarter up 5%, and again we can read tea leaves now in April to see a [continued] progression beyond where it is. So if you look at the trends, the trends are all in a good direction.

Okay. And then finally just a housekeeping item. D&A in the quarter?

Well, it's $2.6 million.

Okay, thank you.

Matt Duncan.

Just a real quick follow-up to help with modeling here. When you look at the new construction versus replacement pieces of your business, [how do you] feel those two pieces perform year-over-year? Was replacement up despite the weather or did the weather cause it to be down?

Well, trying to tear apart the 3%, Matt, is your question. And I would say new construction or the replacement market was pretty flat, new construction would be down 1% to 2% on the commercial side, 1% to 2% of impact.

Okay. All right, that is helpful. Thank you, Barry.

Jeff Hammond.

Just a couple follow-ups here. Speaking of Earth Day, on the R-22 can you just talk about how are you guys participating in that pre-buy? How did that impact maybe the (technical difficulty) shipments and how much of a near-term blip in inventories in the channel did we see from R-22?

This is Paul. We had very little participation in R-22 build. Our companies and our management out in the field wanted to move to 410 as rapidly as they could, so as far as the R-22 inventory that we have put in place it was de minimus. And it's being sold through now and will be hopefully sold through with it before the end of the quarter so that really wasn't a big thing for us.

I think for the industry, obviously January was affected by R-22 shipments in general. Those numbers are available through HRI.

Okay. Then appreciate the long-term trend on high efficient -- and maybe, Paul, you can speak to this -- but just as we think about this tax credit I am just wondering how much of the 63% growth is this tax credit that runs through? (multiple speakers)

And as we anniversary that at the end of 2010 and maybe we don't get something following that in the near-term, is there more pressure into 2011 on that trend?

Well, it's hard to say. I agree with you that it would be nice if it gets extended and this government seems to -- I think there is another bill coming through the House now to pass some credits for insulation. It's all the same thing for homes; it's reinsulating homes. It's all the same idea to preserve and conserve energy.

So it's helpful, I agree with you, and I just can't tell you if it -- with or without it we are going to grow.

The thing that I have been watching --

These machines wear out, they have a limited life. Go ahead, Paul.

What has been unusual during this period, Jeff, is consumers aren't just buying the minimum required unit to get the tax credit they are going beyond that. We are seeing tremendous growth in the 17 SEER, 18 SEER, 20 SEER product right now, which certainly has no economic payback to it based on a pure $1,500 max tax credit.

There perhaps could be a dip, I don't know, but I am feeling -- as I watch the year progress I am going to be pretty excited to see what happens to the ultra-efficient equipment sales which were very robust in 2009.

Okay. Good color, guys.

Well, thanks very much. Anybody else?

There are no further questions in the queue at this time.

We look forward to our next quarterly session with you all. Bye-bye.

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