Watsco Inc (WSO) 2010 Q4 法說會逐字稿

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

Good morning, everyone. Welcome to our fourth quarter conference call. This is Albert Nahmad, President and CEO. With me is Barry Logan, Senior Vice President, and Paul Johnston, Vice President.

First, our 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.

Let's get started. I do like this business. Simply put, the fourth quarter was an exclamation point to what was a great year for Watsco. During the quarter we delivered record sales, expanded margins, and generated strong earnings growth and phenomenal cash flow. During the quarter and year, revenue growth was driven by sales of replacement air conditioning and heating equipment with a continued progression toward higher efficiency systems. But importantly, sales growth was driven by our ability to grow market share.

Looking at exciting industry fundamentals, there are over 74 million installed air conditioning and heating systems that are over 10 years old in the United States. That is the oldest the installed base has ever been. These systems will fail eventually and need to be replaced with new high efficiency systems. This is an outstanding opportunity for our Company, now and long term, given our size and presence in the market.

Sales of commercial products also show strong growth, reflecting improvement in overall environment -- improvement in the overall environment for capital spending and the relevance of high efficiency, environmentally conscious solutions in the market as well. Operating margins improved dramatically, both in our legacy business units, in our joint venture Carrier Enterprise. SG&A expenses were well managed, with additional selling costs being offset by reductions in other cost. Our record cash flow exceeded net income, and our balance sheet remains in pristine condition.

This morning, we issued a second press release announcing a 10% increase in our quarterly dividend rate to $0.57 per share. Dividends remain an important means of sharing our cash flow success with shareholders. We have paid dividends for over 30 years, and this marks the ninth consecutive year of increase in our dividend rate. All in all, it was a strong year which reflects the combined efforts of our people and our strong relationships with manufacturing partners. But, this is an important but, we are far from satisfied. We continue to strive to reach our stated goals of substantially growing our current 10% share. We believe we have much to go in terms of gaining of market share.

Now, the detailed performance for the fourth quarter. Revenues grew 17% to $657 million. HVAC equipment grew 23%, including 19% growth in residential split systems. Other HVAC products grew 6%. Sales of commercial refrigeration products were very strong, growing 19% in the quarter. Gross profit was 23.4%, a 30 basis point decline from last year, simply due to the stronger sales mix of HVAC equipment, which typically sell at lower gross profit margins. SG&A increased 11%, mostly due to variable costs related to higher sales. Operating income improved 47% to $22 million, and operating margins expanded 70 basis points to 3.3% during this off-season period. Diluted earnings per share increased 48% to $0.31 per share during the quarter.

Regarding full-year results, let me begin with a reminder that Carrier Enterprise is included for a full year in 2010 and for only six months in 2009. For the year, revenues grew 42% to a record $2.8 billion. Gross profit increased 40% to $673 million. SG&A grew at a slower rate, 27%, to $508 million. Operating profit more than doubled to a record $166 million, with operating margins expanding 180 basis points to 5.8%. And we do believe we're going to be improving these operating margins year after year.

On a same store basis, sales increased 11%, gross profit increased 11%, and gross profit margins expanded 30 basis points. Same store SG&A grew 2%, in contrast with the 11% increase in sales. These factors, higher sales and well-controlled SG&A, led to a 58% increase in same store operating profit and a margin expansion of 180 basis points.

Carrier Enterprise had a great year in 2010, its first full year as part of Watsco. Revenues were up double digits in 2010, and operating profit more than doubled over the same period last year. Watsco's diluted earnings per share grew 78% to $2.49 for the year. Cash flow was outstanding this year, reaching $153 million, a 73% increase. Debt remains low at $10 million long-term, and we have $126 million of cash on hand. We can consider almost any size investment and still maintain a very strong and conservative balance sheet.

I'd like to point out that during the economic uncertainties of last year, we believe there are but a few companies that have grown at our rate and consistently raised dividends which provide meaningful yields and still kept a very conservative balance sheet. As per providing an outlook for 2011, this is the slowest, most seasonal time of the year, and we plan to provide our full-year outlook later, as we get a better look at the year.

Before I answer questions -- let me do that again. Before I answer questions, a reminder of long-term fundamentals. Since air conditioning and heating accounts for more than half of the energy consumption in a typical home in the United States, Watsco is a huge player in the movement towards high efficiency, energy conservation, and greener solutions. Along with our contractor customers, we can take advantage of the opportunity by helping homeowners implement more efficient and more cost effective solutions.

As mentioned above, the installed base of air conditioning and heating units is as its all-time oldest, so there's a substantial long-term opportunity in our future. We will continue to build our network by opening locations or by making acquisitions. We believe our entrepreneurial buy and build strategy has worked well with all parties in the marketplace and has worked well for our shareholders. We certainly have the capital to invest, and we'll continue to execute on our strategy.

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

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Keith Hughes with SunTrust.

Good morning, Keith.

Thank you. A couple questions.

One, with the expiration of the tax credit, do you have any sort of feel l if there was a pull-forward of demand in the fourth quarter? And also could you tell us in terms of how much high efficiency equipment you sold in the fourth quarter as well?

Mr. Logan?

Thanks, Keith. Good morning.

First things first. The high efficiency equipment, the trend really didn't continue -- I mean, the trend really didn't change much from what we saw a year -- what would be the tax credit equipment, which is 16 SEER systems. It was about 7%, 8% of volume in both the fourth quarter and for the year, so no trend there. And again, to put it in context, 16 SEER is about 7 -- between 7% to 8% of revenue. So that really needs to be understood in answering the first question about pull-forward.

And we don't think many people wake up each morning and spend $4,000, $5,000 on a new system because a tax credit is out there. It's just not something that we expect to see. I think again, the more relevant analysis is the sales mix has improved this year, because it's a higher percentage than it has been. And as we've said all year, and we continue to do the math, and we see about a 1%, 1.5% benefit to price this year because of sales mix, but not from a pull-forward point of view.

Okay. And the margins were fantastic here in the quarter. If we looked at Carrier Enterprise alone, did it show even better margin gains than what I see in the results here for the full Company?

You're speaking to the EBIT margin, the 180 basis point EBIT margin?

Correct. Would it have been greater than that at Carrier Enterprise on a stand-alone basis?

It's both very consistent between Watsco and Carrier Enterprise -- the Watsco legacy businesses units and Carrier Enterprise.

Okay. Thank you.

Your next question comes from the line of Josh Pokrzywinski with MKM Partners.

Hi, good morning, guys.

Just to focus on the SG&A leverage here for a second. It seems like that has moved more in line with the healthier top line than I would imagine. Is that something you would expect to go forward, or are there any one-time catch-up incentive comp costs or charges associated with investing in Carrier or this [Paris] soliciting that was done in the quarter? Just anything to help us understand maybe what the run rate of SG&A looks like in 2011.

I think, Josh, if you can imagine incentive systems and the way they work, your instincts are right. In the fourth quarter, there is some incentive pay systems that were triggered that are in the SG&A numbers. And that's simply produced by closing out a year that had almost 80% EPS growth in it. And that comes from our business units and the way they incentivize branches, regions, business units, and so on. So I can tell you that that rate of change would continue if we're growing EPS in the 80% range each year but -- so that's probably unrealistic.

So I think there are some costs this quarter for incentive and commission-type programs, given the top line performance and bottom line performance for the year. And there are also some branch activities of moving and closing branches in the numbers. We choose not to dance around and have with and without, including, excluding type conversations and that's also in some of the fourth quarter numbers that you see.

Okay. And I appreciate that at this time of year, it's hard to forecast a seasonal business through 2011. But in terms of items that are under your control, are you targeting anything internally in terms of margin expansion or -- how can you help us think about maybe incremental margins through '11, just as we see volume pick up here?

Paul?

This is Paul. We're looking at some acquisition opportunities that we have on the equipment side as well as on the parts and piece side, as far as being able to reduce some of our costs, cost of goods sold.

In other words, we do believe we'll have a margin improvement again this year.

Okay. That's helpful. And then I guess just one follow-up on the strong equipment growth in 4Q. Have you seen that persist into January and I guess what you've seen so far in February?

January -- much like last year, this January is soft, start last year -- 2010 we started with a soft January and ended up very strong, and we are seeing now January start the same way, soft.

Okay. That's helpful. Thanks, guys.

Your next question comes from the line of Luke Junk with Robert Baird.

Good morning.

Good morning.

Could you maybe talk a little bit about repair versus replacement trends? Obviously, equipment growth very strong this quarter. Do you have any feel for whether we're starting to shift back towards the -- ?

That's a very good question. Paul, I think you've got some good information on that.

Yes, we -- obviously, we track a lot of our repair parts to make sure that we can actually gauge which one is growing and which one declining. Frankly, for the quarter and for the entire year of 2010, we saw strong demand not only on the replace, but we also saw continued strong demand on repair. So we're hoping that trend, obviously, would continue into 2011.

But why don't you talk about the aging of the equipment, what you've -- the new data shows.

We've been able to go back and look at the history, particularly on air conditioners more and heat pumps more than we have on the gas furnaces, which have a longer life. And what we found is that if you look at the normal replacement cycle in the industry, pass that against what the population of units are in existence, we're seeing the oldest group of equipment that we've ever seen in the history of the industry.

Installed.

Installed base, right. The average unit installed out there on the air conditioning side is now over nine years old and climbing. So that's good news on the replacement side. And I think we all recognize that you reach a point where a unit can't be further repaired over and over again if the cost just becomes onerous, and finally the consumer has to start replacing.

And that's why our optimism that as the aging has moved from eight to nine years and the oldest ever in the installed base, that more repair business will ultimately end up in more replacement business. And since we've got 74 million homes that have cooling systems that are over 10 years old, and the industry only produced 4.3 million cooling systems last year, I mean, that's a lot of future demand that the data reflects.

Relative to that future demand, we've had kind of this dry ship R22 come in in vogue over the back half of the year here. Do you think that's going to have any impact on hinging that demand as we move through 2011, or is it just noise?

I'll let Paul answer that.

My comment about that is, these short-term things that occur, we don't want to get too carried away with it. I just like looking at fundamentals that, as I said earlier, 74 million homes with central cooling systems that are over 10 years -- that are in the 10-year category, and all of that is going to be replaced, and they're already at their oldest age ever. I mean, it's just very exciting, what we're looking forward to. Let's deal more with your question about the short-term, Paul, on these --

On the short term, we've seen some very, very light demand for the dry ship 22 to date. It's probably going to be with us for quite a while. It comes with some disadvantages, however, for the consumer. It's got a shorter warranty on it. It also has the potential of running out of R22 before the natural life cycle of the product dies.

So, to date we've seen it on some multi-family type projects. We've seen it on multi-family replacement. It hasn't been a big deal as of yet. We're hoping that it stays that way.

Perfect. Thanks very much, guys.

Your next question comes from the line of Tom Hayes with Piper Jaffray.

Great. Good morning, gentlemen. I was just wondering if you could remind us about the typical margin profile on the commercial products versus the residential products. Is there a meaningful difference between the two?

Go ahead, Paul.

Yes, there is. There's a -- commercial projects tend to be -- especially on the new construction side, if it's a new replacement, tend to be slightly lower than residential products. Anywhere from 2% to 3%.

Okay. Great. Thank you. And then Barry, I mean, you guys have done a great job. You've more than doubled your cash balance year-over-year. Just wondering if you could lay out your priorities for the use of that cash going forward.

Sure. Well, first, the dividend, obviously, is a very direct and immediate way and a sustained way of sharing cash flow. So we've raised the dividend again today 10%, and it's -- $2.28 is the annual dividend rate, and that's about $65 million, $70 million in cash flow that is a portion of what we generated this year, shared in 2011. So that's obviously one method.

Also, acquisitions, you know, we certainly can see in the next two to three years what we're certain of is add-on capability for the options that we have in place with Carrier for Carrier Enterprise. There are other territories that we would like to acquire, and the family acquisition market we think will improve as EBIT and valuation becomes a little bit more -- comes closer together in terms of expectation and value.

So cash has always been needed and desired and kept to grow the business. We still have markets with no market share. We have markets that have very strong market share. So it's still a work in process on the building side. As Paul mentioned, we're looking at adding products in 2011, so there will be some use of cash there.

So again, the long-term story that we've said for 10 years is still the -- certainly the intended story going forward with cash flow.

And I might add that we're -- we will continue to get better in the management of working capital, which will continue to increase cash flow and we hope continue to exceed net income for years to come.

It's worth developing one thought, and what's being asked this morning about the short-term feelings that we have and trying to assess that. And one of the key principles for us is to examine how contractors are paying us. We can see the health of our end market very quickly every day when we collect money from 50,000 customers, and the health of that end market is as best as we have seen in our careers. From an ending a strong year and entering a new year, we're very satisfied that the customer side is very healthy at this point.

Great. Thank you.

Your next question comes from the line of Jeff Hammond with KeyBanc.

Hi, good morning.

Good morning, Jeff.

Just real quick housekeeping. Barry, can you quantify the one-time branch closure costs that you mentioned?

Jeff, it's not something we want to get into the math with.

Okay. And then can you give us some of the full year details on the Carrier JV? What were total revenues in the year? Where did kind of full-year operating margin shake out on a year-over-year basis?

We also, Jeff, are not going to be doing that anymore because of competitive reasons. Carrier Enterprise is very much part of Watsco, and we don't want to indicate how one brand, Carrier, is doing versus Rheem or is doing versus Goodman or anyone else that we represent in the equipment business.

Okay. And then can you just talk -- as you look at Carrier, what are the big drivers of margin expansion there as you look to continue to integrate and work on that, and then just update us on the non-equipment initiative within Carrier.

Go ahead, Barry or Paul.

Well, first the -- again, the long-term goal is to get to 10% EBIT, Jeff, as you've heard many times from us, and that's the goal in terms of how we speak to our leadership team. The regions of Carrier Enterprise are really in charge of executing their own plans to get to that target level and --

And so as they are in the legacy business. It doesn't change. We're all the same.

There's not one broad brush to paint across all the regions and all the markets, because products and what they're doing every day can be very different. It has to be customized market by market.

What we've spoken about Carrier Enterprise is getting them into their own framework, their own systems, their own environment to execute on that plan. This was all finished this year in 2010. The margin results speak for themselves. They've doubled the profit this year and -- but the progression towards 10% is now the expectation we set, we challenged to all of our legacy business units and not making a distinction any longer with Carrier Enterprise.

Okay. And then I know it's a soft part of the year and seasonally weak. But as you do your planning for the year and you talk to your subsidiaries, can you just talk qualitatively about how are people thinking about new housing starts, how are we thinking about replacement demand? How are we thinking about price versus mix, share gain opportunities? If you could just frame up qualitatively --

Every one of our business units, Jeff, is talking expansion. The idea that we had to watch our cost is still there, but now the new frame of thinking is expansion. Where do we open locations? Where do we add additional product? You mentioned Carrier Enterprises. Carrier Enterprises still can add considerably more non-equipment products, and that will go on.

But all across the board where the branches are located and the business units are located, it's all about increasing the offering of product through the existing locations, plus adding more locations, either by green fielding or by acquiring. So it's all -- everybody seems to be in very expansion mode for this year, and it's nice to see after the industry contracted for all those years. But we are all very expansion-orientated now and very optimistic.

Regardless of if the economy is up or down or the market is up or down, we've got a strong drive on all of our people to keep the momentum that we started last year with a real focus on increasing our market share. So even if the market were to contract at all, which we don't think it will or I don't think it will, our people are focused on how do they come up with the right programs and salespeople, and to Al's point, locations, offerings, so that we can increase our market share.

Pretty exciting time there now, Jeff.

Very upbeat.

Your next question comes from the line of Matt Duncan with Stephens.

Good morning, guys. The first question I've got here is looking sort of at the revenues in the quarter, can you give us a sense for how your revenues grew, both for replacements and new construction on the equipment side?

Barry?

Matt, I'll answer it a different way. We have components to our equipment business that we mentioned was up during the quarter 23%. I'm not going to do it, but if I broke that into 10 different buckets, commercial, residential, indoor, outdoor and so on, a very consistent growth rate, close to that target, close to what was accomplished at 23%. So there's not a story within the story. Very consistent, and we like that. But that's very strong across residential, commercial and so on, and the commercial refrigeration business which we report out, also up 19%. So --

I think we can help him by new construction. New construction is not impacting our business substantially one way or the other.

Okay. So it's beginning to recover a little bit then, if it's sort of growing as the rest of your business is.

I would say all that recovery is ahead of us. It isn't with us yet.

Okay.

That's the nice part. We're growing this business without having a major contributor from new construction, which by the way, we won't get even when we're -- when construction's at full bore. We'll get an incremental, but our business has basically always been focused on replacement.

Sure.

At least -- we get into 70 -- even when new construction is at its best, it's still -- our mix is still 70% replacement. That's very healthy. Because the universe of replacement units or that -- or the universe of homes will ultimately have to replace grows every year and that -- the setting the stage for increased demand as time goes on, regardless of what happens to the economy, and regardless of what happens to the new construction cycle.

We like it. We like it that way. We're not dependent on the new construction.

On the margins that you guys put up this quarter, trying to understand again a little bit what's going on there. Was there any impact at all from commodity price movements on the gross margin this quarter, number one?

And number two, as we get into 2011, obviously you had a bit of a tailwind on gross margins in 2010 on mix. But I would assume that you are seeing supplier price increases as well across the board that would probably make up for that as we get into 2011. Is that the case?

We've said this repeatedly in past calls, and that is that when there are price increases, because we're a distributor, we're always able to pass those on and pass those on immediately.

Right.

A lot of the vendors really worked hard, outside of the pure raw commodities, they worked hard to try to maintain their price in the marketplace without raising prices. So what we saw really was -- it will be more reflected first quarter, is when we start seeing a lot of the OEMs who announced price increases in the fourth quarter that became effective in the first quarter.

Okay. And then Paul, do you have any thoughts on how much of those price increases you think will stick in the market, sort of what type of tailwind do you think you may see in 2011?

Boy, if I knew that answer, I would be a genius here. Looking at the range everybody passed through, maybe 1, 2 points.

Okay. That's helpful. Thanks, guys.

Your next question comes from the line of Ian Zaffino with Oppenheimer.

Hi. Thanks. Wanted to follow up on the commodity exposure. I know you guys have a decent amount of copper exposure, I think, I don't know, to the tune of 20 to 30 million pounds of copper tubing. Have you started to see any benefit from that, and how should we think about that going forward?

Copper is (inaudible) percent of our sales, max. It's not -- a lot of the copper sales that we make are -- especially in these markets, go into the commercial refrigeration market.

And is there -- as copper's moved up, has there been an opportunity to take margin there?

Yes, there has been an opportunity, obviously, to take margin, but it basically -- through the year, it was pretty much equal to the -- the profit gains were equal to the sales gain. So it really wasn't a big difference in our gross profit.

Okay. So that's different than what it's been previous --

It's not going to move.

Okay. All right. Thank you.

Your next question comes from the line of Robert Barry with UBS.

Hi, guys. Good morning.

Good morning.

I was wondering if you could break the revenue growth down by volume, mix, and price for the quarter.

Barry, have you got that?

Yes, the only thing we report on, Robert, is the unitary business that we have. It's about 27%, 28% of total revenue, so it's what gives insight to the[ARI] data that's published. Units for the quarter were up 14%, and price was up 5%. Price and mix was up 5% for the quarter.

Price and mix.

Pretty consistent with what it's been all year long.

And is the mix of price and mix, I mean, can you make any comment on that? Was it weighted to price or mix? Sounds like it was weighted to mix.

That would be right.

Okay.

And then I just wanted to follow up on a comment that you made a bit earlier in the call about the margin expansion at Carrier and legacy Watsco being consistent. I just thought, given the more significant opportunity for margin expansion at Carrier, I would have expected their margins to grow at a faster pace.

I think 180 basis points expansion is a lot in any given year, and our legacy business units are still almost 250, 300 basis points from where they were a few years ago. So there's a lot of pressure and a lot of performance that's being gained on that side of the business too.

Why we're not trying to make a big distinction between the two, Robert, it's trying to push the EBIT margin, frankly, back to where it was, which is far from where it is today.

Okay. And then I guess just finally, big picture, we talked about a lot of components of the margin growth. But just big picture, year-over-year revenue was up in the quarter almost $100 million, but operating income was up only about $7 million, which implies very low conversion. Can you just kind of sum up kind of why that conversion on that really big revenue gain is pretty modest?

Goes back to the analysis of SG&A and some of the things that we said earlier in the call. And, again, it's looking at -- for the year period, it's probably more relevant to look ahead in 2011 for that conversion, not the fourth quarter.

Well, I mean, what would you think would be a good working assumption for that conversion going forward?

Again, I would look at the historical conversion over a period of time, not simply the fourth quarter, which can be gleaned from the numbers.

And then just finally, can you tell us or remind us what your mix of furnaces is and how much of that growth in equipment was related to furnaces, if any?

Sure, well, furnaces is 5% of total volume so it's something that grew, as I mentioned earlier in the call, was something that grew consistent with the overall growth rate for equipment, which was around 23% for the quarter. It's only 5% of the sales. Most of our business is in the Sunbelt, and I'm certain that other markets had great furnace-driven business in the last 90 days, given the weather. For us, it's just about 5% of revenue.

Okay. Thank you.

Next question comes from the line of Ryan Merkel with William Blair.

Thanks. Good morning, everyone.

Good morning, Ryan.

First, on the gross margins, I realize that the mix of equipment increased, and I'm talking sequentially, but does that explain why gross margins fell 70 basis points sequentially? Was there anything else? Or was that just mix?

Ryan, it's simply mix.

Okay.

I can say that gross profit on equipment was higher this quarter than last year. I can say that the gross profit margin on non-equipment was higher this quarter than last year. It's simply the strength of the equipment business mixing to the lower margin.

Okay. And then as you're thinking about 2011, do you expect high SEER units to grow year-over-year, or might there be a mix shift back to base units because the federal tax credit was lower.

Paul?

Yes. When I look at efficiency -- efficiency obviously has increased every year for as long as I can remember, as long as I can go back. Was there a disconnect because of the tax law change that occurred? We still have a lot of incentives out there that are pushing consumers to go to higher efficiency equipment. We have the utility rebates that continue, are different from region to region, locality to locality. We also have manufacturer rebates, which are continuing, in effect, to move the consumer up from the 13 SEER to a 14 or 16.

So I think as an industry, everybody is continuing to push for higher efficiency products for the consumer when they go to a change-out. And I think another factor that will -- I'm hoping will continue to play is our contractors gained an awful lot of confidence last year in their ability to sell up and to sell the higher efficiency products, as opposed to hitting the bottom with a quick replacement of a 13. So I think the jury's a little -- still out. The only component that's missing is the full federal tax credit of $1,500, but as you know, we still have a $500 credit.

Also, the aging of the equipment. I keep coming back to that. That's the biggest force in the market is the aging of the equipment. You cannot repair forever. You have to eventually replace, and there are just millions of units out there that are very old, and their time will come. And they will be replaced with higher efficiency equipment, because the low efficiency equipment has been dropped from production.

Okay.

The minimum now is 13 and SEER. Many of those units were 10 SEER and below.

Right. That's great color. I just have one more question. Barry, you and I have talked about this, but how is the consumer financing program coming along, and could it move the needle this year? I know it's early days, but maybe you could comment on that a little bit.

Sure. Well, the banks that have supported other industries have come into this industry to, again, with partners like us and our OEMs to push consumer financing harder. It's still a slow grind, Ryan, in terms of immediate impact. We're selling a higher percentage of product that way, but it's still a very, very low percentage, less than 5%. I think it is a more long-range concept to enter our market than something that's immediate impact.

Okay. Thank you.

Next question comes from the line of Drew Pearson with JPMorgan.

Hi. Good morning. I think you guys addressed this, but I want to ask the question a little bit more explicitly. So the step-down in the tax credit, was that not a factor in terms of the strength in your 4Q demand? Did you not see a little bit of a pull-forward?

As Barry said, consumers don't wake up in the morning with the idea that they're going to do tax planning with their outdoor air conditioning in the wintertime. If there was some pull-forward, I think it would have come from planned replacement on -- probably more on a furnace than it would be on a split system. Certainly there were some people who actually thought that issue through and did it. But --

So not a major impact?

I really would have no way of gauging how many of those consumers filed their income tax based on the upgrade to a higher efficiency outdoor unit.

Sure.

And then going back to the fix-replace dynamic, what did you see in your trend in your replacement compressor sales this quarter, and then maybe how that compared, the spread between your unit sales and your replacement compressor sales this quarter, relative to past quarters?

It was slightly slower, once again. You don't replace a compressor unless you're using a heat pump and it's winter. You wouldn't replace a compressor in the wintertime for your outdoor unit. It's front-end as an air conditioning. So it's kind of hard to make that apples and orange comparison of compressor sales versus equipment sales in the fourth quarter. All I can say is year-over-year, looking at the full year, compressor sales were up significantly, as well as the equipment.

Okay. Thank you.

Your next question comes from the line of Jack Kasprzak with BB&T Capital Markets.

Thanks. Good morning. You guys have mentioned new branch openings a couple of times. I was wondering if you could just talk about your philosophy with regard to opening new branches. For example, would you, or have you done them in markets where you don't have a presence as a foothold, or do you prefer to do them in existing markets to increase your level of density?

That's a great question. Paul?

I think the answer to that question is yes and yes. We obviously -- we would look at -- we look at branch expansion within a territory to increase our presence and our footprint. You also look at the --

That's because we -- the purpose of that is to add convenience to the contractor base, especially your Northern areas, so he doesn't have to go far to get supplied.

We have to continue our expansion, because acquisitions are kind of an iffy thing. Acquisitions occur when somebody decides to sell, so we've looked at contiguous increases in our branch penetration to add branches into territories where we're not. We try not to -- we try to keep them close to where we have a presence, where our logistic network can backfill and where we have adequate sales and product support.

And is there a sort of typical investment amount on a branch that has been your experience?

Yes, it depends on what market segment we're looking at. If we're looking at commercial refrigeration, it would be a smaller footprint branch, 8,000 to 12,000 feet. It would have a smaller inventory investment of say, $250,000 to $300,000.

However, if we were going into a major market with kind of a hub distribution point, we would be talking -- on the equipment side, we would be talking in the 25,000 to 50,000 square foot. Obviously with a few million dollars. So a lot of it depends on the nature of the business that we're expanding.

Got it. Okay. Thanks very much.

Your first follow-up question comes from the line of Keith Hughes of SunTrust.

Yes, can you give us any sort of update or metrics around Carrier, and as it transitions to selling more accessories, where we are in that process?

Sure, Keith. Again, we expressed in the conference call already that they had double-digit growth this year overall for Carrier Enterprise, and the parts and supply certainly was closer to a 15%, 20% growth rate on supplies. And the progression is very positive.

As we enter the season, Barry, is it fully rolled out in terms of having the inventory and the selection of products necessary? Or is there still more work to do then?

No, there's more work. This is going into about 600 vendors and making deals, getting merchant activities going, getting sales forces geared up, and then, by the way, getting the inventory in place.

So this is a -- as we've said many times, it's a two- or three-year work in process. It's still very young in the game.

Okay. Thank you.

And using it to sell more equipment. By covering more of the contractor's total requirements, he's going to buy more equipment from us.

All right. Thank you.

Next follow-up question comes from the line of Josh Pokrzywinski with MKM Partners.

Just going back to the earlier question about where incremental margins should fall out from here, you kind of mentioned that using the past as a barometer is a good starting point. And if I think about that kind of mid-teens incremental run rate that you've put up, maybe bounced a little bit over time, help me kind of check that against some of the further opportunities in Carrier. And Barry, I know you've talked about being able to measure Carrier Enterprise on a branch-level basis is an exciting opportunity. Why wouldn't we trend above that kind of mid-teens incremental margin rate, just as some of those other items are still on the come here?

I think you've conveyed what our expectation is from our own leadership point of view in terms of incremental margin, something much stronger than what's been done in the past. Your instincts about Carrier Enterprise getting to a much higher growth -- much higher rate of margin growth than what they've had and even what they've had this year is still relevant.

I think our expectations are higher, but Josh, until we -- you know how we deal with these issues. We would rather be conservative in how we discuss them and let performance speak for itself.

Absolutely. I just want to make sure I wasn't missing anything there. Thanks, guys.

At this time, there are no further questions.

Well, then, thanks very much and we look forward to having a conference call with you at the end of the first quarter. Bye.

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