Watsco Inc (WSO) 2016 Q4 法說會逐字稿

Good day and welcome to the Watsco Inc fourth-quarter 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Albert Nahmad, please go ahead.

Good morning.

This is Albert Nahmad, Chairman and CEO. With me is AJ Nahmad, President; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President.

As always, first, a 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, before I discuss performance, let me first say, we are very pleased of yesterday's 10% increase of our ownership of the Carrier Enterprise Northeast joint venture. This adds to the 10% purchase we made in November of last year, and raised our ownership to 80%, which is the same ownership that we have for the original joint venture. More importantly, additional 20% ownership stake provides added earnings and cash flow and over the long-term will provide us with more value for the technology investments that we are making every day.

Now onto performance. Watsco delivered another record year and a record quarter. We received record sales, earnings, earnings per share, and cash flow and continue to make significant technology investments. Now, the growth rates were slightly below our long-term averages due to seasonal variability in some of our regional US markets and declines in international operations, which were impacted by the strong -- stronger US dollar.

In 2016, we produced record cash flow of $8.52 per share. That is an increase of 25% to $278 million and also exceeded net income. Fourth quarter cash flow was also a record.

As a result of this cash flow performance, we have reduced debt, paid 30% higher dividends, and have used cash to help pay for additional investments we made in the Carrier Northeast joint venture. Now, we continue to invest in several innovative technologies to transform our business of that of our customers into the digital age. I think you guys have heard me say this several times.

The annual run rate for tech spending is approximately $23 million, and increased 17% over 2015. Now, it will take a while to get our customers and employees to adopt and become fully immersed in what are really new technologies for our industry.

For example, we have 88,000 contractor customers, and if you add all the different technicians that they employ, you are talking about probably 200,000 or 300,000 people that we have to get adopted here. But we are excited about our progress.

Now, as a reminder, we have launched three primary technology platforms. Number one, e-commerce and apps using the industries most data rich catalog of product information. Number two, business intelligence to enable more insightful decisions -- excuse me, I have a sore throat. Can you believe it?

It's sunny and 75 degrees and I have a sore throat. Anyhow, number two business intelligence to enable more insightful decision-making throughout our organization. Three, supply chain and warehouse optimization to improve speed, create efficiency, and reduce operating costs.

Now, here are the trends that we see in our technology. For e-commerce and apps, usage is increasing. More line items per order are being generated online.

Over 500,000 SKUs have been mastered into our product database. I don't think anybody has anything remotely near that. Now, for business intelligence, the number of users and queries are increasing and advance in predictive analytics of capabilities are maturing, and the most active users of BI in our Company are generating improved performance -- that's very important to us.

Regarding the supply chain and warehouse optimization, inventory turns have improved in locations that have adopted the new technology. Service levels to our customers have improved. More of our locations are wired to enable use of order fulfillment technology and our square footage has been reduced for existing locations.

Now, as I mentioned, it is early and there is a great deal more to do and accomplish, but we are excited about the progress so far. Now for our financial results. For the year, sales increased 3% to a record $4.2 billion.

HVAC equipment increased 3% with 4% growth in the US and a 1% decline internationally. Other HVAC products increased 1% and commercial refrigeration products increased 6%.

Earnings per share for the year -- sorry again. Earnings per share for the year increased 5% to a record $5.15, which was within the range that we had provided in our outlook, and operating income, grew 3% to a record $346 million. Operating margins improved in the US and declined internationally.

For the quarter, sales increased 1% to a record $914 million. HVAC equipment increased 2%. Other HVAC products declined 1%, and commercial refrigeration products increased 3%.

Earnings per share for the quarter increased 8% to a record $0.81 and operating net income increased 7% to a record $58 million. Our balance sheet remains conservative with a debt to EBITDA ratio of under 1 times.

Now, let me say that again. We are under 1 time in debt to EBITDA. Dividends paid in 2016 increased 30%, and the dividend rate increased 24% effective last November.

We hope to continue our policy of increasing dividends and remain confident in our ability to generate strong cash flow while maintaining a conservative financial position and a lower cost of capital to invest in our business.

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

(Operator Instructions)

Robert Barry, Susquehanna.

Good morning.

Good morning.

Congrats on all of those records.

Thank you. Feels good.

Yes.

So curious about your assessment of the growth in the quarter and frankly, even for the year, in equipment. As investors look at the growth first as peers such as Lennox, which I think is probably the most apples to apples one, but even others, like Ingersoll, it looks like in the quarter and even for the year you really underperformed a bit. I'm just curious what your assessment is.

Well, I'm glad you asked the question. I'm going to take a shot at part of the answer and then I'm going to turn it over to Paul Johnston.

We believe it's a mix of products. The residential growth rate was watered down a bit by slower commercial sales. We are not a big player in new construction as are the two that you just mentioned. We've always said that our basic market is the aftermarket, which is the one we think will be steady and growing every year at the same rate that we are growing and we grow actually faster than the industry aftermarket growth.

So, Paul?

I think it's a little apples and oranges. The numbers I'm sure that you are looking at when you get a manufacturer reflecting their sales is based on shipment data where as our numbers are based on what we actually sell through.

When you look at some of the numbers that come out of the HRI, there was a huge bubble that was shipped in the November to December time period, which are shipments but not movement. Right now we are very happy with our inventory position that we have. We didn't buy forward a lot of equipment.

I think as we move forward with the replacement market, I think our share and replacement market is very solid.

Got you. How did things start off the new year in January and so far in February?

Well, sales are growing nicely into with our long-term growth rate.

Okay. Would you define as kind of a mid-single digit level?

That's right.

Then just a couple questions around IP. Thanks for giving us some more color there. I was curious, that 80 basis point change in inventory turns in the fully adopted location, how does that compare to the 20% reduction in inventory you targeted?

Well, that's a good question for Barry Logan.

Morning, Robert. As we said, 20%, that target is really based on a more simple way of looking at it, and that is to go from four turns to five turns as an initial target. That's the object to get you to the 20%. 80 basis points in those branches, obviously, is pushing almost after just 15 months toward that one full turn improvement in inventory turns.

Obviously, the important thing is to not do it all at once and take risk across the whole company. We chosen to launch in certain locations and prove it and execute it and develop it across the enterprise. That will take time. We wanted to get some early insight into what's going on.

Got you. Maybe just one more for me and I'll pass it on.

Can you provide some context about, you mentioned the sales people using the business intelligence platform at 7 times better sales performance. What percent of the sales people are using it now and does that actually mean that before a given salesperson was using it versus after, I don't know, they're selling rate went up by 7 times? Just thinking context there on what that all means?

Thanks. Why don't we go to the technology man on the phone, A.J. Nahmad, President.

Good morning.

First, there are several thousand people using business intelligence across the enterprise now. That metric is really about -- well, I should say we are able to measure how frequently and how each employee uses the tool so we are able to look at those that use it more often and more aggressively. They are outperforming their peers who are using it less often or less aggressively. So that is where the magnitude of 7 times in terms of sales growth.

In terms of what? Using it better to do what, A.J.?

The tool gives them insight into their book of business about trends and patterns and their customers purchasing behaviors about opportunities to sell them different products or different mix. It's really instant opportunities for the salespeople and we've created a number of dash boards, and reports, and score cards that help them as they go into the field every day.

Okay. Thank you.

Matt Duncan, Stephens.

Hi, Matt. How are you this morning?

Good, Al. How are you?

Good.

First question I have, you noted that there was some markets where you saw unfavorable seasonal conditions and elsewhere your growth was more mid-single digits. How many of your geographies saw those conditions, and maybe if you could talk about what those were and have you seen sales growth bounce back in those places yet?

Why don't we turn that over to Barry Logan?

Good morning Matt.

We are careful not to give out specific local data, per se, just for a competitive reason and for other good reasons. You get a sense of where our business is concentrated in the Sunbelt so that would give you some big picture look at -- I think another reason why you need to measure performance at Watsco versus a broader geography. As Al said, we have seen some improvement in growth rates as we start the year. January, February is not a proxy for the entire year, but it is encouraging that it is better.

Okay.

Speaking of looking forward to this year, what level of price increases on average are you seeing on the equipment side for manufacturers, and do you have any big picture thoughts about what kind of growth you can generate this year? Is it keeping in tune with that mid-single digit growth rate that you guys targeted?

Well, on the growth, of course, if you look at our record, we are pretty consistent year after year. In terms of pricing, Paul?

Yes. The pricing that was announced was anywhere from 3% to 6%. We are still just implementing that now in January and February, so we will get a clearer idea during the first quarter how much that 3% to 6% will stick. What we have seen to date through Q4 though is last year the prices held. We saw a little bit of price increase and we are hoping that we can do that again in 2017.

Got it.

Last thing for me, on the additional investment in the second Carrier JV. My recollection is the first deal -- there was something in the contract that allowed you to buy up your ownership percentage but I don't believe that was in the contract for the second one. If you can talk about your motivation and their motivation was for increasing your ownership in that deal?

That is a well described. The first joint venture we had an option to increase 60% to 80%. We exercised that.

The second joint venture we started off at 60%/ 40%. As we were making these significant investments producing the results that we are, we constantly were after our joint venture partner to let us buy him -- buy down to 80% as we had in the first joint venture. It took a while, but we got it done. That's what we wanted to be, at 80%/20%.

In the third joint venture we are still at 60%/40%, but that's Canada, that's a little more difficult because of the currency issues out there. It's just us trying to persuade our partner that we would like to do that and we are making all this investment and we hope you agree, and they did agree on the second joint venture.

Thanks, Al. I appreciate it.

You bet.

Jeff Hammond, KeyBanc Capital Markets.

Hello, Jeff.

Good morning, guys.

Just back on pricing. My understanding was in 2016 the pricing -- or the price increases didn't hold as well as a lot of the OEMs had some deflation to work with and maybe some of the weather variability caused some price competition. So maybe just to go back at price, what is your confidence level this year with some inflation in the market that, that comes through? And then how did you think about being a merchant in the fourth quarter and buying ahead of price increases, et cetera?

Let me answer the first one, once again, on fundamentals. If you did see price decreases, you probably saw the new construction. Which is a field we play in, but not as aggressively nor as dominant as some of the others do.

Paul, you want to take a shot at the rest of that?

Yes, I mean, I agree with Al completely. We did see price -- some of the price increase hold but didn't obviously on new construction. That follows through. When you look at where we are in the fourth quarter, most of our manufacturers we were able to arrange so that they didn't have to buy forward a tremendous amount of inventory and put it into stock, but we will be able to take advantage of the price increases as they move forward in the first and second quarter.

That's assuming, of course, that everyone else absorbs their cost increases and maintains the price increases they've announced.

Right.

Okay.

Then non-equipment was pretty sluggish again. What are you seeing there? Then there does seem to be some inflation in copper and maybe some of the duct dane and, certainly, refrigerant. Has any of that started to show through?

Well, I do want to give you a general comment about your question, which I think is a good one. We see the same thing. We are going to take major initiatives this year to penetrate more in parts and supplies. Historically, I will let Paul answer that.

Yes. We've seen the same. I guess manufacturers call them headwinds, we call them tailwinds on the inflation side of the commodities. Not a big piece of our business, but obviously it's positive for us.

On the other products that we sell, the supply side of our business, we've got a major initiative being pushed forward to be stronger in the supply business. And I think in the last several phone calls, we've had a lot of discussion as it pertains to the parts business, how much of that is impacted by some of the extended warranties activities that the OEM did back four or five or six years ago.

Okay.

And then, finally, it looks like you had a spike in the fourth quarter in CapEx. You spent a lot more this year than last year. Is that tied to the technology investments or just help with the bump there?

Barry?

Good morning, Jeff.

Jeff, in the fourth quarter it's not technology-related. It's business-related. It's something that we will disclose in the 10-K and look for the year it's around 50% more. I'd expect 2017 to come back down and look more like 2015.

Okay. Thanks, guys.

Ryan Merkel, William Blair & Company.

Hi, Ryan.

Good morning, everyone.

The first question I had, it seems that sales were a little weaker in November and December. I recall you said October was up 4%. Was it weather, was it something else that drove the slow finish?

That is a well-placed question. I'm going to turn it over to my well-placed answer, Barry Logan.

Good morning, Ryan. Again, in the quarter, you're talking about the fourth quarter.

He's talking about the last two months of the quarter. I don't really even remember them.

Yes. Ryan, again, it's the concept of seasonality in our Sunbelt business. We are not going to be driven by winter and how cold it is, how freezing temperatures are. It's really how nice it is in a big Sunbelt market, so you know which ones are the biggest. That's where we saw some moderation, and it's not something that we are paranoid about. It's just something that will play itself out as we get into the spring and summer and expect our big markets to grow.

Okay.

And then as it relates to international business, is the strong dollar the only reason that business was weak in 2016? Are there other reasons?

No, there are no other reasons. I think we are really expanding since we bought the export business and since we bought the Mexican business from Carrier. Those are very high growth businesses for us.

Now, Canada is a different story. We bought that business. The currency issue has been there rather significant. The answer is we have to deal with that, and we will. Hopefully, better this year. There's nothing strange about all of that other than what we have told you. Currencies had a big play in Canada.

I would add to that, Ryan. There is two risks internationally. [There] is currency risk, meaning what you sell becomes more expensive as the US dollar strengthens. Second risk, of course, is credit risk, that being are people going to pay you for what you are selling them? We do see strength in terms of credit risk, write-offs are very low. It shows us and tells us that we are managing it well. It's more about the currency risk where again US products have become 10%, 20%, 30% more expensive than a lot of these markets. Eventually, that's going to catch up with the top line or margins.

Okay.

Just lastly, can you comment on in the quarter did [2016] and above equipment sales outgrow the base unit?

Do we disclose that kind of thing, Paul?

We've always talked about in general what our mix change is. Did it outperform in the quarter? It was pretty much the same as it was the quarter before. So I would say no.

Okay. Because you speak to that as a way to measure the health of the industry and the health of the consumer, correct?

Yes. I think we are going through a transition that we have to find out exactly how the (inaudible) is going to fit in with the consumer replacement market, local utility rebates and all the other things that happen on a regional basis.

Got it. Thank you.

Steve Tusa, JPMorgan.

Hey, guys. Good morning.

How is it out there Steve, the weather?

A little chilly, but just fine.

The worst is over, right?

We can handle it. Never say that.

Now that we own 80% of it, I'm glad that it's chilly out there.

Thanks for all the color on kind of the moving parts of the equipment growth. What was your commercial business? What did your commercial business do for the quarter or for the year, either way?

Barry?

Relatively flat for the quarter and for the year down low single digits.

And did that include whatever you what kind of VRF you would sell, I would assume?

No, it doesn't. We put that as a separate business. Different people.

How is the VRF stuff doing?

Absolutely fabulous.

Okay. Like double-digit, I guess that means?

Paul, I can't believe you answered that question.

Double digits can be somewhere between 10 and 99, by the way.

Fabulous. Phenomenal. We will look out for Twitter from you guys.

Good.

One last question just on the Trump stuff out there. Have you guys dug in a little bit more to understand from a supply chain perspective, you know, where your sourcing is, where you are sourcing a lot of your stuff?

Remember when Mr. Trump went to Indianapolis and after he was very critical of access taken by Carrier Indianapolis, but then he became a great proponent of Carrier. We thought that would cause great demand for Carrier, but it didn't. It was just normal.

Of course, we have spoken to all of our major suppliers and, of course, we are satisfied that they can continue to supply us no matter what happens with government policy and supply us in a competitive way. You know, a major part of all HVAC equipment is made in Mexico. In the case of some of our suppliers, major OEM equipment suppliers, they have to fill these in the United States that we buy a lot from and they can crank it up even to produce more. So I'm not concerned about that. It's a good question, but we are very on top of that with the OEM.

Okay. I think that's -- sorry, one last one. Acquisitions, you know, pipeline. What you are seeing out there?

Let me tell you. That's a good question. I feel very positive about the economy. I'm not alone, the stock market is reflecting that. We have had such a healthy balance sheet and we have this investment in technology that will continue a rollout in development for a long time, so -- but I am still so optimistic. I am now looking for very serious acquisitions and more active personally than I've been in a long time because I feel so good about where we are and where the economy is going. So I don't have anything to report, but I have to tell you, I am focused.

Is it mostly the smaller guys or are there any OEMs that are shipping around their strategies?

I can't answer the OEM issues because I don't know what they are doing. My appetite now is for larger ones but, of course, it doesn't matter. Smaller ones also provide more share and more distribution points. Now, I'm not saying we are going to get anything done, but I'm telling you I'm very focused on it and want to get a lot done.

Okay. Great. Thanks a lot.

David Manthey, Baird.

Good morning, David.

Good morning. Could you talk about the contribution (technical difficulties) price and mix each, specifically this quarter.

I'm sorry. You broke up. Can you repeat the question?

Sure. I'm wondering if you can talk about the contribution from price and mix this quarter specifically?

Barry, do we do that?

I can give you a sense of it. We always talk about HVAC equipment business when we answer this question, that's what is measurable in terms of pricing mix. We did see a growth in units for sure and we saw some growth in price. Mix, as Paul alluded to, was relatively flat this quarter, but the mix is up for the year.

Okay. So we should assume that some positive number in the fourth quarter.

Yes. We see 3% US growth for HVAC equipment. That's what I'm breaking apart.

Got it. Okay.

Second, when you look at the international results, could you discuss what the local market growth was versus the impact of currency?

Barry? You want to take a shot at that?

Sure. Well, for the quarter, and Canada, by the way, is the largest market, obviously, of discussion. We did see unit growth. We did see some Canadian dollar growth but not the US dollar basis. It's not enough for us to get to use a lot of explanation and press releases about with or without currency because of the materiality. I would say also that the fourth quarter was better than the rest of the year in that market.

Okay.

In our Latin American markets, we sell in US dollars. We sell and collect in US dollars. There's not a currency play per se.

The US dollar becomes stronger. It's more of a demand play where can they afford to buy US product.

That's correct

Okay. If I'm deciphering this correctly, you said you saw some unit growth in Canada but it was offset by FX.

That's correct.

Okay.

Third, you mentioned you are at a $23 million run rate for tech spending in the fourth quarter. Could you give us an indication of what you think that might be in 2017?

A.J.?

Just to clarify that $23 million run rate is annualized. Our approach to that is -- first, I should say that much -- many of the platforms we developed are now maturing, they are in place. Our focus is on getting them adopted through the several hundred thousand contractors and technicians and internally. If and when there are great opportunities that arise that we can deploy or that we can take advantage of and make investments and have strong returns on investments, we won't shy away from that.

Right now the focus is on driving home and maximizing return on what we have invested. I don't want to be held to a number in terms of spend because it could be opportunistic.

Okay. Is that saying, A.J., since you have these systems implemented, that number could actually come down theoretically or are we still saying it is growing?

Well, it's hard to say exactly because these continue to develop on top of these platforms. We continue to tweak and iterate. That's been our approach since the launch, an iterate approach. We don't have any current plans for major new platforms, but this is a way of doing business for us now. You know, this is moving away from being a technology program at Watsco. It's just being Watsco and being encompassed in what all we do.

Okay. All right. Thank you.

Robert McCarthy, Stifel.

Good morning, Robert.

Hey, morning. I'm surprised and shocked you don't manage for the quarter better. Just kidding.

Where are you, Robert?

I am on -- well, a city formerly known as Boston. It's now known as Hoth. I am enjoying the beautiful weather up here.

I guess, you know, first question is when do you think you're going to be able to have a credible outlook for 2017. Usually it depends -- sometimes it's the first quarter. Sometimes it's the third quarter. Sometimes it's towards the end of the year. (Multiple speakers) It depends what it depends. Maybe this year can you just give us a sense when you can see the white of the eyes, how you think this sort of plays out. What are the qualitative factors?

I don't know that we can tell you definitely but we like to look -- this is such a seasonal business, we like the look through the first half and then talk about what we think is going to happen. Sometimes, like last year we were not able to do that till the third quarter, but let's say our traditional is we like to look at the first half.

We will leave it there for now.

Then on the technology spend side, the question there is have you seen -- you have cited some interesting anecdotal -- not anecdotal, but incremental disclosure in terms of some of the metrics you use to show better sales outcomes, et cetera, less square feet. Have you seen productivity pick up in your salesforce in terms of measures? Maybe your contracting base -- automating functions for the contracting base where your service rates are high and your salesforce can be put to more productive use in closing new sales.

A.J., here's your opportunity to talk about your approach to the salesforce.

That's exactly the point. I visited probably about a dozen contractors this year so far, and when you sit with them and you explain to them the intent and the context and the spirit of these investments, which is to help make them more efficient in the field and make it easier for them to do business without us. In turn, as a byproduct of that makes our salesforce more efficient, which is helpful for the customer because then the salesforce can help with more value added type requests; expedite orders, check on orders, bring new business, or go hunt for more business. So that is exactly the intent of these investments, and it's starting to play out. Of course, we want to accelerate how quickly we can realize the value of that.

And then, finally, just in terms of the technology spend, are some of the OEMs engaging with you on some of these technology investments? Or you cross purposes? Can you talk about, particularly sensing technology where there could be some channel conflict but also some channel cooperation? How do you go about it?

That's a great question because since we are the innovator of this technology strategy, the OEMs had to be part of this because if you look at our 500,000 SKUs that information had to come from them, in some cases at the beginning they were reluctant but as they got more involved with us they cooperated. I think, A.J., you can confirm this, if we had full cooperation at least in the majority of what we do and others we think that aren't cooperating will cooperate because of such a great opportunity for them. A.J. you can improve that.

Yes. I would say absolutely. We have spent time with the senior leaders of our OEM partners and other parts and supplies vendors, and their technical teams and finding ways to collaborate where really it's one plus one equals three opportunities where our investments alone -- our investments plus their investments can really create some unique things that can be done independently. Now we have the talent and the resources to bring that -- to make that play out in a tactful way.

Something else is on my mind about that question. Because we have this 500,000 SKUs, which we believe could eventually double, it's a lot of talk in the press about technology companies like Amazon displacing the traditional businesses. I don't think it's very easy for anybody to come along and duplicate the product information and the digitation of what we have and the knowledge of the industry that we have. I think that sort of advantage will accelerate and improve our competitiveness not only against our normal competitors but also against people that might come into the industry. So to us that's not only an offensive play but it's also a defensive play to develop this technology.

One more question and just last question that came up on M&A. Obviously, looks like you paid south of 14 times, by my estimate, consolidating another 10%.

We didn't pay 14 times. We did not pay double digits.

Okay. Answer to my question there. Still, that's a higher IR investment, particularly when you are trading at 16 times range.

I guess from your standpoint, looking at M&A, you sound very bullish. Do you think this is a good environment in this Trump era for people to sell? Obviously, for the bid asset to work, number one, you probably need the asset to mature and it's an event, whether a family patriarch passes on, or whatever the case may be, where there's an opportunity for it to happen, but also you have to have a positive view of your underlying business prospect fors kind of the bid to be there. Do you think it's going to be a good environment for M&A for you over the next 18 to 24 months from your perspective?

I'm not sure I understand entirely, but I can tell you that I believe it's important when we visit with wonderful companies that we want to be part of our family, we bring them the technology, we show them. We think it is an advantage for them to be part of us, to take advantage of that technology, and by the way, it takes a lot of money. You've heard us talk about that to get this technology. I think it's an advantage in the M&A world.

Plus, our culture of decentralization plus the fact that when we buy a great company, we respect the sellers and we follow him and we invest in him. When I say him, it could be a company, it could be an individual.

Our reputation, we've done over 60 of these acquisitions, is very good in what happens post acquisition. The new thing is this technology that we spend so much money and that we are continuing to spend, we provide to them for them to use against their own competitors. So, yes, very positive.

Anytime there is a distributor that deals with contractors to an end market, like the one we are in, we have a great asset, we believe. We have an advantage over others that haven't developed this sort of technology.

Thanks for your time.

(Operator Instructions)

Chris Dankert, Longbow Research.

Morning Chris.

Good morning. Thanks for taking my question.

I guess my first one would be more targeted at A.J. here. It's nice to see some of the tech metrics you have in the results for 2016. Beyond the inventory reduction, is there any goals you'll be highlighting for 2017? The first thing that pops out is the BI's performance 7 times better than guys that aren't using BI. Why isn't everyone on that? Anything you want to comment on tech in 2017.

I like that last question the best. If there is 7 times out performance why isn't everybody using it to outperform?

Again, it goes back to the culture change question. There are early adopters and then there is the laggers and then there is the 70% between. I think at this point, we've done a pretty good job getting the early adopters on board. We are focused now on the 70%. That's both internally and among our customers, which a lot of the stuff is customer basing.

The internal stuff, which is the supply chain technologies and the order fulfillment, and usage of BI; that's all within our control. So our leaders know exactly what our targets are and we have big goals in terms of adoption and what kind of value that's going to create when they are adopted. The customer base, again, we set very aggressive goals in terms of getting our companies to help drive this through their customers and their customers businesses. I don't think yet we want to share exactly what those numbers are, but they are aggressive. While we hope that we can accelerate the pace, we are still careful to say we are still in the early innings of all of this as well.

Got it. I know it is all very touchy as far as how much you want to disclose, but thank you for the color there.

As a follow-up, have you seen any disruption risk? You guys highlighted reducing square footage by 500,000 square feet. I'm assuming there's probably some other moving parts of that CapEx spend. Is there any risk to the customer disruption in 4Q or 1Q here?

First, let me just a general speaking, that's what we reduce with the branches we've opened over a year. We have been adding branches. That's not in that number.

Okay.

The reduction square footage is not for the sake of reducing square feet. It's because we are taking math and science and a data first approach to the business. The facilities, our prophecies and so forth, and optimizing the space requirements and optimizing the prophecies and the branches all for the sake of creating a better customer experience for the 90,000 customers we do business with, or 88,000 customers we do business with.

So these are not -- these are all about being a better company. So I don't believe there should be any disruption to how we serve customers. I think it's the exact opposite. We should be able to be better with our customers with a smaller footprint or more efficiently whatever that requires based on the situation, hopefully.

I got you. The question of advantage -- it's more about long-term, of course, I think everyone sees the benefits of improving the utilization of your assets and that kind of thing. I think it was more kind of a question for short-term, some guys may be concerned about little variations in sales this way or that way -- and if it could be explained by moving where you are sourcing product from this to that, if that could help us weigh some of those concerns? That was kind of my question.

By the way, we had a conference late last year on the topic of technology, which was conducted by Watsco in Miami. It is on our website. You can get a much more in-depth understanding of what we are doing technology wise.

Thank you.

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

Well, thanks for attending. This is a longer conference than we normally have, and I really like that. Give us a chance to answer your questions and to deal with whatever issues are out there. But we are very optimistic. We feel good about what we are doing and we want to remain as the leader in the distribution of HVAC products. Thanks again. See you next quarter.

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