Watsco Inc (WSO) 2018 Q3 法說會逐字稿

Welcome to the Watsco Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

And I would now like to turn the conference over to Albert Nahmad, CEO and Chairman of the Board. Please go ahead, sir.

Cheerio. Good morning, and welcome to Watsco's third quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President.

As we always do, before we start, the usual 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 our performance. Watsco achieved record third quarter results. This includes record sales, profits, net income and earnings per share. Sales growth was driven by increased unit demand, price and mix for replacement HVAC systems.

We also announced a 10% raise to our annual dividend to $6.40 per share effectively in January of next year. 2018 marks the 44th consecutive year that we have paid dividends.

In addition, adoption and use of our various technology platforms continues to grow and our run rate for e-commerce sales now exceeds 30% of total sales. Now that our selling season is concluded, we are on a mission to accelerate the pace of adoption and customers -- with customers as well as within our own organization. Further investment into technology was made during the quarter, as we completed the acquisition of Alert Labs, a technology company in Canada. This is a terrific team of entrepreneurs that has talent and products to help our customers grow and become more profitable.

This morning's press release also mentions a companywide initiative to leverage our technology investment, improve productivity and reduce costs. Watsco's culture is to challenge our leaders and provide necessary support. To that end, unprecedented investments were made in technology and our organization to support the launch of our many innovations. Given the results this year, we are now challenging our leaders to use our business intelligence platform to find and execute on opportunities. Progress was made in the third quarter and there is more to come over the next several months.

Our balance sheet remains conservative with a debt-to-total capitalization ratio of 7%. The fourth quarter is a strong period for cash flow, and we expect to close the year with very little debt. This positions us to take advantage of almost any size investment opportunity.

Now the detailed third quarter results. Revenues grew 5%, including a 7% increase in HVAC equipment sales. Gross profit increased 8% with a gross margin improvement of 50 basis points. Operating income increased 7%. Operating margins expanded 10 basis points to 9.4%. EPS increased 16% to a record $2.11 on net income of $79 million, including the benefit of long term -- I'm sorry, of lower income taxes.

Looking at our third quarter results a little closer. Profits in our Florida locations were down $3 million after growing during the first half of the year. Margins and mix were all positive, but unit growth was offset single digit during the third quarter. And in Mexico, profits declined $2 million on lower sales. More importantly, all of our other operations had a terrific quarter, achieving an 8% sales increase, including its increase in HV -- including an 11% increase in HVAC equipment sales, along with an 18% higher operating profit and expanded margins.

Now results for the 9 months. Revenues grew 5%, driven by 7% increase in residential HVAC equipment. Gross profits increased 6% with a gross margin improvement of 10 basis points. Operating income increased 7% to a record $314 million. Our operating margins expanded 10 basis points to 8.8%, and EPS increased 18% to a record $5.43 on net income of $203 million, including the benefits of lower income taxes.

Now in terms of our outlook for the full -- for next -- I'm sorry, let me start that again. In terms of our outlook for this year, we estimate annual EPS in 2018 to be in a range of $6.40 to $6.50 per share versus 217 -- 2017's adjusted EPS of $5.54. This represents a growth for 2018 of 16% to 17%.

Finally, let me highlight important fundamentals that differentiate our business from others. Watsco's primary markets are large fragmented and replacement-driven and provide opportunity for steady growth over the long term. In addition, our conservative mindset towards debt and maintaining a powerful balance sheet provides us safety and the flexibility to take advantage of any size opportunity, especially during periods of economic volatility. And given the large amount of long-term equity held by our leaders, Watsco's culture remains risk adverse with the focus on the long term. We believe our culture and actions will continue to serve well all of our stakeholders, our customers, our fellow employees and their families and our shareholders for many years to come.

With that, A.J., Paul, Barry and I are happy to answer your questions.

(Operator Instructions) The first question comes from the line of Brett Linzey with Vertical Research Partners.

Just wanted to focus on the incremental costs on investments. You did indicate they're approaching $25 million this year. How much does that need to step up next year to achieve the fulfillment and continued roll out of the technology strategy?

Sure. Let me ask A.J. Nahmad, who is running the technology program.

With the -- that number has been relatively consistent for some time now. And as I've said on previous calls, it's more about what we see as opportunities and for the long-term returns. So there may be some fluctuation in those numbers, but probably more likely pretty consistent.

Okay. And then just shifting to the top line. So I think, Carrier realized about 2 to 3 points of price in the quarter. Your equipment growth was up 7%, that does apply kind of low-single digit volume growth for Watsco. Just looking at shipments for the industry, July was up 8%, July (sic) [August] up 14% and then September solid, pretty strong. I'm just trying to understand what Watsco needs to do from a resource or positioning perspective to help lift that volume number going forward?

I'm glad you asked that question because as you saw in our press release, we are not losing share, we are gaining share. And maybe we should explain the fundamental idea about what markets we serve. And why don't we go to our data guru, Paul Johnston.

Yes. Brett, we're seeing, the market is kind of split into two buckets. One is where the marketplace is very weather-sensitive. And the whether-sensitive part of the U.S. is outside of the Sunbelt, it's up in the Midwest, New England, Northeast, Central Plains, about 40% of the U.S. market. 60% of the U.S. market is really not weather dependent. And what we saw in the summer, the entire summer, not just the quarter, but we saw it incredibly warm compared to prior year in the weather-sensitive states. Degree cooling days were up 30% to 33% in those areas. And so what we're looking at right now is that the growth in the weather-sensitive states, where Watsco, frankly, doesn't play, we're up materially. I would say mid-teens, low 20s whereas, the Sunbelt states, when you look at the replacement demand, it was fairly flat to up slightly.

Yes. It's important for us to explain that in addition to that, that these are manufacturers that you're reading the data that not this distribution data. And in the markets that we serve, which are primarily replacement markets in the Sunbelt, we're doing great. It's not, it's not -- you should not compare us to the markets that we don't serve, where they're experiencing double-digit growth rates because of weather in those markets. Our markets don't react to weather, it always gets hot. Now sometimes we show a little faster growth than others, but we're okay. We're doing well. We're gaining share in what we serve.

Okay. And then maybe just a follow-up on my first question on investments. How did operating margins perform relative to your expectations? I guess, another quarter of little or no leverage. And I'm just trying to understand where you are seeing pressure on that cost equation?

Well, again, we try to explain the concept of what we've done. We designed software and programs to enhance our customers' business. We did the same thing internally with our business intelligence. We told our leadership, when we first introduced the technology, do what you need to do, hire whoever you need to go. Just do -- just go at it because it's going to be brand-new to our customers. And these customers are not used to change. Many of them have been doing the same thing for a long time very successfully, I might add. So a lot of people were added, and that's fine, we supported all that. But now that the platforms are pretty much proven, they should and will produce efficiencies that you'll see the return coming as time goes on. So we knew what we were doing. We said go at it with everything you need, they did. And now we're going to say go at it that will increase productivity and that's what we expect. And we're starting to see that -- we started to see that in the third quarter.

Next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

This is Brad on for Jeff. Just a follow-up on the demand question. You called out some flattish sales in Florida. I guess just with the Irma comp from last year, and you called out some meaningful disruptions last year. I guess, I would think that will be a little bit better. But just curious if there is any kind of dynamics on that.

Great question. Let's go to our data guru.

Yes, we're probing into that. We had a very strong front half of the year in Florida and then during the peak replacement year -- period, we actually saw a flattening and even a slight downturn, obviously in single-family replacement demand. A lot of theories out there right now. We're interviewing a lot of contractors and obviously, looking at the marketplace in total. But I would say, right now, the jury is a little bit out on exactly what was driving that. And, whether it's a trend or just a bump on the road.

Weren't manufacturer shipments into that Florida also down?

Yes, manufacturer shipments in Florida are down through September. Even though new construction, which we're somewhat of a player in, but new construction demand is up and total industry shipments into the state are down.

I guess, so just a follow-up...

It's industry-wide, it's just not Watsco.

Have you seen any normalization thus far through 4Q that you could speak of? Or do you think it's like you said a continuation of this -- industry-wide dynamic?

Too early to tell right now. October is starting out good, but whether or not it's a summer phenomenon. I mean, we look at the season, the primary season, which is from approximately April through September and that's really where we saw some softness in demand.

Okay, great. And then just on pricing, what's your view on receptivity in the market? It seems like after a year of kind of really unprecedented number of increases from the OEMs, are we starting to hit at that threshold where you're getting a little bit more kickback than you normally would or just kind of broader thoughts around price?

Go ahead, Paul.

Yes, it's -- it is unprecedented. I've been in this industry for, I guess, since Willis Carrier, but I've never seen this many price increases. The first two, very smooth. The third one, probably a little bit of pushback, but pretty much universal among all the OEMs, we're seeing price increases. Whether or not we are going to see any elasticity, changes as far as market demand because of those, I think, that's a far stretch because the price increases generally have been cumulative about 7% to 10% so far.

And one of the OEMs already announced some price increase next year.

Correct.

Next question comes from the line of David Manthey with Baird.

First question, based on the data that you gave us that sales were pretty flattish, I assume that's sales dollars in Florida for you this quarter. Is it safe to assume that pricing was up low- to mid-single digits?

In Florida?

In Florida, nationwide, HVAC equipment, anything you're willing to give us?

Well, our overall sales increase includes both a mix of unit increases as well as price increases. In Florida, specifically, our revenues included price increase, but in the third quarter unit sales went down slightly.

Right. okay. So in terms of...

Dave, I would just add to that, and margin obviously -- margin for the quarter is up 50 basis points that's driven by the equipment business. And we should also tell you in a market like Florida, margins were also higher. So in terms of price realization and capturing the market, that's the evidence.

Okay. So given that the third quarter, if you look at the State of Florida, precipitation was pretty normal, and we had record heat. I'm still trying to get to the why here in terms of why replacement revenues and unit volumes would have been lower? Do you put any credence in the thought that we're 13 years out from the industry peak? Back in 2005 that was followed by 4 years of decline, could we be hitting that part of the curve, do you think about that at this point?

Well, well, let's go to our data guru. Paul?

Yes, certainly. That's certainly, something that's built into our econometric model as far as looking at demand. Yes, I do think that has some impact in it. Actually, it was not record heat in Florida, it was actually cooler than normal, but it was hot...

It doesn't matter, Florida is always hot. It's always hot. It's always going to create demand for replacements. What we're trying to say is that outside of the Sunbelt, higher temperatures does improve the demand for HVAC equipment. But in the Sunbelt, it's steady, it doesn't act like the northern markets do. So when you hear these great increases, you're hearing them because they participate in those northern markets that we don't have a position in, of any size anyhow. So we're trying to explain this so that you understand the fundamentals, that the markets we serve, we are doing well and gaining share. In the markets that we don't serve, they're -- this particular year, they did really great, the hot weather did drive double-digit increases in those market areas. But long term, we like the markets that we're in, that doesn't mean eventually we won't go North. But, at the moment, we like the consistency of demand for replacements in the Sunbelt areas that we richly serve.

Right, okay. And I'm intimately familiar with the weather in Florida, but as you're thinking about these trends, and Paul, you mentioned it, is it possible that when you look at these unit shipment trends that we could see slower growth, even flatness for years in the equipment business? I'm just wondering how worried should we be about this cycle?

Trust me, whatever is going to sell in Florida, we'll be doing it. But go ahead and answer that Paul.

Yes. We're going to be gaining share, plus there's other market segments within Florida, which we're entering. We really have been the sellers of the single-family replacement. We're moving steadily into other market segments now, particularly on the commercial side, multifamily side. There is a lot of other segments besides single-family homes.

But I think you've identified well the Florida situation, which is a little unexplainable at the time. But Florida is the largest market for HVAC equipment in the United States. And this is our area. We have more locations here. What is it? Over 100? We are especially with the technology that we're offering our contractors, they will be able to gain share whatever business there is in Florida as they adopt it. And it is a slow adoption. But as they do it, they'll gain share, plus we're going to enter other segments of this market. So I think your observations are very well taken, but don't count us out in Florida. We're the powerhouse, and we'll continue to be.

(Operator Instructions) The next question comes from the line of Ryan Merkel with William Blair.

So why don't I ask about Mexico? What's going on there? Because Mexico was doing really well maybe last year.

Mexico. Yes, it does. Especially since we bought it from Carrier, it's been a winning combination, Paul?

Yes. As you know, this was the year of the election down in Mexico, where they elected a new president. He is very far left. I think there was some concern about added investment during the election cycle that probably slowed the market down. Now that we're past the election and the new president is in office, I think, he is moving further to the right. I think we'll start seeing some activity down there picking up again.

For example, they have a major renovation at the airport, and we're supplier to that renovation. Well, that was put on hold by the incoming president. So we'll see how that develops. But it's still a very healthy business. It just had softer sales and that caused the decline in profitability. Long term, I don't think it's going to be an issue at all.

100 million people...

What?

There's 100 million people down there and it's a developing country, it's a great market.

Okay. And then I want to ask about the maturing investments that we've been talking about on these calls for a little while now, but I guess, I want to come at it a little differently. Operating profit growth has been growing mid-single digits. What do you think operating profit growth will be once these initiatives mature? Should it be growing 9%, 10%, I guess, is my question?

I wish we had precision on that, we just don't. We just know we're leading the innovation in the industry. We're spending more money, as we should because we are the largest. We just think it's a very positive thing to do even sacrificing growth rates in the short term. As long as we explain ourselves, as long as we explain that our goal is long term, which it is, what is it going to amount to in numbers, it's hard to figure out. We have 90,000 contractor customers. Now they employ many technicians, so we're probably talking 300,000 400,000, 500,000 technicians. How long will it take them to adopt the mobile apps that we have, the e-commerce. All those questions we'd like to have answers. We just don't know. We just think it's a slow-moving adoption, although we're going to try to do better with it. But will I think it will materially improve our performance? Absolutely. And will it think -- do I think it would give us a competitive advantages over anybody else to distribute this product in the industry? Absolutely. So I wish I could give you with precision what numbers we're talking about. But we just don't know the -- for the reasons I was just stating. We just can't give you precision on numbers.

Fair enough. And just quickly lastly, you mentioned launching productivity initiatives. Any more details you can provide? Or maybe...

Yes. What we mean by that is, for example, the order fulfillment tools that are now in the hands of our locations, that improves -- the tool that we provide allows our branches to do more with less. And the increase in productivity will hopefully reduce our employment costs as we introduce these tools.

Which is particularly important right now given that there's all those buzz about labor shortages and labor demand. I think it's appropriate that we put these in place before that so that we can do more with less.

Next question comes from the line of Robert Barry with Buckingham.

I guess, I want just follow-up on the productivity and just see if you can maybe detail what you think the size of that nut is over the next 12, 18 months or so?

Well, another estimate, Barry?

Yes. Robert, I think the press release gives a little bit of color on what we're talking about. About 250 people were added over few years. And what Al said earlier was important. What he said was we went to our leaders. We're going through this monumental change, monumental transformation in our business and asking them, go do it and figure out how to do it and protect our business and protect your customer and protect the supplier relationships and so on. So around 250 people were hired, which is about a 5% increase in workforce at the time. And that's one of the principal things that's being addressed in productivity is now to go back to those leaders and say 2, 3 years later, now what? How do we find the productivity that we know has been gained? Let's rationalize what we should be doing in a marketplace and let's make sense of all these investments and how it's played out 2 or 3 years later. So that's the challenge that went out earlier this summer. Some of those plans were drawn. We're not ready to say here is what it means. There were reductions by the end of the third quarter. There'll be more to come as the year plays out so that's the brackets I would put around it, it is around 250 headcount additions that were made during that period. The second bucket, obviously, is -- our second-biggest SG&A item is our facilities. How much square feet do we need in this new paradigm of operations versus what we had 3 or 4 or 5 years ago? That's been reduced, that's been tweaked, it's been made smaller and actually, we have more locations today than we had 3 years ago with less overall square feet. But that's, again, a slow grind to produce less space and save some money. So that's in the discussion also. And the third is freight and delivery. We are the last mile delivery company for our company. It's about 1,000 trucks across 560 locations. They all have drivers, they all have resources tied up in largely fixed costs and that's, again, another third layer that is part of this productivity initiative to rationalize over time. So it's early stage, we're not ready to throw out a bunch of numbers and wish lists, but that's the nature of what we're doing.

I can tell you what my goal is from an operating margin perspective. It's at least 10%, at least, we'd like to move our operating margins -- EBIT margin to at least 10% and beyond.

And do you have line of sight to getting there?

No. I like your persistence, but we really don't. But we see progress. Even now, I mean, we've reported progress. But that's never been done in distribution. I think we have the capability of doing that.

Got it. Just to clarify, when you talk about 250 people, the plan to actually have a reduction in force? Or are you just able to grow without adding people?

Both.

Obviously...

Go ahead, Barry. Go ahead.

Obviously, there is attrition in every business, and that's how we would always want to intend to kind of carry out that type of program. And it's a brand-specific, location-specific, entrepreneur-driven-specific local market thing. This is not a broad stroke at Watsco. This is asking and challenging local markets, local leaders to look at this every day, give them data that they now have that they didn't necessarily have a couple of years ago to make -- to look at those decisions and make them.

Not only that. If we have attrition, our culture is very much a proponent of fill it with existing employees. If they are unfamiliar with the technology, train them. We'd rather look inside before we look outside to fill the opportunities that are providing by the new technology. That's a cultural thing. We want to give our employees long-term careers. All of this is long-term thinking. So as Barry says, attrition is hopefully -- our goal is to replace by promotions with training.

Got it. Maybe just a question on gross margin, very nice gain there. Just maybe some comments around how sustainable that kind of year-over-year performance might be going forward? It does sound like the price increases continue to come through and environment generally inflationary, but it's a little bit of a large gain versus what typically, I think, for Watsco is kind of very stable gross margin performance? So what's...

I would say that -- yes, I'd say the rate of change needs continued price increases to see the same kind of result. So you're right, it is outsized increase in gross profit because of price increases. There is more to come this year or next year, which seems to be in the cards. I would hope there would be improvement. But then that flattens out and as price increases work their way through the inventory cycle.

Got it. And maybe just lastly from me a question on cash flow and expectations for the year, in particular, just how have you been managing inventory levels? I think you've been maybe holding a little more inventory through the season than is typical. Any color there would be helpful?

Yes. We have -- our technology is geared towards improving turns, which would contribute to cash flow. Now pricing, of course -- the increases in pricing that you've mentioned, we are aware of, does increase the value of our inventory. So that the turns don't show up because of this more investment inventory. And every year, we sometimes do prebuys, but that's consistent, so I'm not sure that's part of it. So our inventory turns this year, did not show much of an improvement. However, it's not adopted across the board yet, particularly at Carrier Enterprises, which is our big player. And we expect as the technology adopted there, I'm talking about the inventory software that we adopted at Gemaire and that's really producing some great inventory turns. But more importantly, it's improving the ability to provide a contractor, customer that comes in, whatever he wants. Our -- I think, our ratio is like 98% of the time when a contractor comes into our location, we have what he needs at that moment. That software is particularly designed to do that as well as to let us plan the inventory levels better.

Next question comes from the line of Chris Dankert with Longbow Research.

I guess, I'd actually kind of move the conversation to A.J. here. The Alert Labs acquisition, interesting technology. I guess, is there any kind of a plan or timing on the rollout getting that to potential customers, any SG&A impact, anything else that you really point to as far as app adoption, contractor feedback, just kind of update on technology here?

Sure. Specifically on Alert Labs, it's very exciting. As we mentioned, they are just a bunch of really smart entrepreneurs. Their culture is unique and impressive and their skill sets are complementary to ours. As far as products, they have two products in market today that measure water flow and seek out flood and leak protection and help mitigate those costs. The device that we are developing together, which is Sentree, which is the air conditioning measuring and monitoring device, is in beta today. And we expect to launch in full force in Q1. And there will be a sort of surgical launch, it won't be available to everybody at the same time. But as far as -- we do talk show with the contractors all the time, and I think, just about every contractor who sees it, his jaw drops with excitement because there's a lot of potential here. It's very early days though, so I don't want to get too ahead of ourselves in speculating what it might mean in terms of dollars or in a business plan. But we're excited about it, and I think we got the right team now, both to design it, manufacture it and continue to enhance it over time. As far as the other technologies, we showed that the e-commerce continues to tick up in usage as far as percentage of our sales and the early results of people using our technology, e-commerce and mobile apps and some of the Watsco Ventures technologies, it is early results still, but it's very positive for our customer base. The customers like it. They continue to use it. Attrition rate of those customers is very low and the growth rate of those customers that are using it is very high relative to customers that aren't using it heavily. So that's why we are very encouraged by the long-term prospects of these technology investments. But like we said earlier, it's a matter of doing this at scale, which is just going to take time because it's new and it's different and we're introducing enhanced tools into an industry that's been doing things very much the same way for a very long time and like was said, and very profitability. So it's a matter of scale now.

Got it. And then I guess, the initial reaction I have to the product would be is there also kind of a cross usage of this product to add preventative maintenance information, analytics, that type of thing even further down the road?

Yes. That is the intention of the Sentree device, is that we designed it as a pro product, meaning that we'll sell to contractors not directly to homeowners. And contractors, they can choose how to sell it on to their customer base, which are homeowners and building owners. But what we hear a lot from them is that they would embed this in service plans that they have with homeowners, a sort of a connected service plan or enhanced service plan and what the device does is real-time measuring and monitoring, but also predictive diagnostics using machine learning algorithms.

I would add that that's why we keep saying long-term adoption, that's why we have a very young president to see it long term, see it through.

I was going to say something for...

That's a little funny. That's supposed to be a joke there.

No, I said -- I'm just going to have some fun and add to that, the 55-year-old guy on the phone here, is the -- the customer engagement that's going on really over the next 6 months is -- seems to be very powerful stuff. About 9 feet from where we are speaking this morning is about 15, 20 folks from the Northeast getting the full treatment...

Contractors.

on everything we're up to and -- contractors -- and really listening and learning and this is -- we're all gaining 10 pounds because we've had mounds of food out here while customers are doing this over the last several weeks. So we're trying to resist that temptation, but...

It is delicious candy.

what is going on is -- the customer engagement going on is really extraordinary right now.

I'm sorry, just one -- it's because they see the value in it for their business. Our message to them is that we want to help you grow because when you win, we win, right? If you grow, you're going to pull along us with you guys. So that's our mission and that's how we say it to these contractors is we're in business to help you guys grow.

Any other questions?

The next question comes from the line of Steve Tusa with JPMorgan.

Glad to hear you're chipper, there is nobody out there that's as excited as you are. So it's good to hear, it's good to hear. Everybody's so depressed these days.

Yes. We're absolutely not depressed, we're excited.

You got the life down there in Florida, no doubt about it.

Come, visit, Steve, especially to Tampa.

I'll try, I'll try. So just on the gross margins, I think -- just remind me, so you guys have some inventory, and I know there was this kind of unusual cadence of price increases from the OEMs. Are you guys able to kind of leverage that? So for example, if you bought some product from Carrier in June or July or something and they raised price in August that you can kind of -- you get a little bit of a spread benefit on that?

We do.

Okay, got it. Got it. Are you see -- what would you -- I think, at a high level, there's a lot of discussion around the consolidation potential in this industry. Lennox talked about Carrier a bit on their call. What would be your take on kind of a Carrier and Lennox tie up? They said they wouldn't want to impact the front end of the business, but those guys like to control more of distribution. Have you guys thought kind of about the game theory on that at all?

Well, let me ask you this, Steve, related to that particular issue. Did Lennox say they're going acquire Carrier or be acquired?

No, it was basically just consolidation. So would it be like a reverse mortgage trust or a merger of some sort, more of a combination? I mean, I think Carrier is obviously too big for Lennox to go out and kind of acquire specifically. But whether it's them or York or anybody else -- yes, anybody else kind of getting -- what's your kind of take on that? You've been around for a while.

From a distribution perspective, we think it's healthy because think about it, if two manufacturers get together wherever they are, that removes a competitor, there's just one now. And OEMs, whoever are the survivors will be in a game of distribution because we have the largest distribution network actually in the world, certainly in North America. We can't control those kinds of things, as you know, the consolidation. If I were to guess, I would say that difficult because of the antitrust. But on the other hand, I suggest air conditioning is a global market now. I mean, there are Asian manufacturers already in the United States. So if somebody were to say why don't we merge, but the worry about antitrust wouldn't be so great because if they added all the other manufacturers that exist around the world that are serving the U.S. market, that may not be such an issue, that's my these, I don't know how true that is.

Now that makes sense. And then lastly, Trane has actually talked about in their filings now that they're kind of going out and acquiring independent distributors. It's unclear, whether it's -- whether it's commercial or residential, I think, it kind of sounded as though it's residential. Have you kind of seen them get a little more aggressive strategically in -- around stuff that may be you guys have been trying to go after?

Well, let Barry answer that because he's in the market constantly, for that sort of thing.

Steve, for a second, who did you say?

Trane.

In Ingersoll's filing, they mentioned that they kind of acquired distributors. And it's not even -- they didn't even say from time to time, it was kind of seem like more of a consistent run rate now. And I don't -- I know they churn their distribution a little bit, but it's -- I don't recall them kind of talking about it that specifically. So just wondering if there's any kind of change in the marketplace for these types of assets and that -- whether they're kind of more involved or not?

Well, just -- and again, I'm not them. But in my experience, on the commercial industrial side, commercial applied side, commercial service side, they've been very active for most of my career bringing those types of services and relationships in-house and acquiring, essentially accumulating those assets. On the residential, light commercial side, we've seen very little acquisitions in really a 20-year period and then the recent period, I can't think of any. As with all OEMs, they're active in making distribution decisions that -- within local markets, that's not new. I would say they have been more active than they had been maybe 5 or 10 years ago. But certainly not competing for M&A type activities in our neck of the woods.

But Steve, you have to remember from an OEM perspective it's not -- once you acquire then you have to carry the inventory into receivables, that's an enormous -- you need the cash first to acquire and then cash second to support it. The independent distributor takes over all that. If they operate their independent distributors, that investment all goes to the independent distributor, not only the acquisition price, but as well as the working capital that follows. So these are significant -- you know our record, we've invested billions of dollars in acquisitions. So of course, we believe in the independent distributor model for many reasons. And I hope that we have continued opportunity, and we see no lack of opportunity. It's just right -- wait and see what happens.

One last quick one for you. Are you seeing any signs of -- there's a lot of debate around the housing market and direction of the housing markets? Obviously, you guys are more replacement and stuff like that. And any kind of signs that things are turning down when it comes to your more kind of direct read into the new home homebuilding kind of sector, across your footprint?

Paul?

Yes. As you know, that's not a big piece of our business. It's fairly small in the residential side. This year has been great and it continues to be great through the third quarter as far as increase. Looking at the permits through September, it came out yesterday. It appears at least from a permitting standpoint, they continue to grow. If new construction for us is, like I say, more on the supply side than it is on the equipment side. And to date we've been able to hang on to that.

No, he is referring to the industry in general. If we have any knowledge about industry in general. Barry?

I can give you some specifics to Watsco, not just the whole market, but Watsco. There's three things that kind are important in gauging that. And one is margin. Passing through price increases at a higher margin is a good indication of the health of the end market. The other is bad debts. We float customers $500 million in accounts receivable every month and it gives us a lot of insight into how they are doing if they pay us. And year-to-date, I mean, year-to-date our bad debt write-off is around 3 basis points. And I've done this job when it's 20 basis points. It's a very healthy credit market, so to speak within our customer group. And the third is mix, if contractors have the faith and confidence to walk into a homeowner and say here spend 10% more on a higher efficiency system and they are accomplishing that, mix is a good indicator of health, and again, we saw an increase in mix this quarter.

So what you're saying is our contractors are the same ones that serve new construction and you don't see our contractors' financial condition getting any weaker?

Yes.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks.

By the way, are you going to be our operator from this point on? The gentleman, is he all right. The one that was here before. This is to you, operator. All right, kidding. Emma. Emma didn't hear me. She tuned me out. All right. Many thanks for your interest in our company. I hope you stay with us long term. That's our methodology always, what benefits we accrue to all the stakeholders here long term. So I hope you'll be with us long term. Thanks for your attention today. Bye.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.