Watsco, Inc. (WSO) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Albert Nahmad, you may begin your conference.

Good morning, everyone, and welcome to our Third Quarter Conference Call. This is Albert Nahmad, President and CEO, and with me is Barry Logan, Senior Vice President; Paul Johnston, Vice President; and Ana Menendez, Chief Financial Officer. First, the cautionary statement, as we always do. 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. Watsco had a good quarter. We established new records for sales, operating profit, earnings per share and cash flow. Trends in our HVAC equipment business are similar to those discussed in our last call. On the plus side, we saw growth in the sale of R410A replacement systems versus the R-22 dry charge units, and we saw growth in the sale of 16 plus SEER systems, the more efficient systems. Partially offsetting this was a higher sales mix of base level 13 SEER systems. In other words, equipment sales were strong at the high and low end of our product offering with a decline in the middle. We believe this reflects some of the uncertainty consumers are feeling about the economy. Longer term, the trend towards consumers upgrading existing systems to more efficient, environmentally friendly products versus patching up their old systems is what is important. We would expect the sales mix toward higher energy efficiency systems to improve with the economy, along with the enacted EPA regulations that will raise minimum energy standards for many of the products we sell. This year, we believe we continue to gain market share in the markets we serve and feel that many of our initiatives to improve customer service, product availability and improved contractor tools are paying off. We also reduced SG&A again this quarter, producing further efficiencies to the long term. SG&A as a percentage of sales for the quarter was at its lowest level ever. Our international business, now about 15% of sales, also grew nicely during the quarter. We have an excellent team in place, and they have increased product offerings, added locations and added people to continue our growth in these markets. This quarter also reflects increased ownership in Carrier Enterprises, the first joint venture formed with Carrier 3 years ago. Our ownership is now 70% and we have second option to raise ownership to 80% in July of 2014. This joint venture has been a big success for us and for our partner, Carrier. Now the detailed performance of the third quarter. EPS increased 17% to a record $1.19 per share. Operating income improved 15% to a record $86 million. Same-store operating profit increased 3%, with operating margins expanding 20 basis points to 8.3%. Revenues grew 12% to a record $1 billion, and were up 1% on a same-store basis. HVAC equipment sales were up 1%, other HVAC products were down 4% and commercial refrigeration products increased 16%. Gross profit increased to 11% and gross margin was 23.8%. And SG&A decreased 4%, including new locations. Now results for the 9 months. EPS increased 12% to a record $2.61 per share. Operating income improved 15% to a record $191 million and operating margins increased 10 basis points to 7.2%. Same-store operating profit increased 4% to $172 million, with an operating margin of 7.2%. Revenues grew 14% to a record $2.7 billion for the 9 months, and were up 3% on a same-store basis. HVAC equipment sales were up 5%, other HVAC products were down 4% and commercial refrigeration products grew 18% in revenues. Gross profit increased 11% to a record $632 million. Gross margin was 23.7%, reflecting a higher sales mix of HVAC equipment and growth in sales of commercial products. Continued focus in cost control generated a 3% decline in SG&A, excluding new locations. Cash flow for the quarter was a blockbuster at $124 million. We expect strong cash flow to continue into the fourth quarter, as it is a seasonal period for working capital reduction. We expect to meet our annual goal of producing cash flow that equals or exceeds net income this year. As reported earlier this month, Watsco is paying a $5 special dividend along with a $0.62 regular quarterly dividend on October 31. We consider this a terrific reward for owning Watsco shares given the state of the economy and the uncertainty surrounding federal tax policy. We expect our balance sheet to remain conservative with a debt-to-cap ratio of under 25% after payment of the dividend, with debt to EBITDA of under 2x by the end of the year. In other words, we will maintain the capability to invest large sums of capital in our business and we are seeking substantial opportunities to do just that. As we stated in our press release, we expect to pay a more moderate dividend in 2013. We will decide once we know more about the government tax policy, that's the federal government tax policy, and the general state of the economy post-elections. Please note that our EPA calculations for 2012 will be reduced by an estimated $0.38 in the fourth quarter related to the payment of the special dividend and is non-reoccurring. Excluding this impact, we have revised our outlook for 2012 for EPS in the range of $3 -- to the range of $3 to $3.10 versus $2.74 last year. With that said, Barry, Paul and Ana and I will be happy to answer your questions.

[Operator Instructions] Your first question comes from the line of Matt Duncan from Stephens Inc.

The first question I've got for you, Al, on the dividend policy going forward. I know it's probably still preliminary, but do you have any thoughts around how -- what sort of quarterly dividend you might be paying in 2013 if the dividend tax policy is allowed to change?

We really don't know the answer to that. I mean, you were right when you couched your question. We have no idea with the uncertainties of federal tax policy, and we have no idea whether this economy is going to continue to grow, even though it's growing slowly. And we're a pretty conservative company, so we know we want to pay dividend, but we just don't know or even can start to imagine at what rate. We do want to continue being a dividend-paying company.

Okay. I guess, what I'm getting at is, do you anticipate too very much of a change in your dividend yield? Right now it's around 3.5%. I just don't know if you guys have been thinking about changing that material or maybe just a little bit given the tax policy change.

I don't know. We just don't know.

Okay. Fair enough. And the other question I've got, then I'll hop back in queue. It appears as though you're still seeing the market shift towards replacement and away from repair given the 1% growth in equipment sales with the 4% drop in other HVAC products. A, is that still happening? B, if it is, why you think that is occurring right now and do you think that the increasing costs of R-22 is factoring into that equation at all?

That's a great question. I'm going to go to our expert, Mr. Johnston.

Wow. Those are 3 big questions, Matt. The answer to the first one is, is it shifting away from replacement -- is it shifting towards replacement from repair? From our viewpoint, what our data shows, yes, it is. That during the quarter we continued to see what we saw in the second quarter and that is we saw replacement units coming out, although they were on the low end of the 13 SEER spectrum for the most part or very high SEER at 16 and above. That was a trend that we continue to see in the third quarter. Compressor sales remained soft through the quarter, so that's another reflection that, that would be -- that is the case and that continues to be the case. Now why is that continuing? I think a part of it is, I'm speculating here, would be the age of the product that's out there in the field. I think people do have a concern about R-22 and its availability plus the cost of it, particularly among the contractors more than the consumers. And I think there was a general shift by the contractors, in general, moving the consumer to a decision to go with 410.

Your next question comes from the line of Robert Barry.

You lowered the outlook. What was the driver of the lowered outlook?

Our sense of the economy and the industry within the economy and what we're seeing on a day-to-day basis.

So it's a lower revenue outlook then versus what you had last quarter?

Yes.

Okay. And then I just wanted to drill down further on the parts and supplies decline. Is the higher cost of refrigerant a tailwind for the other HVAC equipment?

Paul?

Could you describe what you mean by is, "Is that a tailwind?"

Is it -- are the puts and takes driving it, is it one of the benefits? Is it helping?

The higher R-22 costs or sale price to the consumer and to the contractor, yes, that does help drive consumers away from the R-22 replacement more towards a replacement of 410A equipment, yes.

I guess what I was getting at is, because it seems like the higher cost of the refrigerant, which I think you sell, should be helping parts and supplies. And I thought that...

[indiscernible]

Okay. And I assume that they're still...

It's a very small piece of our business.

Okay. Is there still some benefit also from adding more parts and supplies at the Carrier properties?

We have a full complement of parts and supplies available at the Carrier facilities today. It's a matter of them being able to get the sales generated now through to the contractor. We get the contractor in there to recognize that Carrier is a parts and supplies outlet. Generally, it's more supplies. Carrier is an excellent parts. I'm sorry, go ahead.

I guess, where I was going is I'm trying to figure out that, given what seems like these 2 tailwinds, maybe they're smaller than I thought, why that parts and supplies is still down. I'm wondering, do you have a sense of if a consumer decides to replace instead of repair and you lose that compressor sale or the parts sale, how much you're kind of picking up on the equipment side because it seems like it's kind of a net headwind for you guys, that you're not picking up as much on the equipment side as you're losing on the parts side.

Okay. On the replacement side, there's not much supplies that goes into a replacement unit sales. Generally, it's the unit itself and it's some other indoor equipment that goes with it. But generally, you're not replacing ductwork and grills and registers and wiring and all that sort of thing when you put in a replacement unit.

And that's as far as construction.

Just asked more simply, what's driving the decline in the parts and supplies? It seems like it's accelerated.

No. It's continued at the same -- approximately the same pace it's been at. What's going to make it grow again is going to be obviously an increase in residential and new construction, commercial new construction. And that really is the driver behind the supply business. And the supply business is a big piece of what Watsco has.

Your next question comes from the line of Ian Zaffino from Oppenheimer. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Just a quick question and a follow-up on the last one talking about the new construction. I mean how do you actually think about the business? Because I know the last quarter you had said that there really isn't much of having a new construction play here and now you're kind of indicating that in the parts or, at least partially new construction. Can you kind of give us an idea and maybe by just product line, what portion of it would be new construction versus just kind of standard replacement?

Well I still don't think that new construction is having an impact on our company, it's just still very small. Eventually it will, of course, if it returns to previous high levels. But it's not a big deal yet. That doesn't mean we're not going to enjoy the benefit of it as it starts to increase. But more important is the completions increase. But can you add more color to that, Paul?

New construction for -- the numbers, the percentages are great, as you know, especially when you look at the permit numbers...

The percentage growth, yes.

Yes. And when we look at -- we had our key markets, the Southeast, Texas, California, the numbers of new permits is definitely up. We hope to see some benefit of it in the future. It's a bright lining for us that we look forward to it occurring. As of yet, we just haven't felt a material impact in our results on the supply business. Generally, the products that we sell on the supply business would occur later on during the construction cycle, when you put in the ductwork and you're finished, you put the grills in, and you put the air conditioning and the furnace so the air enter in. So it's something we look forward to. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Okay. But I guess by product line, you probably see maybe the biggest increase on the supply side because there's not a whole lot of replacement on the supply where you see kind of a less of a proportional increase on the unitary side, but maybe from a dollar contribution, a bigger contribution from the unit side because it is a higher ASP. Is that right?

That's kind of the right line, yes.

Your next question comes from the line of David Manthey from Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First off, I'm wondering if you could talk about what's next operationally for Watsco. It seems like going forward acquisitions just given your scale, can't possibly have the same magnitude of impact and...

I wouldn't conclude that. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: No?

No. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. Well, let's put that on the table for right now. But then second, your EBIT margin target, where you talked about 8% in the past going ultimately to double digits, correct me if I'm wrong, but it seems like that's somewhat faded into the background, I haven't heard you talking about that much lately. I'm just wondering in somewhat concrete terms, how should investors think about the Watsco growth and margin story over the next 3 to 5 years?

Well, I don't think that we put our double-digit goal in the back burner. I'm just saying that given the demand of the industry and our participation in it, we believe we are getting share of the demand. But the industry is not growing much that even in spite of that, we're getting more efficient. As you noticed, our EBIT margins are improving, even in this dull market. If you say 3 to 5 years, I cannot imagine this industry demand isn't going to climb at a rate higher than it is now. And I think that's the first real need to get to the double-digits EBIT margins in the 3- to 5-year period that you're referring to. We're hitting record margins now. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Right. Could you talk about how you plan to outgrow the market? I know you said that you felt like you're gaining share within your markets. And outside of whether or not you believe in reversion customer behavior driving above average industry growth, could you talk about what areas you plan to gain the most share in, if it's just hand-to-hand combat in the equipment side or more of the [indiscernible]?

We do all of that, but we've got a very conservative balance sheet. We like to acquire additional territories, or within territories, we like to acquire businesses that have locations that we can add to the density of the market so that we have greater customer service because we have more locations. And that's always been our weapon is add locations, high-density locations, and then add additional product. And we like to do that through acquisition, preferably. And that's why I'm saying we're always in the market very hungry for the largest transactions that we can find. There is no transaction that is too big for us when it comes to distribution assets in our industry. And I might say that we're probably the only ones who can say that in the industry because of our scale today. But it's the same old thing, more locations, more product offering to the locations and then having a highest skilled, highly motivated organization to gain share through those locations. And I just said, no one has our scale, so we could do this in a fairly unique way. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. Last question, given your -- the change in outlook on the dividend policy, I'm wondering, does that change your inclination toward share repurchase or maybe in broader terms, if you could just tell us what you plan to do with the cash? I mean, obviously, this quarter year-to-date, this year, if you're growing free cash flow at 100% plus of net income, you're piling up a tremendous amount of cash. And if you're not paying it out in dividends or let's say that some of these larger acquisitions don't materialize, what is your plan?

Well, I would not want to mislead you that, while we have done stock repurchase in the past, that is not something that we would -- I think we have a preference for additional dividends rather than we do for stock repurchase. But you said it right, we'd rather use our capital to expand the business, but historically, we've always had more capital than we need to expand the business and then we return that to the shareholders. And I think that would be our preference as well going forward. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Let's just say that those don't materialize. I mean, you're talking about above market growth and expanding margins and I suppose that means increasing level of cash flow at the same time, you're talking about reducing dividends. If the big deals don't materialize, does the cash just build up on the balance sheet or how do you...

Don't forget we're saying, we're going to pay a more moderate dividend because we just paid a $5 million dividend to help our shareholders who could be facing a higher tax rate on dividends. That's the reason for that strategy. It's not -- it isn't anything else. That doesn't mean that after a period of time, after the special dividend, we could substantially, I don't know how long that would be, so I don't want to be quoted, but at some point in time in the future, we'd like to change that word moderate to more meaningful dividend distributions for the first couple of years.

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

Just one last thing on the dividend. I mean, is it an oversimplification to say if the tax law doesn't change, we're not cutting the dividend?

Well, you guys are good at these questions. I wish I could give you answers that we know we're going to have, but we don't. We don't know what the economy is going to look like. We don't know what the tax law is going to look like. There's a lot of uncertainty out there. I think the -- we're telling everything we know. We don't know what we're going to do. We know that we wanted to pay this approximately 2 years of dividend ahead of time like the $5, and just to help our shareholders who might be facing higher taxes. But the proper thing to do and the responsible thing to do as we get into the new year is to see what all the circumstances are. You know we like to be dividend payers, we've demonstrated that. And because we think we can do both, invest in our business and continue to scale it, as well as paying a pretty good dividend rate. That's really what we like to do, but given the uncertainties now and all the things I've told you about, we paid $5 worth of dividend upfront and now we'll see what's going to happen. But we do like to be dividend payers, and we like to be dividend payers and increase our dividend every year. Does that help?

Al, I just want to add some color about some of the previous question, just reflecting on it. Whenever we felt that we had excess cash, our big-game hunting that we do on the acquisition front seems to have always occurred, that doesn't mean it keeps occurring. But if we go back to 2004 and '05, we had a very large deal, 2007, a large deal. 2009 began the Carrier acquisition, which have lasted over the last 3.5 years. So at a point in time where we've ever felt, "Gee, what are we going to do with our capital?" We've always had opportunities and glad that we kept conservative in those periods to take advantage of those opportunities and never ever really reached deep into a highly leveraged situation. So I'll just add color to that, that we're only 10% of the North American market. There is big-game hunting going on every day in the company, and that capital that we secured for ourselves through the years to do what we've done is in place for what we're seeing as we're going forward.

Okay. And then just shifting gears, last quarter you mentioned some initial issues with the Canada business. Can you just elaborate on kind of what was going on there and if those issues are kind of lingering or getting resolved?

Issues have been partially resolved, but there's more to go.

And what are you -- I mean, what are kind of the downside surprises that you're finding?

Well, as I mentioned in prior calls, it's the profitability of the business.

Okay. And then, Al, you mentioned kind of puts and takes within the mix. Can you just give us what unit, beyond the equipment side, what units were versus price mix?

Paul?

What units were versus price mix? As far as what our unit -- you're talking about our unit movement versus our...

Yes. On the plus 1 in equipment where units...

[indiscernible] pricing. I think that's what you’re asking, isn't it?

I mean, is mix negative, net negative?

Yes, it is. We saw a mix shift down to more 13 SEER even though it was more 410A 13 SEER from the prior quarter. But it was also -- we have different classifications of 13 SEER. You've got a fully featured 13 SEER and you've got what we call a Cube 13 SEER. And we're seeing a lot more of the Cube 13 SEER, the low-end of 13 SEER.

Okay. And then last question...

It's an oxymoron, I know.

Last question on this R-22 and some of the consternation and the reason, all of the reasons that demand is lower. How are your R-22 inventory levels? And do you worry or does the industry start to worry about any kind of obsolescence if this trend kind of continues to happen?

Good question. Paul can answer that. Paul is right on top of that.

We only follow that every day. Our R-22 inventory is kept at an absolute minimum. It's not a concern to us at all. And that's something, like I say, we watch every week and make sure that our companies only carry the amount required to meet what they got from limited customer demands now. So we're very happy with our position. I can't speak to the industry as far as what that does to obsolescence, but generally speaking, I guess somebody will always buy it, but we're not going to stick our neck into it.

Your next question comes from the line of Ryan Merkel from William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: Just want to follow up on the question about the equipment line, the volume versus the price mix. You didn't quite answer it. I don't know if you have the information or if you could just answer it a different way. What percent of the equipment mix was at the 13 level versus 14 and above?

Paul, do you have that?

Yes, I do. For us, at the 13 SEER level, it's a little north of 50% of our business. Ryan Merkel - William Blair & Company L.L.C., Research Division: And is it fair to say that the higher price point of the complete R410a system is driving people to the lower SEER, lower value lines and maybe even perhaps window units?

Oh my God, I wouldn't compare it to a window unit, no. Material difference there in the price of the product installed, obviously. What I say -- I would -- and if you took a guess on our part. But yes, I would say definitely that it's the consumer space with the repair versus replace and their concern and the contractors put the concern in their head as they rightfully should that they should replace it with a 410 as opposed to spending more money on a 22 machine. I think a lot of consumers would migrate down to the low end of the 13 SEER, to the baseline 13 SEER 410 inch [ph]. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. And then it just seems that the growth in the industry has been weak, really, the last 2 years. We had the 1 good year in '10 because we had a tax credit. But what -- everybody on the call is probably disappointed in the growth of the industry, but what changes it? Is it better GDP growth? Is it house prices going up? When do we get back to this kind of 5%, 6% growth in HVAC distribution?

Well, you've heard it over and over again probably wondering whether it really makes any sense. But we think there's an enormous amount of pent-up demand because of what you just stated. And when that gate opens up, Paul, do you have a -- what would cause that gate to open up?

We've analyzed and studied this 16 ways from Sunday, trying to figure out what would be a leading indicator for it. And frankly, it's employment. It's that basic and simple. As more people have jobs and have full-time jobs and have confidence that their job is going to not be terminated, consumers will open up and start spending money on this product again and start looking at the product as something that is not a luxury but a necessity of life. The other thing we track, of course, is consumer sentiment. And if you look at consumer sentiment, it's back in the 80s again, thank God. Last year, we were looking at 60% consumer sentiment. So those are 2 great things, I think. Looking at new home construction, new home construction has got to double to get us back to normal. So that's a long road, it's a road that we welcome and we hope it starts to happen. But we're not going to hold our breath that that's going to be something that we can control. Ryan Merkel - William Blair & Company L.L.C., Research Division: I got to sneak one last thing here, could you just comment on the weather in the quarter? I know you don't want to blame weather, but from what I understand, it was a bit more rainy, a bit cooler and some of the OEM results in essential regions were better. So here's your opportunity, did that impact things?

Weather, when we look at weather, we look at prior year weather. And when you look at it on a national basis, it was a little cooler than it was last year, much above normal, whatever normal is. But just looking at it from last year at least, it was down like 2% on a recooling days basis. Yes, it was wet in Florida. We had some wetness, but that's something that we always look at it as delays demand. It isn't something that we stand behind and say that's really what drives our business.

Ryan, I think part of that answer too, is that still to this day, 80% of what we do is in the Sunbelt. It's going to be hot. It's going to be consistent year-over-year, and I don't think that -- that's the primary reason why weather can't be either our benefit or our excuse. And the volatility of that I think is latent in the market in some of the northern parts of the country for next year is there. But I think for us, it's always been consistently in the Sunbelt and that's been a key message for us for many years now.

You're next question comes from the line of Josh Pokrzywinski from MKM Partners.

Just to the extent that some of the new housing recovery that we've seen so far seems biased to some of these national builders. Is that a benefit to you having your scale or do they typically go...

Oh, sure. No. I mean, what these builders do very cleverly, they negotiate with the guys that produce the product to get a better price. And then we, the distributors, participate in the program but it creates, it creates a demand for us when the OEMs do that. For example, Carrier or Rheem or whatever else we represent, they will negotiate national contracts with national builder, then we do the fulfillment.

Has new housing been a tailwind? Are you guys seeing that in your markets or is that taking place outside of the Watsco zone?

There's just nothing that we want to say, this is a big deal going on. We read the newspapers like you do and we can see the news, and you know the markets are signaling a big change. Well, one day they are and another day they're not. There's even uncertainty about housing. But all we're saying is, it's too early for us to feel an impact. And when we do, it will be meaningful. But who knows when that is. We don't like to raise expectations on housing because we're conservative. Go ahead, Barry.

Josh, I mean, the analytics are very clear. Permits and starts are up 30%, 40%. Completions, which is like...

It's a small number.

This September, was up 13% and that's 80,000 homes. 80,000 homes in a 5 million unit industry. So it's nice that there's 80,000 more, but it's just not material to what's behind us. If we compute and have fun with math on what's in front of us, it's pretty interesting.

Understood. And kind of going back to maybe some of these industry dynamics at the OEM level. It seems like Goodman has been pretty aggressive on the low end in the past couple of years and obviously, they're a big relationship for you guys. To the extent that maybe they forced the hand of some of the other OEMs to look at that low end more seriously, if somebody like a Lennox or Ingersoll which, traditionally, was a little less prominent down there. Do you think you guys have maybe lost a little bit of share and that some of these other distributors -- I'm sorry, some of these other OEMs that you don't really carry had more to catch up on the low end?

I'll let Paul answer that more thoroughly, but I can tell you that the other OEMs are as competitive as Goodman. What they don't have, the other OEMs, well it depends on which ones you're talking about, is as good a distribution as, say, Carrier does, or Rheem does, or Goodman does. Of course those are the 3 major lines that we represent. But people like Ingersoll and York are not as strong with their distribution. And I think that's why we gain share and they may or may not, I don't know. Paul, do you have a view on that?

I agree with that. And Josh, as you know, they're reporting their shipments. We report our sales. When we report a sale it's actually something that's going to be installed. It's not inventory. And the OEMs with the exception, some small exception, unless they're shipping to their own company-owned branches, they're shipping to a distributor who puts it in inventory. And you don't know if it's actually been sold through the channel. So what we do is we look at our market share over a long period. And the only numbers I have are numbers that reflect through August, because that's all AHRI has published and basically, what I look at there is the industry is at a dead heat from prior year. It's flat, up 0.1 of a point and Watsco's up mid-single digits, as far as our unit movement is concerned. And when I look at it for the third quarter, I could only guess what the third quarter is going to end up being. But basically, there was a pretty good bump in gas furnaces in the quarter in shipments, I don't know if that reflected sales. I would hazard it wouldn't probably reflect a lot of sales. But on the residential products, the residential air conditioning cooling products, I'm going to guess it's going to be up 1%. And I would say that Watsco is going to beat that number by a little bit, not much, but by a little bit. So definitely the answer is no, we're not losing market share in my opinion.

I guess the angle that I'm coming from is that maybe some of these other guys who weren't as prominent on the low end where the market seems to have gone had more catch up room and maybe...

Sure.

Everyone grows at the same rate. I guess, in your opinion, does that happen?

Sure. Yes, I mean I don't want to name names but there are some of these brands that you're hearing about that are gaining -- have revenue growth going on currently, while they're coming off a very low performance that their comparisons are, I guess.

Sure. Understood. And then one last one on R-22. Obviously, very early to call what the rate of decay is from here, but I mean if you guys had to handicap what the mix of that could look like in 2013 just based on what's out there now with refrigerant allocations and the feedback from contractors as we work our way through the season, do we get down to 10% or less at R-22 next year?

Yes. I would definitely hope that would be the number. The deterioration we saw was quite remarkable this year. If that trend line continues, it would obviously be 10% or below.

It's on its way out.

Yes. It is. It's a dead horse, in my opinion.

[Operator Instructions] Your next question comes from the line of Sanjay Silvester (sic) [Sanjay Shrestha] from Lazard.

A couple of questions. So on the refrigeration side, the commercial refrigeration, even though it's only 4% of your sales, but that was up pretty strong. Is there any read through there as to what's happening to the end market or was there anything specific in the quarter, anything we can glean from those numbers?

Paul, you want to deal with that?

Yes. We continue to add territory and products there. That's a growth initiative that we started years ago, and we just continue doing it. And so a lot of what you're seeing there is just the continuation of adding more products and more territory that we handle that under.

There are a few anchor OEMs in that business, too, and we, as Paul suggests, we're getting more territories and it's very exclusive territories, and it's been a terrific growth for us. So it's something we want to keep investing in and do more of.

Got it. Now on sort of the residential side though, right, you're at 1% growth. And I hate to kind of come back to that point. But when we're then looking at some of the equipment guys, right, where you're talking about high-single- to low-double-digit growth. Granted on one side, they're playing catch-up, but is that number also skewed a bit by geographic representation that you guys have and that's why maybe your number is 1% and therefore, you're losing no market share or gaining market share, and maybe it's something as simple as that. Is that what it is?

It could be part of it. We really don't know what their share is and whether -- we have estimates as far as where they're stronger. Stronger in the Midwest, obviously, and the Northeast than we are in the Sunbelt.

We don't participate in the Midwest and have a small participation -- a growing participation in the Northeast. We don't participate Midwest yet, and we're building a larger presence in the Northeast.

Okay. Great. Two final questions. So one on the acquisition front, right, Al, when you say that there is no distribution outlet that's too big for you guys to potentially go after. So a 2-part question on that, one, are you in sort of active discussion at this point in time? And two, when you refer to that, what is sort of that buying power you think that you guys have in terms of going after this opportunity as a part of your long-term strategy of growth?

We'll, I'm not going to identify any specific because I think that's going too far, but Mr. Logan is, at my request, constantly in contact with sellers. So we say companies who want to buy and it's just impossible to predict when we get a great -- we always seek the best companies and when we're going to have a transaction. But the ones we're looking at in our current, shall we say, portfolio, are -- they would move the needle a little bit. Someone said it earlier, you have to do transactions that move the needle, at least you'd like to. And at a $3.5 million rate, which is what our present rate is, we understand that. And the ones that we think we might be able to do something with would move the needle, if we get them. It's very if. There's valuation, there's culture, there's all kinds of things. But we are very hungry for more transactions. We are very ambitious. If we can reach a size of a company 4x than we are now, I'd be very happy.

Your next question comes from the line of Keith Hughes from SunTrust.

My question has been answered.

[Operator Instructions] Your next question comes from the line of Steve Tusa from JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Paul, what were the compressor sales like in the quarter?

Pretty much similar to what we have in the second quarter, they were down in the 20%. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Down 20%?

Yes. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. On the -- I guess, on the furnace stuff, you guys don't do, I guess, a ton of furnaces, but you were talking about the industry stats. And I'm just wondering if you have a view on this upcoming changeover in, I guess, May of '13. It's going to be kind of a very delicate situation for the distributors and the contractors to kind of balance. And what we've also heard is that the new furnaces are going to cost a lot more to install. So if you knew of any kind of, like, I guess pre-buy going on here where the contractors are going to try and push the lower costs, the older furnaces on people this winter given that the costs are going to go up so much next year?

Yes. I would say it definitely is going to happen. What we're hearing is that the EPA is, or the DOE has ruled it. It's going to be date of installation is what the rule is going to be basically based on it. It's not going to be -- if you have the inventory you can always go ahead and install it. The idea of this particular regulation is that you can't install the lower efficiency product after May of 2013. So that could create a bit of a bubble, if you will, of people if they want to replace that furnace at a lower price, they would have to do it beforehand. So that could have an impact, yes. But it's going to be very sensitive. But Steve, it's going to be very sensitive. You're not going to want to be left with any inventory. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Yes. Right, right, so I mean you want to, I guess -- did you think that maybe some of that was just, some of the recent furnace numbers that people are kind of getting ahead of it and planning a little bit? And then that's going to, obviously, those orders are going to drop off as the contractors or distributors get their complement because they're not going to be the one left holding the bag, obviously.

I don't have any regional data yet for the quarter, all I've got is the national. So I can't give you a definitive answer on that. Do I hope it's that? Yes, I hope it's that. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. And any dynamics around price that were interesting in the quarter or any kind of commodities coming off here and the OEMs have put up such massive price costs benefits here in the last couple of quarters. I mean, anybody now looking to push back a little bit on pricing? Have you seen kind of the normal behavior from the OEMs as far as warning you guys about what they're going to do with price here in the fall and in the winter?

It's been very quiet. It's very quiet as far as these sort of pricing actions. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Is that normal?

I guess, I would have anticipated a little bit more of action around pricing by now, but there just hasn't been to date.

I'm sorry, Steve, just to add to that. I think this is one of the few years in our careers where there's basically no pricing action in a given 1 year's time. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Interesting. And then just one last question, I guess, the margins have been okay. I mean at what point do you feel like you're maybe cutting too much in some of these markets and hurting service levels? How much more room is there to get efficient on the SG&A side?

Well, that's a never ending process. And no, we don't -- we get better at things, we don't get worse at things by getting more efficient. We don't cut service, we sell on service. So I would say that it's an ongoing process and it's not anywhere -- it's going to go on forever, as it should. We should get better at what we do. We should get better at what we do with less cost. And there's no end to -- I can't tell you that's over in a year or 2 or 5 because I just think that we're always going to be doing it. And there's also technology. Technology, which we are very focused on, will even accelerate the efficiencies as we go down the road.

There are no further questions at this time.

Very good. Great. See you next quarter. Bye now.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.