Good morning, and welcome to the Watsco Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Albert Nahmad, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone. 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, Executive Vice President. Now before we start, our cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. Before I report, let me first wish that you and your family are healthy and safe. Now on to our report. Watsco just completed an outstanding third quarter. EPS grew 25% to a record $2.76. Records were set for sales, gross profit, operating profit, operating margins, and net income. These results were driven by strong growth in our U.S. residential HVAC equipment business, which grew 19% during the quarter, and from operating efficiencies achieved throughout our network, as evidenced by the nominal change in SG&A. Homeowners clearly are investing in their homes as HVAC replacement sales have remained strong from early summer through today. We also believe that greater adoption of our Watsco technologies has contributed to our results and led to gains in market share. Our best indication of this impact are two simple metrics. First, customers that use Watsco technologies are growing at a much faster rate than non-users. Second, we are experiencing minimal attrition among active users on a year-over-year basis. Now keep this in mind, we continue to invest in our platforms and to drive for greater adoption by more customers. Here are some examples of our progress. Weekly users of our mobile apps have grown 31% since last year, with over 100,000 downloads. E-commerce transactions have grown by 19% this year to nearly 1 million online orders, which…

We will now begin the question-and-answer session. [Operator instructions]. We will go to Brett Linzey from Vertical Research Partners. Please go ahead.

I wanted to start with just the sales trends, 10% growth in HVAC equipment, 19% in the U.S. resi products. What was the big driver in that category? So, everything excluding equipment, where did you see strength?

Why don’t we turn to Paul Johnston for that answer?

Yes, I'd like to make sure I understand. Everything but equipment?

Well, just the total U.S. resi sales up much stronger than the equipment. So, what was the big driver kind of ex-equipment? What categories drove that?

Oh, no. You misunderstood. Go ahead, Paul, and explain that.

Yes, resi is equipment. It's gas furnaces, coils, air handlers, split systems for residential. So, it's included in the total equipment.

I think they previously came in equipment, that's what he is -- that’s what we're trying to say.

And just a follow up to that. Did you see any mix benefit in terms of the gross margin line from kind of strength in the other categories versus just the equipment side?

Paul?

Well, yes, we had some moderate growth in the parts and supply side of our business, which we indicated, a little heavier on the part side in mid-single-digits. And that, obviously, is an enhancement to our gross profit. So, that mix did help a bit.

Yes.

The next question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Just on the equipment side, can you remind us what the mix is of kind of the -- on the equipment side, the U.S. residential versus I guess would be -- the drags would be commercial and international?

Paul?

Yes. Barry, why don’t you handle that as far as what is offshore versus onshore?

Exactly. You are on the right track, the largest part of our equipment business is the U.S. residential business by far. To a lesser extent there's commercial U.S. and there's international which is -- which has a slant toward the commercial applied market. So, that core-core business of ours which is residential U.S. is what -- is up 19% this quarter. The commercial U.S. market is recovering but it is still not anywhere near the growth rate of obviously residential. International is what has been more impacted than anything else. You'll find some of our international data in our 10-Q when we file it. But that's a market where it is much tilted towards the commercial market and those markets have been more impacted than anything else we operate. But as I say that from a profit perspective, from a EBIT perspective -- actually our international business is up this quarter from a profit perspective. Although the sales have been impacted, they've done a great job with managing the business and actually are more profitable this quarter internationally.

Okay, great. And then, can you just -- I guess a couple of questions. One, on inventory levels, just kind of where do you see your inventory levels? Are they too low for the demand environment or about right? Do you still have some restocking to do? And just speak to a lot of discussion about IAQ, what you're doing there? What you're seeing there? What you're doing to kind of broaden that in light of kind of increased interest there?

As you heard earlier, we do have investments in inventory management software that's considerably helping us to maintain and grow revenues with less investment in inventory. Maybe more color can be provided by Barry or Paul. Either one jump in.

First one, inventory, I -- Paul, I -- you have layers to this. But big picture, we started the year, early this year talking about inventory being something we want to improve inventory turns from 4 to 5, is a very straightforward goal, a very straightforward math calculation to say what that's worth in cash flow and that's before any of the disruptions or any of the noise of supply chain discussions that we've had. So we started the year with that in mind as a strong source of cash flow, as well as obviously an operational efficiency that can be gained through our 600 locations that we operate. So that's been an initiative before any of this noise. And Paul, you can comment on current state of what's going on with the supply chain and so on.

Yes. The supply chain rapidly recovered in the September timeframe and pretty much got back into a normal flow. And we started seeing inventory flowing again. We're not really experiencing the big stock outs. We got some spotty issues with inventory on the supply chain side. But for the most part, I think the OEMs have recovered nicely. As far as our inventory levels, we were able to not only use the technology that we've invested in to improve the inventory turns, but we were also able to improve the quality of our inventory. And so now we're able to analyze by branch, by division, by product line, by SKU exactly the types of inventories that we need to have in place. So it was -- it's been a wonderful investment that we've made in it. I think the dividends that we're going to receive from it are going to be paying back over the next several years.

A.J. a little color on the technology involved in this inventory.

Yes. I think Paul, your last point was important and that it's not just the amount of inventory or even the turns of the inventory, but it's the quality of the inventory. And that is absolutely a function of the technology that we're using and the people, the teams that are using them. That's been a major focus and there's been major achievements there. And also given the constraints on supply with the demand going on, it's important to note how great of a job our team from the field did, signing products that our customers filled -- or their orders filled, so they could sell product. So that was really a herculean effort. And we're proud of them.

Okay. So it sounds like inventories have kind of normalized in the lower year-on-year is maybe a function largely as some of the internal changes. Can you just talk about IAQ? How big is it for you guys? Is it moving the needle? Is it something you're excited about given kind of the COVID dynamic? And it just seems to be a lot of people talking about it.

Yes. It’s -- it definitely is an important piece of our business now. Historically, as you know, IAQ has been something we always talk about. But I think definitely, the pandemic made it into a frontline product area. It’s growing very, very rapidly, 2 or 3 times what it was in prior year. Excited about all the new products that we're putting in new lights.

UV light.

Yes, UV-C lights, air cleaners, filtration, the entire gambit is growing rapidly. And very good and I think it's sustainable.

Yes. And being the industry leader and having the scale that we have when new products, roll out from new companies, whether they're start up or mature companies, we often get the call first as a distribution partner and we're getting first look at a lot of these products.

And Jeff, what I would add is just to -- A.J. kind of -- we talked about before on platforms and technology and people and execution. IAQ is now part of every single recommendations in our platform called OnCall Air, OnCall Air is this presentation platform that contractors give to homeowners to sell them solutions. And again, that would be an example where old school, a contractor may or may not present that feature or benefit, may or may not add it to the collection of things he is doing. Now, it's embedded in the technology, embedded in the presentation, embedded in the proposal that's being given. So looking at the future state, that kind of thing is very important.

A.J. why don't you explain more in lay language what the OnCall Air does?

Sure. OnCall Air is a business that we built that has a software tool, that is sold on a FAS basis to contractors to help them sell in the house. So it replaces the yellow carbon copy pieces of paper that they previously used to write proposals on. And it’s sure a full digital interactive experience with lots of product information and videos about the product offering and enables contractors to sell with a good-better-best offering. And all those add-ons and accessories and recommendations that Barry was hinting at are embedded in the tool. Consumer financing options are embedded in the tool. It's basically a modern sales platform designed to only for HVAC contractors. And the contractors that are using it are growing faster, they're getting bigger tickets, they're closing more deals. And it's also a tremendous start. Thank you.

And it's also using all the product data that we've curated for the last five years with not just a sales platform, it's an information platform of all the products, all the data, all the SKUs, all the connectivity to e-commerce to allow for fulfillment. It's really I think again a terrific platform, really go into that future state of how things can be sold in the home.

Remind me, A.J. how many SKUs that we have in terms of data?

Yes, in our product information management system now, we've mastered about 800,000 SKUs in the industry.

The next question comes from Chris Dankert of Longbow Research. Please go ahead.

I guess, first off, congrats on the U.S. res growth. Really impressive. If I'm remembering correctly, I mean, your fulfillment metrics are typically mid to high 90s, very strong. I guess, with that kind of a spike in demand from flattish to up almost 20%, was there any dip in your ability to fill? Or was the team pretty well able to keep up with the needs of the customers there?

That's a great question and all the OEMs were stressed. And from our observation is they kept up with us as best they could as they did with other distributors. So yes, did we lose a little bit of sales? Probably. But overall, I think they kept up with us, and as I said, with other distributors as well. And they're working hard. They're not messing around here. They know this is an opportunity so they run hard. Anybody want to add color to that?

Yes. I mentioned it earlier, there's a herculean effort in the field. Where there was product shortages, our teams found ways to fill orders anyway. There's a lot of warehouse transfers going on. There was a lot of helping contractors find, if they were looking for product A but we didn't have enough of it, we could substitute a product B and get them at a competitive price. There's a lot of little wins like that, that helped our customer fulfilled.

And our OEMs, like Al said, came too magnificently. We were working with them daily. We had conversations with all of our major OEMs on a daily basis, talking to what our needs were, where our needs were. And they really jumped through hoops to be able to help us fill open orders where we had spot shortages. It was very well done.

I got to imagine being able to keep up with customers this quarter, just it's got to breathe a lot of goodwill. So nice work.

Well said, I agree with that.

And just 1 quick update. Any update on VRF, the size for you today, what the growth looks there? Is it meaningful for you at the moment?

It's not a material size in our market. The VRF is and by itself. The general duct-free split market is becoming larger and larger each year and continues to grow in the low 20s. VRF, we had a good quarter for VRF. It did grow. It kind of suffered in the second quarter a little bit. A similar situation that you had with all commercial products because that's generally where VRF goes. And so it did have a downtick to it but then a recovery because most of the jobs that we have with VRF are long-term jobs that are forecast out 6, 8, 9 months.

The next question comes from David Manthey of Baird. Please go ahead.

So relative to all of the comments you had here on stock-outs, do you think that manufacturer shortfalls were positive or negative in the third quarter? And I mean net-net, did Watsco miss out on sales or did they actually benefit from shortfalls that other distributors may have been experiencing, and you picked up some contractor business that you may not have had before? Do you have a feel for that?

Well, I don't think that OEMs discriminated for us as opposed to their other customers. I don't believe that. But I think they were a part for all their customers.

I'm thinking between brands. One brand was out and that contractor would switch over to something that you had in stock. Do you think you saw it in there or is there anything measurable?

Paul, do you want to take a shot?

Yes. That's a great question and one that we have to do a lot of forensics to try to identify exactly what the impact of it was. Right now, I would not say that it really had a big impact because we were obviously going hand to mouth with our inventory. So it became very, very difficult for us to go out -- reach out and take somebody else's customer, if you will, and provide inventory to them when we were trying to maintain the growth of our customers in the market. So a little...

I think that's well said, yes.

Yes. A little bit more time, I think, under our belt, I think we'll have a better feel on that.

Okay, fair enough. And then second on the other HVAC products. If I heard you right, Paul, I think you said that the parts business was up mid-single, which, I guess, would imply the supplies being something lower than that to get to the plus 2 overall. And I'm just confused on why that would be, given that we're seeing such a strong push in the new residential construction market. I guess a bigger picture question for all of you is that, in that other HVAC products business, do you envision a world where that can grow? It seems like it's been flat or down forever because there’s offsetting factor between parts and supplies. Is there a world where that can grow on a more regular basis?

Definitely. Yes, that is a marketplace that we have a strong focus on, as far as you know how -- what are the dynamics of where we can make that market grow. And of course, a lot of that is going to be market share. It's going to be product availability, it's going to be using our technology to be able to replenish dealer stocks in a more rapid economical manner for the dealer. So there are a number of efforts that we can get into to make that market grow again.

But Dave, I think you're spot on. Being the largest distributor dealing with 1,000 vendors, we believe that we're able to negotiate, due to our volume buying, as good the prices as anybody and we believe that should help us gain share. But we think that we have more work to do in order to get the growth rates going. I don't -- certainly don't think it's going to stay at -- proportionately at this level. I'm very hopeful that parts and supplies will increase as a percentage of our overall business. And some of the things we're doing with our OEMs, I think, will assist that. Don't count us out on parts and supply just because...

No. I was going to say stay tuned. That's a new major data-driven initiative that we're just kicking off now in earnest, and that will be kind of a next-generation effort on parts and supplies.

And I'd just like to add another layer to that, if needed, probably not needed but I feel like saying it anyway is -- there is no, I think, big macro dynamic, Dave, where parts are suddenly becoming a solution. The equipment growth rates have been too consistent. And through today, as we said in the opening comments, that consistency is through today. So I think what we're alluding to is, this is a market share gain for parts and supplies also. And we have probably 15 competitors in Miami selling parts and supplies, and it's the most fragmented part of our industry as distributors that sell parts and supply. So where A.J. is alluding to as well as this can become a technology play in a far different advanced way than what's being done historically and it's an opportunity for us.

That was much more eloquent than me, Barry.

Well done. Barry is a very eloquently.

He is.

In every way, in every way.

The next question comes from Stephen Volkmann of Jefferies. Please go ahead.

Barry, if I can pick on your elegance again for a moment. Well, you said something I thought was interesting earlier. Many things, obviously, that I thought were interesting, but 1 specifically was that the IAQ is now sort of part of all of these OnCall Air proposals that come through. Is it possible to ballpark what -- how much of the add-on would that be like 10% to the project or 20% or 50%? I just really have no idea.

Yes. It's certainly not 50%. But the OnCall Air concept that differs from the historical sales concept is, giving the homeowner a good-better-best solution which includes IAQ. It's not just adding IAQ, it's adding a bundle. It's selling higher efficiencies. And then the fact that consumer financing can then make those higher efficiencies and larger bundles more affordable is part of the holy grail of what we're trying to create here. So I wouldn't say IAQ adds -- Paul, you may know, but it's not just adding 10% or whatever the percent might be. It's presenting this bundle in a very connected way with the homeowner that's going to respond to it differently than if a contractor happens to remember it when he's writing down on paper on an Office Depot form. So far different sales process is really what it's about.

And there are various layers of IAQ. IAQ is not just 1 product. You've got a number of different products. You can tier into the installation. So a baseline installation would be -- if you use just minimum IAQ products would be probably around 10% of the install price could go as high as 25% to 30%.

Just 1 more thing on that. In OnCall Air, it's no longer just a static proposal. It's a digital interactive sales experience, so just like buying online when we all buy -- when we all shop online in Amazon and others, we're seeing other products that might make sense in this purchase. That happens in the OnCall Air experience. And it also happens in our B2B e-commerce as our customers shop on our website. And the line item has fascinating statistics but the line items for invoice on our online stores, meaning our subsidiary's website, is 30% higher than offline sales. And that's the number that stayed true for a while.

And then just my actual question I was going to ask originally was more on the SG&A side. Very impressive SG&A control in the quarter here, I guess, flat on a same-store sales basis. Just how do we think about that going forward? I assume there's probably some costs that are going to kind of creep back in as the world opens up. But how should we think about it?

Barry, that he will answer that, so let's get this up.

Again, every distributor has 2 things they're managing, SG&A, obviously, the fixed cost that he would like to lower over time and the variable cost that he don't mind spending because they're -- usually, they're driven by sales or margin growth. So we're no different. The key this year has been to get cost -- fixed costs down. How do we take some of the latent costs in our -- not just renting facilities, but any measure of latent cost in our stores down. And that's where we've been accomplishing the most this year. Renting facilities, for example, was lower year-over-year on 6% higher sales would be an example. Some of the fixed payroll where we're examining really the technology benefits that might come. This has been obviously a climate to address some of those costs and then try to push for the permanence of them as they go into next year. So I'll have a great analytic for you to say X amount of fixed cost has been reduced and will stay permanent. But culturally, there's not 1 of our 30 regional presidents that hasn't taken the task, their own local cost structure to accomplish that. The variable cost will be driven by sales. There will be more commissions. There will be more performance-based comp. There will be more delivery costs as the business is growing the way it is, and that's obviously embedded in our third quarter performance where you see SG&A flat. We have growth in variable. We have offsetting reductions in fixed. And again, culturally, just it’s a huge effort to go on to sustain this because it's -- they can be more permanent than temporary benefits, especially on the fixed cost side.

Yes. I'll add to that on the variable cost side, well, all SG&A -- the third biggest bucket of all of our SG&A is freight. That's the cost of moving product into our locations, between our locations and out of our locations to our customers. We fill orders. And I hate to be a broken record on technology, but we now have new technologies that exposes more data and enables more optimization around how we do all of that, how we bring the product in, how we deliver it to our customers, just making smarter decisions day-by-day, transaction-by-transaction, of which we do 7 million-plus a year to optimize costs and gain efficiencies. Early innings of that.

And A.J., is there enough of that technological opportunity to offset the general increase in logistics costs that we're seeing broadly?

I would say TBD. Yes, that's the goal, right, is to be ever more efficient.

Yes, the largest cost of that discussion is delivering products from 1 of our 600 stores within 10, 15 miles of where it sits. And that activity-based cost used to be largely a branch manager figuring it out every day. And then with technology, how do we help empower, enable and change the game of how that local process is done. Or if it's moving inventory around, then it becomes embedded in the inventory optimization project that we have going on. So as we said in the call, scratching the surface. But yes, some of that scratching is having an impact on results.

The next question comes from Ryan Merkel of William Blair & Company. Please go ahead.

So first off, the resi growth, also very impressive, in my view. This is probably hard to answer. But I'm just wondering about sustainability. What level of growth can continue? Because I have to imagine there was some pent-up demand that deferred work from Q2 that got done in 3Q. So I don't know, it's hard to answer, but what do you think?

Well, I would say that your conclusion is correct. It's very hard to answer. It started in the third quarter. It is not tailed. I mean the growth rate -- there is growth going on at the start of the fourth quarter. How long that will be sustained is hard to say. But we'll just have to see. Our game plan is, if we can't get it from industry growth, we're going to get it from the share growth. We're going to use the advantage of our technology. So unless somebody can add can add to that, Barry, Paul, A.J.?

I think when the industry numbers are all added up, I mean, obviously, there's going to be an anomaly in shipment data coming out of the industry association in Q3 where the industry is going to show this huge bubble of growth. But when you put it all together, we're going to have to look at it at year-end as far as what the actual growth in equipment sales were for the year. And I think going forward then, the pent-up demand from second quarter that we pulled -- pushed into the third quarter, we're still seeing, as Al said, some of that in the October time frame. It's a crystal ball outlook as far as what's going to occur in 2021. I think when everything is added up, it's going to look like a pretty normal year for the industry.

I think what you're also saying is the first half industry shipments were not -- were probably below where they should have been in the second half and somewhat in terms of catching up.

Right, right.

Yes, it won't be necessarily out of line.

I'll try to kind of -- it's a good question. I looked through that. And I think you have to look at things on a year-to-date basis and smooth things out and then ask the question. So year-to-date, the U.S. residential market, our business is up 8%. And there's virtually no price in that. So that's simply machines breaking, the same number we're going to break. No matter what is going on in the economy or COVID, machines don't know. So you have an 8% growth rate, largely driven by a healthy replacement market, contractor confidence to go in and install the right thing or upgrade the right thing and get the work done. And that type of growth rate is above average but not so far out in the space that it doesn't seem sustainable because again, I think homeowner, contractor, distributor, even OEM is feeling this kind of health in the market and if stay-at-home added something, fine. But I think in big picture, 8% sustaining itself is not out of the question or out of the ordinary. And some of the short-term choppiness, you need to look through it, I think.

Yes. Okay, that's a good answer. That context helps.

Just 1 more point there. Whether it comes from industry growth or share gain, I'll tell you 1 more detail is that our growth rate to new customers is higher than it's ever been, meaning we have more sales to more new customers. And we can attribute that to a number of factors, but we have more customers buying more products than ever.

Yes. So it speaks to share gain on top of whatever the market gives you, which I think will be pretty ….

Absolutely.

Okay. And then I'm going to come at the SG&A again and -- because you had troubles the last couple of years leveraging SG&A, and then here this quarter, right, it was incredibly strong. Based on your answer to the prior question, it sounds like you've taken fixed costs down. You've got this technology that's now making it more efficient. So my question is, should we look at this as an inflection point or is the new normal? I mean, have we turned the corner and now assuming the top-line is there, you're going to start delivering more consistent SG&A leverage?

I would say that the first, I'm going to comment on like what you've said. For the last 2 years, we've reported over and over again that we were doing, more than that time, significant investments in our technology and I don't think that's going to stop. It may even increase because we do think it's a competitive edge to do what we're doing. But obviously, some of that's being offset by other efficiencies that are occurring. Barry, my SG&A expert?

Yes. First, Ryan, I was right. I mean, $30 million of technology spending today didn't exist 5, 6 years ago, and that's 50 basis points of EBIT margin. We could have built an elaborate pro forma EBIT calculation for everyone but we didn't do that. And instead, we just tell people, this is the right way to do it and execute it. So obviously, the rate of increase in that spending has diminished as things are maturing. And Al is right, we will spend more. But this is a good time to talk about it. It's very clear that sales, margin, share, efficiency, other technologies that we're building beyond the customer-facing stuff has started to have an impact. So I think as an inflection point, that's a nice big cliché to ponder. I think the basic question is, is it having an impact? And answer is yes, it clearly is. And culturally, when you talk about new normal, again, I go back to the 30 leaders across Watsco's footprint. There isn't 1 of the 30 that isn't looking at their business differently because of their actions this year and because the technology is just beginning to really influence all aspects of their locations in their business.

The next question comes from Brandon McCann of Morgan Stanley. Please go ahead.

Yes. It's actually Josh. Had to sneak in because I was embarrassed about missing it the first time. I guess a few things that maybe I missed because of the -- I've joined a little late. I guess, first, just given the healthy end to the season and at some point, every consumer kind of throws in the towel on summer and says, well, guy, I can't wait until next year for some of the stuff, especially if the contractor can't get there for a while. Do you feel like you're having a longer-than-normal season that maybe stretches out in the months that you normally don't talk about cooling demand? Or potentially some level of -- I know it's not a backlog industry but a backlog of broken stuff out there waiting for attention as we get into the spring of next year?

I'll take a shot at the first half of October. Strong demand. Will that be sustained? I don't know. But first half of October, we got smiles on our face. Maybe because we're gaining share, maybe because the industry is doing better. It's hard to say but I like it.

And from what you guys have been seeing on contractor lead times that would maybe kind of speak to, like, hey, you guys just can't get in the job site fast enough?

I think most of that would have been completed in the -- during September. Any sort of backlog that the contractor would have had. So I don't think that's an issue right now.

Josh, just to add to it, I would say that if 80% of what we do is in the Sunbelt, and there's -- people didn't are going to wait until next spring. I think we've always been, and to the extent, we'll always be this kind of real-time way of looking at us in terms of our sales and our seasonality. So I don't think we'd see the deferrals. I think where we see deferrals right now is the commercial market that's built the backlog, waiting for jobs, waiting for money, waiting for contractors to fulfill backlog in the commercial market. I would say that's the only part of our business where that might be true for next year.

And that’s financial and not anything else, right?

Yes. Let him say what he was going to, what did you say, Josh?

I was just saying that the commercial comment would be more of a financial decision, not like residential, just saying, well, I'm not used to...

That's right. Yes. Although the indoor air quality is a big theme now of the commercial as well. Carrier, for example, has introduced equipment that's used in the applied world for buildings and that sort of thing. Very useful to attack on the spread of the virus.

And then, Paul, you had something.

Yes. I think we're putting together some additional data on -- one of the things I keep hearing is that people had more replacement jobs because people were staying at home. And so they were running their air-conditioning longer. And I guess that sounds good on paper. I want to get underneath that and find out really if the data proves that correctly, were the run times actually longer in the Sunbelt, as Barry said, 80% of our business is in the Sunbelt. Were they actually longer in the Sunbelt because people were home and not at work or in school? And I think the jury is out on that a little bit right now.

Got it, that's helpful. And then just shifting gears entirely. Any observation that you would have out or revisitation that you would have on the dividend policy or payout? Obviously, you guys have a pretty high dividend payout right now. But with any potential changes to the statutory tax rate, did that -- is that color you're thinking? Or is that something that would be revisited if taxes were to go up?

That's an easy one. We have consistently followed the principle that we will share our growth with the stockholders. And I have a history of doing that year after year for a number of years. We see no reason not to continue that, no reason at all, especially given that we have no debt and strong cash flow. So I would say that we're going to sustain what we've been doing in the past, unless there's something that comes up that I'm unaware of it. But right now, it looks pretty good to do that. Don't forget cash flow has been, to a large extent, a little greater than earnings, and that gives us additional opportunity to do more for our stockholders.

And we have a question from Steve Tusa of JPMorgan. Please go ahead.

Great performance this year managing some of these supply constraints, spotted supply constraints and big numbers on the sell-through, for sure.

Thank you.

I'm just curious though, when you guys -- Barry mentioned kind of the plus 8% this year, it sounds like, I guess, you're thinking the market kind of grew a bit below that obviously, if you're taking market share. Plus 8% is still a pretty big number to call kind of a normalized growth rate. If people aren't running their machines longer or harder, i.e., kind of shortening the useful lives for an installed base that's kind of grown low to mid-single-digits, maybe in the 4% range. How do you kind of get to a higher normalized kind of number than that? What is -- I guess, what's changed?

That's a good question. Barry, so sustain your 8% idea.

Well, the -- I mean, just to be philosophical and then I'll actually answer your question. There are 2 things that happened this year that are interesting and frankly surprised me. And 1 is that we have another year where the mix of high efficiency is growing. So if there is a consumer risk this year, it's not evident in the mix of products we're selling. It's a positive and it speaks to the homeowner contractor relationship as that's playing out. Secondly is...

Is that about 1 point -- do you think mix is about 1 point, I think Lennox said mix was about 1 point? Is that about right?

That’s maybe a little strong, but rounded, that's probably okay. The other -- I think it's probably a little high but that's just my feeling. The other thing that no one ever asked about is contractor credit. When we sell $5 billion of stuff to contractors, 80% of it is on credit. So we have to wait 30 days to get our money, and it's the best -- one of the best leading indicators of how our contractors' health is...

How we're going to collect it, yes. Okay, Barry. I know where you're going.

And we see almost the lowest default rate, lowest bad debt, lowest kind of risk factors and credit than we have seen. And again, it does speak to the idea that contractors are active and closing deals. And if we're helping them through our technology, great, but does speak I think to the industry and to our contractor relationships I think in terms of health of that end market and how homeowners are reacting to what's going on when something breaks or if something needs to get replaced and so on. So I don't know if that adds to 8%, Steve. Market share gains, I think, will prove out this year adding to that 8%. I feel like that momentum is only getting started for longer-term body of work we're doing with our OEMs right now. It may be -- time will tell, but I think that we can't underestimate the health of what's going on with the contractor, homeowner relationships that are out there.

And that's been -- you said you're kind of implying that, that was not something that pre-pandemic, it was kind of normal, and that this has gotten better post pandemic?

Yes.

It's amazing that an 8% unemployment rate means better consumer credit behavior. Interesting. This whole thing is pretty interesting.

But Steve, also remember, our customer is the homeowner, and the unemployment rate is much lower with homeowners than it is for people who are renters. There is facts there. And the second thing that we mentioned on really gaining market share is a combination of 2 things: one, is acquiring new customers; but also, as A.J. indicated, with some of our new technology, we've reduced the attrition rate of existing customers. And so it's a combination of the 2, reduce attrition and grow new customers that yields you a higher return as far as share of market.

Right, right. And I guess to that point, I mean, what changed for you guys on that front? I mean, I don't -- when you just compare factually kind of your growth rates versus the market, they weren't that great ahead of the pandemic -- heading into the pandemic. I mean, did something -- did you kind of turn on something here where because of the e-commerce dynamic like people went to you guys because you had the technology ready? And was there something that kind of flipped for you guys specifically? Because I think the supply constraints in the industry, on net, probably would have hurt you guys because one of the major players that supplies you guys, I heard, was kind of out. So that shouldn't have helped you. Was there something that kind of flipped for you guys specifically here in the last couple of quarters?

We're just great leaders. What can I tell you?

Other than, of course, great management, other than that.

Sometimes, I think that to see that you underestimate the earlier investments we were making, which was affecting growth rates of earnings. Maybe others were too short-term orientated. And -- but we didn't mind because we're in for the long-term. And so we may have been hurt by the recent growth rates in recent years. But we're starting to get a payback in what we do. And I'm optimistic that we'll do even better. What the industry will do? I have to say that being home because of the virus, and having, in some cases, record heat, did not hurt demand. It is a very hot summer and most of us are staying home. We don't go to restaurants, we don't go to movies, we don't go to supermarkets. And that means you're using cooling more than you normally would, and wear and tear on equipment does create needs for repairs and replacements.

Right. How much was -- one last one for you. Pretty big difference between the resi growth rate in equipment and your total equipment growth rate and resi is obviously a big piece of that. How much was kind of commercial down for you guys?

Paul or Barry?

Yes. The commercial in the U.S. is down, I would say, right at double-digits, and again, a slight improvement over where the second quarter was. And international is the larger impacting component, which is where we sell not to contractors internationally but also other distributors. So there's some changes in the channel internationally. So again, I will report what our international component looks like in our 10-Q in a couple of days.

Sorry, one last quick one. What was price for you guys on that equipment, growth rate for this quarter? And are you seeing any of these OEMs that may have had supply issues get a little more aggressive as far as trying to kind of regain that market share so far?

No. Really, we have not seen price on the equipment side. No, we have not seen price move a bit. A big change in the market dynamics.

Will they increase prices in the New Year might be your question. And it's hard to say but my prediction would be they will.

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 paying attention to our company. We think we're the best in the industry, we'll continue to be, and we look forward to the next quarter to report our progress. And in the meantime, stay healthy, stay safe. Thanks, again. Bye.

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