Q3 2020 Watsco Inc Earnings Call

Participants will be in listen only mode.

If you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.

After todays presentation, there will be an opportunity to ask questions. Last me question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two 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.

Go ahead Sir.

Good morning, everyone.

Welcome to Watsco third quarter earnings call.

This is al Nahmad, Chairman and CEO with me is A.J. Nahmad, President, Paul Johnson, Executive Vice President and Barry Logan Executive Vice President.

Before we start our cautionary statement. This conference call has forward looking statements as defined by U.S.C.C. 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 families are healthy and safe.

Now onto our report.

Well, that's good just completed an outstanding third quarter.

Bps grew 25% to a record $2 and somebody six cents.

Records were set for sales gross profit operating profit operating margin and net income.

These results were driven by strong growth in our U.S. residential HPC equipment business, which grew 19% during the quarter and from operating efficiencies achieved throughout our network as evidence by the nominal change and that's your name.

Homeowners clearly are investing in their homes as they speak to see replacement sales have remained strong from early summer.

Today.

We also believe that greater adoption of our watsco technologies has contributed to.

To our results and led to gains in market share.

Our best indication of this impact art too simple metrics.

First.

Customers that use watsco technologies are growing at a much faster rate.

The non users.

Second we are.

We are experiencing minimal attrition among active users on a year over year basis.

I keeping this in mind, we continue to invest in our platforms and to drive for greater adoption by more customers.

Here are some examples.

Our progress.

Weekly users our mobile labs have grown 31% since last year with over 100000 downloads.

E Commerce transactions have grown by 19% this year to nearly 1 million online orders, which is about a bigger than they have daughters, and then you're right at the moment.

Our annual.

Our annualized ecommerce sales run rate.

Great is 32%.

First the 29% at the end of last year and in certain markets.

Use of E commerce is over 50%.

Our dockside pick up services have expanded to more locations and now include Noncontact payment.

Finale.

This technology has only been a beta well for a few months and already over 12000 orders were fulfilled during the quarter by more than 2000 unique users.

Two of our newer innovative platforms have gained momentum we call them all.

Paul on call there and the second one credit for comfort.

These platforms provide digital connectivity for contractors and homeowners, when making proposals and buying and financing replacement systems.

Contractors using our what we call on call their platform provided digital proportional proposed proposals digital proposals to over 39000 households.

During the quarter and generated 114 million in sales nearly double that of last year.

Our credit for comfort platform process.

Well the number of digital financing applications, resulting in an 87% increase in third party funded loans and.

<unk> expenses and inventory management software have also benefited us this year with inventory turns.

Proving 25 basis points over last year and of course contributing to cash flow and operating efficiency.

All of this is exciting that we believe watsco technology.

Our only scratching the surface of their full potential.

As always free feel this schedule tsum call with us and we can further explain our technology in progress.

We also strengthened moscow's balance sheet. This quarter, we generated record operating cash flow of $373 million, which is far away.

Record for the year, so far and we have no debt at this time.

Importantly, we have the capacity to make almost any size investment or growing our business.

And I always like to comment that we're in a 40 billion dollar industry of which we are only 5 billion. So we have lots of room for growth.

And then finally, one more very important thought our results are a testament to the efforts of our teams across the Watsco network.

We deeply appreciate their commitment.

With that.

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

We will now begin the question and answer session.

Last question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys yeah.

Yeah, if at any time or question is not addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

The first question comes from Josh.

Once he of Morgan Stanley Please morning, Josh.

[noise] Hello.

So once again your line is open.

Is your are you actually the only needed on your side Sir.

Mhm.

[noise] [noise] okay.

And we'll go on to the next questioner and return to the queue.

Oh I see some activity well he just got it okay well go to Brett Linzey from vertical research partners. Please go ahead.

Hey, good morning, everyone. Good morning, Hey, what.

Wanted to start with just the sales trends, 10% growth in H. HVAC equipment, 19% in the in the U.S. resi products.

Was the big driver in that category, so everything excluding equipment, where do you where did you see this right.

Why don't we turn to the are Paul Johnston [noise] for that.

Does that answer yeah, I'd like to make sure I understand everything but the equipment.

Well just the total U.S. read these sales are much stronger than the equipment. So what was the big driver kind of you know actually equipment, what categories drove that well.

Well Oh no you misunderstood go ahead, yeah Linda.

Resi is equipment.

It's a it's gas furnaces coils air handlers split systems for residential.

So what's included in the total equipment.

Right right, Okay. Okay, Chris It came in equipment, that's <unk>, that's what we're trying to say.

Got it and just.

Just just a follow up to that did you did you see any mix benefit in terms of the gross margin line.

You know from kind of strength in the other categories versus first just on the equipment side Paul.

[noise] well, yeah, we had we had some moderate growth in ER and the parts and supply side of our business, which we want to get a little heavier on the on the parts side, yeah mid single digits and that obviously isn't an enhancement to our gross profit.

So that makes did help a bit yes.

Okay, Alright, great I'll leave it there pass it on thanks a lot.

Sure.

The next question comes from Jeff Hammond of Keybanc capital markets. Please go ahead, Jeff.

Hey, good morning.

Just just on the equipment side can you remind us what the mix is of you know kinda that you're on the equipment side. The U.S. residential versus I guess would be that the drags would be commercial and international.

Paul.

Yeah, that's very why don't you handle that as far as you know what what is offshore versus onshore.

Sure John for your you're on the right track or the largest part of our equipment business and the U.S. residential business by far.

Well that's church that there is commercial U.S. yeah.

And then there's international which is which has a slant toward the commercial applied market. So.

So so that's not bad but that core core business of ours, which was residential U.S. is what is up 19% this quarter.

The commercial U.S. market is [noise] is that Hasbro is recovering, but it's still not oh, you anywhere near the growth rate up obviously, a residential international is what has been more impacted than anything else.

You'll find some of our international data in our in our 10-K, when we file it.

But that's a market where it is now my tilted towards the commercial market.

And and and those markets have been more impacted than anything else we operate.

But I have to say that from a profit perspective from an EBIT perspective.

Our international business is up this quarter up from a profit perspective.

So although the sales have been impacted they've done a great job with that man.

With managing the business and actually are more profitable this quarter internationally.

Okay, Great and then can you just you know I guess a couple of questions. One on inventory levels, just kind of where do you where do you see your inventory levels are they too low for the demand environment or about right do you still have some some restocking to do and just speak to you know a lot of discussion about I.

Q I'm, what you're doing there or what you're seeing there what you're doing to kind of broaden that and in light of a kind of increase the 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.

Oh, yeah, yeah, either one.

Either one jump in.

No I would say first on <unk> personal the inventory I am Paul I know you have a good layers to this but big picture. We started the year early this year, we're talking about a inventory being a something we want to improve inventory turns from.

Four to five it was a very straight forward goal, a very straightforward NAV calculation to say, what that's worth in cash flow yeah.

Yeah, 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 without in mind Oh, those are the strong source of cash flow as well are they obviously an operational efficiency that can be gained through.

Our our 600 locations that we operate.

Well, that's been a oh well initiative.

Florida This noise and Paul you can comment on the current state of.

What's going on with that supply chain and so on.

Yeah, the the supply chain you know rapidly recovered.

In the.

In the September timeframe, it pretty much got its got back into a normal flow and we started seeing inventory flowing again.

You know, what we're not really experiencing the big Stockouts, we'd have some spotty issues with inventory on the supply chain side, but for the most part I think 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 into.

Improved the inventory turns but we were also able to improve the quality of our inventory.

And so now we're able to analyze you know by branch by Division by product line by SK you exactly the types of inventories that we need to have in place. So it was a it's been.

A wonderful wonderful investment that we've made in it and I think the dividends that we're going to see pretty much are going to be paying back a bit over the next several years.

Hey, Jay Little color on the technology involved in this inventory.

Yeah, I think I think Paul your last point was important and that it's not just the amount of inventory or even the turns the inventory, but 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 that are using that.

Oh, that's been a major focus and a there's been major achievement there and also.

And also given given the the constraints and supply with all the demand going on it's important to note how how great of a job our teams in the field that finding product they've got our customers build or their orders filled so they could sell product that was really a herculean effort.

And we're proud of them.

Okay. So it sounds like inventories of kind of normalized in the <unk> and the lower year on year as maybe a function largely of some of the internal changes or can you just just talking about I Q you know how big is it for you guys does is it moving the needle is it something you're excited about you know given kind of the Cove. It you know dynamic.

And yeah. It just seems to be a lot of people talking about it.

Yeah, It's a yeah definitely isn't important a piece of our business side I know historically you know.

Historically, you know, it's as you know I Q, it's been something we.

We always talk about but I think definitely.

Definitely the the pandemic you know made it into a frontline product area is growing very very rapidly you know two three times what it was in prior year.

I'm excited about all the new products that we're putting in with something.

Putting in new a new light you know you'd be lighting there.

Yeah, you be see lights air cleaners filtration.

Entire gambit is is growing rapidly.

It's been very good and I think it's sustainable.

Yeah, and being the industry leader and having the scale that we have when new products.

Roll out some new companies, whether their startup a mature company, we often get the call first as a distribution partner Werent.

We weren't getting first look at a lot of these products.

Okay. Thanks for that color has a judge.

Jeff what I would add just in <unk> Ajay you kind of you know, what we talked about before on platforms and technology and people and execution.

Q is now part of every single you know.

Recommendations and our platform called on color on call. Eric That's got presentation platform that the contractors get the homeowners to sell them.

Solutions.

Again that would be an example, where old school a contractor may or may not present that feature benefit may or may not added to the collection of things. He is doing now it's it's embedded in the technology embedded in the presentation embedded in their proposal that's being given so.

Now looking at a future state that kind of thing is very important.

Hey, why don't you explain that are more in the late language what the on call there does.

Sure Anquillare is a business that we built that has a software tool that it's all about I thought I'd ask pizza contractors to help them sell in the house.

Though it replaces the yellow carbon copy excuse the paper that they previously used to break all those on and it isn't sure sure excuse me a full digital interactive experience with lots of product information and videos about the product offering enabled contractors and sell the good better best offering and at all.

Those add ons and accessories in a recommendation that Barry was anything at our embedded in the pool that consumer.

At consumer financing options aren't bounded to look basically a modern sales platform design Jordi for HBP contractors.

And the contract there that are using it are growing growing faster, they're getting bigger ticket, they're closing more deals.

And it's off to a tremendous start.

Thank you and it's also it's also you know using all the product data that we've created for the last five years, where it's not just a sales platform. It's an <unk> information platform all the products all the data.

All that skews all the connectivity to E commerce to allow for fulfillment, it's really I think I got a terrific platform.

Well you know it really you know going to that future state of how things can be sold in the home.

Remind me age how many ask you get used to we have in terms of your data.

In our product information management that now we have not heard about 800000 Sq <unk> industry.

Thanks, a lot guys yeah yeah.

Next question comes from <unk> <unk> of Longbow Research. Please go ahead.

Morning.

Hi, Good morning, Good morning, guys. Thanks for taking my question I guess first off congrats on the U.S. Reds growth really impressive if I'm remembering correctly I mean your fulfillment metrics are typically you know mid to high Ninetys very strong I guess with that kind of a spike in demand from your flattish to up almost 20%. It was there any dip in your ability to fill.

Bill or what the team pretty well able to keep up with what the needs of the customers. There. That's that's a great question and all the Oems were stress and and from our observation is they kept up with us as best they could as they did with other distributors. So.

So yes did we lose a little bit of sales, probably but overall I think that.

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 as an opportunity.

So they run hard.

Anybody want to add color to that yeah, yeah, Okay no.

No no.

Oh I mentioned it earlier, there was a herculean effort and the field, where there was products shortages. Our teams found ways to fill orders anyway. There's a lot of warehouse truckers going on there was a lot of helping.

Helping contractors find that they were looking for product a but we didn't have enough that we could substitute with product b and get them at a competitive price a lot of [noise].

Little little wins like that that I'll cut our customer.

I felt.

Okay and.

And our Oems like Dallas Fed came to 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 wearing each word and they really jumped two groups to be able to help us still you know open orders, where we got spot shortages.

It was it was very well done.

Got it thanks for the color guys I got to imagine being able to keep up with what customers. This quarter. Just it's got to read a lot of goodwill so nice work.

All said I agree with that yeah.

Oh, just one quick update you know any update on on VR rough the size for you today, what the growth looks there is meaningful for you at the moment.

Oh, no. It's it's not a material size in our market to Drs isn't by itself you know that the general duct free split market is becoming larger and larger each year.

And.

Continues to grow and you know in the low twentys.

Vrs, we had a good quarter for Vrs it did grow up.

It kind of suffered in the second quarter, a little bit of a similar situation that you had with all commercial product because that's generally work the our EPS goes and so it did have a down downtick to it but then a recovery because most of the most of the.

Most of the jobs that we have with the IRS or a long term jobs that are forecast out you know 689 months.

Gotcha Gotcha. Thanks, a lot for the color guys appreciate it sure [noise].

Next question comes from David Manthey of Baird. Please why Dave.

Hey, good morning, everyone.

The so relative to all of the comments you had your on on stock outs do you think that manufacturer shortfalls were positive or negative in the third quarter and it and I mean that that did watsco Miss out on sales or did they actually benefit from shortfalls that other distributors made a bet experience.

Got 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 do.

I I don't believe that but I think they worked hard for all the color and see well well yeah I'm thinking between brands one brand was out and that that contractor would switch over to something that you had in stock did you do you think you started in there anything measurable.

Well, Paul do you want take <unk>, Yeah, [laughter], that's a great question and one that would have to do a lot of forensic should try to identify exactly what the impact of it was.

You know right now I would not say that it really had a big impact because you know.

You know, we were obviously going hand to mouth with our inventory. So it became very very difficult for us to go out and reach.

Reach out and take somebody elses customer, if you will and and provide inventory to them. When we were trying to maintain the growth of our customers in the market.

So a little bit that's well so yeah.

Yeah, 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 two overall.

Yeah, I'm just confused on why that would be given that we're seeing such a strong pushing the new residential construction market I guess, a bigger picture question for all to use that in that other HVAC products business do you envision a world where that can roll. It seems like it's been flat or down forever because this off.

Offsetting factor between parts and supplies is there a world where that that can grow on a more regular basis.

Definitely yeah that that that is a marketplace that oh, we have a strong focus on as far as you know how what are the dynamics it where we can make that market grow and of course, a lot of that is going to be market share. It's gonna be product availability is going to be using our technology to be able to replenish.

Dealer stocks in a more rapid economical manner for the dealer.

There are a number of young efforts, if we can get into to make that that market grow again, but Dave I think you're spot on being the largest distributor dealing with a thousand vendors.

We believe that were able to negotiate.

Due to our volume buying that's good the prices as anybody and we believe that should help us gain share, but we think that we have.

More work to do and.

In order to get the growth rates going I don't certainly don't think its going to stay at that proportionately at this level I'm very hopeful that far.

Parts and supplies will increase as a percentage of our overall business.

And Oh.

Some of the things we're doing.

With our Oems I think both systems.

Right that's right.

Don't count us out on Farxiga supply that's good though [laughter] I was going to say about that since they did you know that the that the new major data driven initiative that that were just kicking off now and Ernst <unk> that'll be kind of a.

The next generation effort on parts and supplies.

Alright, it sounds good but still I got it out another layer that if its needed I'm, probably not needed, but I feel like saying it anyway. [laughter] is there there is no I think big macro dynamic, Dave where we're parts are suddenly becoming a solution you know they maybe equipment growth rates have been to consistent and and.

Three today as we said in your opening comments that you know that consistency is through today. So I think what we're alluding to is this is a market share game for parts and supplies also and and yeah. We are probably 15 competitors and in Miami selling parts and supplies and it's it's been.

Most.

Fragmented part.

Fragmented part of our industry is distributors the sell parts and supplies. So.

<unk>, where Jay is alluding to as well as this can become a technology play and I'm far.

In a far different advanced way than what's being done historically and it's an opportunity for us.

Great well, we'll watch for that thanks, very much guys.

That sounds much more eloquent than me very well done [laughter] Berry is a very eloquently, yeah, [laughter] everywhere and everywhere.

The next question comes from Stephen Volkmann of Jefferies. Please go ahead Barney state Craig Good morning, everybody I'm very if I can pick on your.

Pick on your L. against again for a moment [laughter] Oh, you said something I thought was interesting earlier, many things obviously that I thought were interesting, but one specifically was a that the I.Q. is now sort of part of all of these on call Air.

You know proposals they 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.

<unk>.

Yeah, its certainly not 50, it but but on color concept. That's that differs from historical you know sales processes.

Giving the homeowner a good better best solution, which includes I acute it's not just adding I agree that's it's adding a bundle its selling higher efficiencies.

And then in fact, the consumer financing and then make the higher efficiencies and larger bundles more affordable.

As part of the Holy Grail of what we're trying to create here so.

So so I wouldn't say I agree you add you know Paul you may now, but yeah, it's not that it's not just adding 10% or whatever the percent might be.

Presenting this bundle in a in a in a very oh.

Oh, you know conducted way with the homeowner that's kind of respond to it definitely.

Then if a contractor happens to remember at when his writing down on paper on the office depot for you know.

So far different says process is really what it's about.

There are various layers. So I q. I Q is not just one product you.

Yeah, you've got a number of different products. He can you can tear into the to the installation. So a baseline installation would be you know if you just minimum I acute products would be probably around 10% of the installed price could go as high as 25 to 30.

Okay, Great that's helpful.

Just one more thing on that I don't call. There is not no longer just a static proposal at the digital interactive.

They'll experience, though so much it's just like buying on online when we all buy when we all shop online and Amazon and others, we're seeing other product that might make sense and that's purchase that happen any I'll call air experience and it also.

And it also happens that aren't in our E b to B E commerce as our customer shop on our web site and the wind down of fascinating <unk>. The line items per invoice on our online stores, meaning our subsidiaries website <unk>, 30% higher than offline sales.

And and that's the number that stayed true for a while.

Great. That's great. Thanks, So much and then just my actual question I was going to ask originally it was more on the S.J. side very impressive as Jamie [laughter] control in the quarter here, I guess flat or us 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 there.

As the world opens up but how should we think [laughter] I've worn Barry that he will answer that so lets go [laughter] again, a every every distributor has two things are managing that you can obviously the fixed cost that you would like the lower overtime and.

And the variable cost if you don't mind spending because they usually they're driven by by by sales or margin growth.

So we're no different.

Ki this year as Ben said get cost fixed cost down how do we take some of the late in constant or just.

Nothing facilities, but any measure of late and cost in our stores down and that's where we've been accomplishing the most this year.

Ah, yes rent and facilities for example was lower year over year on 6% higher sales would be an example, some of the some of the fixed payroll a we're examining related technology benefits that might come. This has been obviously a climate to address some of those costs and and then.

Try to push for the permanence of them as they go into next year. So I don't have a great analytic for you to say X amount of fixed cost has been reduced and we'll stay permanent but.

Culturally there's not one of our our 30 regional president.

That has been taking the task their own local cost structure to accomplish that.

Variable costs 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 yesterday in a flat.

Growth in variable, we are offsetting reductions in fixed.

And again culturally.

Oh, it's just a huge effort to go on to sustain does because they can be more permanent and temporary benefits.

Especially on the cost side.

Yeah, I'll add to that on the variable cost side, well I'll ask Uniteds third biggest bucket of all her as she needs freight.

That the cost of moving product into our location between our location anything out of our location or it might be fill orders and I hate to be a broken record on technology, but we now have a new technology that exposes more data and enables more optimization around how we do all of that how we bring a product then how either.

Right. So our customers are just making smart decisions day by day transaction by transaction or what should we do 7 million plus a year are to optimize cost and and and again officially.

Gain efficiency.

Early innings of that.

Okay, and AJ is there enough of that technological opportunity to upset the general increase in logistics costs that we're seeing broadly.

I would say CBD you know [laughter].

Got it yeah, that's the goal right it could be ever more efficient [noise].

Yeah I was just <unk> you have a large the largest cost about that discussion is delivering products from one of our 600 stores within 10 15 miles of where it sits.

And that activity based cost used to be largely a a branch manager figure it out every day.

And then what technology, how do we help empower enable and change the game of how that local process is done well that's moving inventory around then it becomes embedded in the inventory optimization project that we have going on.

So a as we said in the call scratching the surface.

But yes, some of that scratching is having an impact on results.

Yes, Thank you guys.

Sure.

Next question comes from Ryan Merkel of William Blair and company. Please go ahead.

Right.

Hey morning, all.

So first off that the Reggie growth also very impressive in my view, it's it's probably hard to answer but I'm. Just wondering about sustainability you know what what level of growth can continue because I have to imagine there were some pent up demand now that that deferred work from Q2 that got done in Threeq you. So.

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.

Uh huh.

It started in the third quarter.

It is not.

<unk>.

Well I mean, the growth rate there is growth going on.

At the start of the fourth quarter, how long that will be sustained.

I, it's hard to say.

But we'll just have to see what our game plan is if you can't get it from industry growth really goes to the share growth are going to use the advantage of our technology.

So unless somebody can add to that.

Hi, Paul AJ.

I think you know when when the industry numbers are all added up you know I mean, obviously, there's going to be an anomaly in shipment data coming out of the industry Association in Q3, where the unit.

Where the industry is going to show this huge.

Bundled them growth, but when you put it all together you know we're going to have to look at it yet you're in as far as what the actual growth in equipment sales were for the year.

And I think going forward then or.

You know the pent up demand from second quarter that we did pull pushed.

Pushed into the third quarter, you know still seen as al said some of that and you have the October timeframe.

Timeframe.

It so.

It's a crystal ball outlook, you know as far as you know what what's going to occur in 2021.

I think.

I think when 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 as the first half industry shipments for now.

We're probably below where they should have been in the second half is in somewhat in terms of catching up right right and then I know you know the annual won't be handled it was early autumn.

Oh, My Gosh I've tried to kind of you know just it's a good question I look through that and do you have to look at things on a year to date basis and smooth things out and then asked the question. So year to date, the U.S. residential market, our business is up 8% and as well.

Yeah, there's virtually no pricing that said that simply machines breaking the same number we're going to break no matter what is going on in the economy or cool. Good machine don't know so so you have an 8% growth rate largely driven by you know a healthy replacement market contractor confidence to go and install the right thing or upgrade the right thing.

Got to get the worked.

And that type of growth rate is above average.

Ah, but not so far out and you know out in space that it doesn't seem you know sustainable.

Because again I think I'm a contractor distributor.

Even though we is feeling that that's kind of health in the market and.

And if you stay at home added something fine, but I'm thinking big picture, 8%.

Sustaining itself.

It's not out of the out of the question or out of the ordinary and then some of the short term Choppiness you need to look through it I think.

Yeah, Okay. Good answer that contact helps just just one more point there whether it comes from industry growth or share gain.

I'll tell you one more detail is that our growth rate to two new customers, it's higher than it's ever been I mean.

Meaning we have more sales to more new customers and we can attribute that to a number of factors that we have more customers buying more parking lot than ever.

Yeah. So.

Speaks to share gain on top of whatever the market gives you, which I think will be pretty good. So okay, EPS and then I'm going to I'm going to come out yesterday again, and you know because you had troubles. The last couple of years leveraging X gene and then here this quarter right. It was incredibly strong you know based on your answer to the prior question it sounds like it.

Taking fixed costs down get this technology. That's now you know making more efficient. So my question is should we look at this as an inflection point or is the new normal I mean are we turned a corner and now you know assuming the top line is there you're going to start delivering more consistent as she any leverage.

Well I would say that the first time.

First I'm going to comment on what you see.

Good.

For the last two years, we've reported over and over again that we were doing more of the naptime 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 advantage to do what we're doing.

But obviously.

Obviously, some of that's being offset by other efficiencies that are occurring.

Barry.

I guess I I.

Sure.

Yeah first Ryan I, it was right around $30 million of technology spending today didn't exist five six 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. It. We just tell people. This is the right. This is the right way to do it and execute it.

So so obviously the rate of increase in that spending has diminished as things are maturing and ALS right, we will spend more but.

But this is a good time to talk about it it's very clear that.

That sales margin share efficiency or other technologies that we're building beyond the customer facing stuff has started to have an impact.

So I I think is an inflection point, that's that's a nice big cliche to ponder.

I think the basic question is is it having an impact answer is yes, it clearly is and.

And culturally when you talk about new normal again I go back to the 30 meters across cross Watkins footprint there.

During the one 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 are there other other locations in their business.

Okay, Yeah, very encouraging thanks, <unk>, thanks for the answers.

Good.

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

Yeah, it's actually Josh sorry for the the Tech morning, Josh [laughter] God and alias an alias [laughter] I'd have to say again that was embarrassed about missing it the first time.

Okay. Thanks.

Thanks for taking the question I guess, a few things that maybe I missed because of the Oh 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 throwing the towel in summer and says like I can wait until next year for some of the stuff and it's actually a contract or can't get there for a while.

Ill.

Do you feel like you're having a longer than normal season that maybe stretches out in the month that you normally don't talk about a cooling demand or potentially some level of yeah. I know its not a backlog industry by backlog a broken stuff out there waiting for our attention.

We get into the spring of next year.

I'll take a shot at the first.

The first.

Half of October.

Strong demand.

Will that be sustain I don't know.

But first half of October we got smiles on our face.

Got a bit because regaining share maybe because the industry is doing better it's hard to say, but I like.

But I like it.

Any standard from what you guys can see on contractor lead times that would maybe kind of speak to like Hey, guys just can't get to the job site fast enough.

I think most of that would have been completed in the during September yeah, I mean sort of backlog that the contract or would have had so I don't think that's an issue right now.

Yeah, Josh I am I think I would just add to it I would say that if 80% of what we do is in the Sun belt I did ask that you know the people who are going to wait till next spring I think we've always been and and to the extent well always be that's you know.

A real time.

Were looking at us in terms of our sales and our seasonality I'm sorry.

I don't think we see the deferrals I think where we see deferrals right now is the commercial market that's built the backlog waiting.

Waiting for jobs waiting for money waiting for contractors to do.

To to fulfill backlog in the commercial market I would say that's the only part of that.

Part of our business, where that might be true for next year.

No I don't know if there was an answer and then I have anything else right yeah.

Hi, Josh.

Let him let him say what he was kind of what was it what did you say Josh.

<unk> said that the commercial comment would be more of a financial decision not like residential just saying well I'm not sure. That's right now so I don't know yeah, although although the indoor air quality is a big theme now of the commercial as well.

Kerry for examples introduce.

Equipment to the U.S.

Its use in the applied.

India applied World.

Oh for buildings and that sort of thing very useful.

Attack on the a thread of the virus.

And then Paul yet.

Yeah, I think you know.

Were putting together some some additional data you know.

One of the 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 long.

And I guess, that's that's sounds good on paper I want to get underneath that and find out really it's the data proves that correctly you know.

You know, we're the run times actually longer in the Sun belt as Barry said, 80% of our businesses in the Sun belt, where they actually longer in the sunbelt because people are home and not at work are in school.

And I think the jury's out on that a little bit.

Got it that's helpful and then just shifting gears entirely.

Any any observations you would have our revisitation that you would have on that.

The dividend policy or pay out obviously, you guys have a pretty high dividend payout right now, but with any potential tax changes to the the statutory tax rate does that does that color your thinking or is that something that would be revisited. If that were to go up that's an easy one we have consistently.

Followed the principle that we will share.

Our growth with the stock holders.

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 you I would say that we were going to sustain what weve been doing in the past unless there's something that comes up that I'm unaware of it right now.

It looks pretty good to do that.

Okay.

Don't forget cash flow it has.

I've been to a large extent little a greater than earnings.

And.

That gives us additional.

Opportunity to do more for our stockholders.

Understood. Thanks.

And we have a question from Steve just Oh JP Morgan. Please go ahead I, Steve Hi, guys. Good morning.

Morning, Great Great performance this year managing some of these supply constraints spotted supply constraints and [noise].

Big Big Big numbers on the sell through for sure. Thank you.

I'm just curious, though when you Guy you know Barry mentioned kind of the plus eight this year sounds like you know I guess.

I guess, you're you're thinking the market kinda grew a bit below that obviously, if you're taking market share.

Plus eight its still a pretty big number to call kind of a normalized growth rate if people aren't running their machines longer or harder I eat kind of shortening the useful lives for it.

Current installed base, that's kinda grown.

So low to mid single digits, they maybe in the 4% to 4% range.

How how do you kind of get to a higher than normal lives kinda number than that what is I guess what's changed.

That's a good question.

Barry So sustain your 8% idea [laughter] well well there I mean, just to be philosophical and then I'll actually answer your question.

There are two things that happened this year that are interesting and frankly surprised me and one is that you know we have another year, where where the mix of high efficiency is growing.

There is a consumer risk this year, it's not evident in the mix of products we're selling.

It's a positive and and it speaks to the homeowner contractor relationship. That's playing out secondly is that am I don't know why do you think mix is about a point I think Lennox said mix is about a point that about the right <unk>, that's maybe a little strong but rounded that's probably okay.

The other the other I think it's probably a little high but that's that's just right.

Right my feeling.

The other thing that no one ever ask about is contractor credit when we sell $5 billion and stuff. The contractors you know 80% of it as on credit So we have.

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 our our contractors health is Oh My God luck is yeah, Okay, Barry I know, where you got that and and and we see yeah, we see almost a.

The lowest default rate lowest bad debt bullets kind of you know this factors in credit than we have seen.

And again it it does speak to the idea that contractors are.

Our active and closing deals and if we're helping them through our technology, great, but it does speak I think to the industry and to our contractor relationships I think.

In terms of health of that end market and how contract now how homeowners are reacting to whats going on when something breaks or if something needs to get replaced.

And 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 a longer term a body of work, we're doing with our Oems right now it.

It may be a time will tell but I think that but you can't underestimate the health of what are what's going on with the contractor hamada 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 you know normal and that this has gotten better post pandemic.

Yes.

<unk>.

[laughter], it's amazing that you know an 8% unemployment rate means better or you know consumer credit behavior interesting well [laughter] things pretty interesting [laughter] actually Steve also remember that our customer is the homeowner and the unemployment rate is much lower with homeowners.

So it is with people who are renters.

Right right that there are there is there is facts there yeah, [laughter] goodness and the second thing that we mentioned on really gaining market share as a combination of two things one is acquiring new customers, but also it seemed to indicate here with some of our new technology, we've reduced the attrition rate of existing customers.

And so it's a combination of the two reduce attrition and grow new customers that yields you a higher a higher return as far as share of market.

Right right and I guess to that point I mean, you know.

What changed for you guys on that front I mean, I don't I you know when you just compare factually kind of your growth rates versus the market. They weren't that great. You know ahead of the pandemic it heading into the panned out because he did something did you kind of turn on something here, where you know because of the E. Commerce dynamic like you know people went.

Do you guys because you had the technology ready and you know what was there something to kind of flipped for you guys, specifically because I think the supply constraints in the industry.

Our net probably would have hurt you guys because one of the major players that supplies you guys. I heard was you know kind of out so that shouldn't have helped you or was there something they kind of flipped for you guys. Specifically here in the last couple of quarters.

Just great leaders, what can I tell you [laughter] fourth grade management.

The other thing that we.

You know, sometimes I think that the Steve that you underestimate the earlier investments, you're making and which was affecting growth rates of earnings.

You may be others for <unk> to short term orientated and but we didn't mind because we're in it for the long term and so we we may have been hurt by the.

The recent growth rates in recent years.

But you know where we're starting.

We're starting to get a pay back and 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.

Yeah that is a very hot summer and most of US are staying home. We don't go to restaurants are going to go to movies or even go to supermarkets.

And EPS beings are using.

Calling more than you normally would and wear and tear on equipment does.

Create needs for repairs and replacements right. How much was one one last one for yet I'm pretty big difference between the resi growth rate in equipment and your total equipment growth rate and red. He's obviously big piece of that how much was kind of commercial down for you guys.

Paul or Barry.

Yeah, the commercial in the U.S. and.

I would say right at double digits, and again, a slight improvement over where the second quarter was <unk>.

International or is it <unk>, the larger and packing component, which is where we sell not the contractors internationally, but also other distributors. So there were some bright and channel some changes in the channel.

You know internationally so.

Oh again, I will report what our international component looks like Oh, 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.

Got you know a little more aggressive as far as trying to kind of re gain that market share so far.

No I really really we have not seen price on the equipment side no we have not seen price.

A big bear a big change in the market that will they increase prices in the new year.

It might be your question.

And.

It's hard to say, but my prediction would be they will.

Yep Yep, just like every year, okay. Thanks, a lot guys appreciate it.

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 are the best in the industry will continue to be and we look forward to.

Oh, 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 [noise].

[noise].