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Watsco Inc. (NYSE:WSO)

Q3 2008 Earnings Call

October 16, 2008 10:00 am ET

Executives

Albert H. Nahmad – Chairman, Chief Exec. Officer

Barry Logan – Senior Vice President and Secretary

Paul Johnson – Vice President

Analysts

Matt Duncan – Stephens Inc.

Ian Zaffino – Oppenheimer & Co.

[Tom Hays] – [Microcox]

Curtis Woodworth – J.P. Morgan

Unidentified Analyst

Unidentified Analyst

[Kyle Romera]

Operator

Welcome to the Watsco, Inc. third quarter conference call. (Operator Instructions) Mr. Nahmad, you may begin your conference.

Albert Nahmad

Good morning everyone, welcome to our call. This is a beautiful South Florida day. My name is Albert Nahmad. I’m President and CEO. With me is Barry Logan, Senior Vice President, and Paul Johnson, Vice President.

First I want to read this statement, and a reminder that this conference call has forward-looking statements as defined by SEC laws and regulations, and are made pursuant to the Safe Harbor provisions of these various laws. Also results may differ materially from the forward-looking statements.

First I’d like to comment on and highlight what’s occurred. Our organization has responded well to the revenue environment, which was impacted by comparatively cooler temperatures during the quarter in the Southeast, which is a large market for us, as well as the impact of new housing, especially out West – particularly in California.

The good news is that growth profit margins during the quarter reached an all time high. Up 150 basis points in the down market, and that’s a remarkable accomplishment in our view. We again lowered SG&A year over year. As a result operating margins during the quarter on a same-store basis remained constant at 8.1% in the face of a 12% same-store sales decline.

Sales results also reflect higher pricing in a richer sales mix of high-efficiency systems. We have also produced more cash flow in 2008 than 2007, despite adding $38 million in inventory of new 1090 equipment.

We will use our financial strength competitively to offer broad product availability at the local level to best serve the replacement market. This is one of our key strengths, our ability to use our financial strength to provide product availability to our high factor customers.

We expect 2008 to be another year of achieving our stated goal of producing cash flow greater than net income, and as stated in the press release, we have raised dividends in 2008. It is our intent and hope to maintain our track record of providing increasing dividends each year.

Dividends in 2008 increased 34% over 2007, and are now at an annual rate of $1.80 per share, a meaningful yield against our stock price. Our balance sheet remains strong. Our net debt as of today is $30 million, and availability under our revolving credit agreement, which is in place to the year 2012, remains well over $250 million at a cost, let me emphasis that, a cost of just over 3%. Again we consider this a competitive weapon in the current market environment, and we are actively seeking investment opportunities in our normal disciplined matter.

Now for the specifics of the third of the third quarter performance. Sales were $475 million, and the same-store basis declined 12%. Gross profit was $127 million with gross profit margin improving 150 basis points to a record 26.7%. Thanks to our gross profit margin, improved 160 basis points to 26.8%. SG&A was down 4% on a same-store basis.

Operating profit was $38 million on operating margins of 7.9%. Same-store operating margins was equal to 2007 at 8.1%. Again we really believe this is terrific performance, well as to the change in revenues. Earnings per share declined 8% beneath $0.84 per diluted share – a net income of $23 million.

Now for the nine-month period, sales were flat to last year at $1.37 billion, and are down 9% on a same-store basis. Gross profit improved 3% to $356 million, and gross margin improved 70 basis points to a record 26.1%. Same-store gross profit margin increased 80 basis points to 26.2%. SG&A was down 4% on the same-store basis. Operating profit was $93 million on operating margins of 6.8%. Same-store operating margins was 7.2% versus 7.3% in 2007.

We continue to produce record cash flow. Year-to-date operating cash flow was $37 million, versus $35 million in 2007, and this includes a 2008 $38 million inventory investment in the new 410A air conditioning systems, which we had stocked in advance of an environmental mandate that takes effect in 2010. Why are we doing this? Because many contractors have started to actively sell and market these new products well in advance of the mandate and we are in a strong position to respond to their needs.

The combination of high efficiency solutions match with these new greener products molds well for the replacement market as both contractors and consumers will have attractive solutions to upgrade their existing systems.

Over the last 12 months we have generated cash of $109 million, well in excess of our established goal of cash flow exceeding net income, and as I said earlier, 2008 should be no exception in terms of exceeding this goal.

Debt ended the quarter at $48 million, and a debt-to-total capitalization ratio of 8%. Today our net debt is about $30 million, and we have $300 million of total capacity under our credit line that expires in 2012. Not to mention that our cost of debt today is just over 3%. We are in a great position to invest in our business and are actively seeking opportunities to build our net worth.

As stated in the press release, we are revising our outlook for 2008 earnings per share to $2.22 to $2.26 per diluted share, reflecting current market conditions that we expect to extend into the fourth quarter.

Before I get into answering questions it is important to again look at the long-term story of our company. We only think long-term, and think only in terms of maintaining a discipline approach of building a much, much larger company using the same conservative principles that have gotten us this far.

Our 20-year record as a distributor shows revenues have grown at a compounded annual rate of 20%, and the market capitalization of the company has increased more than 60-fold to well over $1 billion.

But an important reminder our market share is just 8%. That’s 8% of the estimated $26 billion market for HBAC, our products, and we intend to grow our leading market position substantially in coming years. Why do we think that we can achieve this, and why is our confidence high? That’s because we have already achieved double-digit marketing shares in certain key states where the competition is fierce.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matt Duncan – Stephens Inc.

Matt Duncan – Stephens Inc.

The first question I’ve got, Al, do you have the numbers in front of you for the percent change in your replacement in new construction sales year over year?

Albert Nahmad

Barry do you have that?

Barry Logan

Yes, on a year-to-date basis?

Matt Duncan – Stephens Inc.

Just in the quarter, Barry, if you’ve got that.

Barry Logan

On our replacement side is low single-digits decrease in replacements, new constructions would be around 7% of the 12%, and then the commercial businesses would be a 1% difference.

Matt Duncan – Stephens Inc.

And then, Barry, looking at that replacement business being down in the quarter how much of that would you attribute to the cooler August and September temperatures and also maybe to hurricanes?

Barry Logan

And I’ll be happy to send out the data, its public data from the weather center. There is about a 20% to 30% difference in cooling degree-days in just August, and also we saw some of that in late September, and if I try to do some imputation of that it’s about 4% to 5% of the 12% is sitting in that dynamic.

Matt Duncan – Stephens Inc.

For replacements, it sounds like you think replacements probably would have been up, call it 1% or 2% without the cooler weather.

Barry Logan

Yes, and then would have been a year-to-date trend as it’s turned out from the first half of the year.

Matt Duncan – Stephens Inc.

Sure, and as we look at units then, units versus price I guess, it looks like you guys have done a good job capturing higher prices as evidenced by your very nice gross margin improvement, so if you had to talk about maybe looking at volume versus price, how do you think that the business is doing there?

Albert Nahmad

Well as you know we only improved in pushing through price increases all year, and the composites across our business is somewhere around 4% or 5%, and that’s what’s been captured through the nine months.

Matt Duncan – Stephens Inc.

Fair enough. Are you guys seeing any changes right now, I guess with the economy clearly looking like it’s teetering on the edge and getting worse, are you seeing any changes in sort of how people are repairing or replacing a broken AC unit, or in other words are you seeing any shift towards repair as the economy gets tougher? Is that dynamic about what it’s been in the past?

Albert Nahmad

Well it’s been almost two years that we’ve had some of these dynamics going on, and what we see in the sunbelt is some consistency in replacing systems. As you get out of the sunbelt it’s a little bit more of a discretionary item, discretionary purchase, so if you go north it’s something we see and have been seeing. I wouldn’t say it’s more acute at this point than it has been.

Matt Duncan – Stephens Inc.

And the last couple things and then I’ll jump back into view. First of all, on the price increases, do you feel like you guys are going to be able to maintain these higher prices as things get tough in the economy, and therefore be able to maintain your gross margin percentage at these new levels?

Albert Nahmad

We do. We believe that we compete fiercely on service and no one does as good a job as we do. The high density of branches we have is a high-service function for the contractor, so he has to travel less to reach the products that he needs to repair and replace cooling and heating systems.

Matt Duncan – Stephens Inc.

Al, as you look at acquisitions now, in a more difficult credit environment, you guys obviously have a lot of volume capacity. If I remember correctly, your revolver is about 300 million.

Albert Nahmad

Correct.

Matt Duncan – Stephens Inc.

What are your plans for acquisitions now that the economy’s tougher and credit [inaudible] is tighter, are you going to pull back on the reigns any there, or are you still –

Albert Nahmad

No, just the opposite. We believe that, for example, cash per share is about $3.89, well in excess in the earnings per share, and we believe that’s just a trend that’s been continuing as we manage our working capital better and better all the time, so we’re hungry for the largest transactions, and we believe that this environment may create more opportunity, but we’re really conservative.

But we lack the conservatism with our appetite. The bigger the better, and we know that we can finance almost anything in the industry that comes our way if we have to acquire it. There’s nothing too big that we can’t acquire.

Operator

Your next question comes from Ian Zaffino – Oppenheimer & Co.

Ian Zaffino – Oppenheimer & Co.

Just a quick question here just as far as the cost cutting. It looked like a lot of the cost cutting come on the gross profit side. I don’t expect it to come on the SG&A side. Does that mean that there’s just going to be a lot more SG&A cuts to come, or how much of that has been realized versus your gross profit initiatives?

Albert Nahmad

Barry?

Barry Logan

Ian –

Albert Nahmad

[Inaudible] either in the press release or?

Barry Logan

Sorry?

Albert Nahmad

Go ahead, I’m sorry.

Barry Logan

That’s OK. We came into the program for implementing all the cost savings with about a third of the initiatives is in gross profit and the rest is in SG&A. And SG&A is something that takes a forward grind a longer time to execute, and there is more to come.

The $8 to $12 million that we talked about in the press release certainly has some SG&A in it that will come out over the next three quarters, and obviously in our big seasonal quarters, an increase in gross profit has a very direct, immediate, and very quick reaction to the earnings.

So it looks like right now a lot has come from gross profits, because we just went through our biggest seasonal period, but there is generally more SG&A that can come over the next few quarters and that’s primarily what’s in terms of the annualization of a lot of those changes that have happened throughout ’08, not at the start of ’08.

Ian Zaffino – Oppenheimer & Co.

And then this next bunch is how do you think about your cash and cash flow? I know we’re in a terrible market as far as financing so you don’t want to have to use any dry powder, but how do view acquisitions versus share repurchases versus dividends, and what is really the sustainable dividend? What can you truly increase that to on a sustainable go-forward basis, because obviously $1.75 is – you can pay more than that, so I’m just wondering what you’re thinking?

Albert Nahmad

We agree with you, and I say in my prepared comments that we intend and hope that we can increase dividends every year, and this year is no exception. But our first priority is to build a network, a national network, and we do that very efficiently by acquiring businesses that already have branches and a good customer base.

So while we’re very hungry to acquire distributors, we also feel their test was whether or not equipped to finance acquisitions, as well as to increase dividends, and now we put share repurchase at a third priority between acquisitions, increasing dividends, and lastly share repurchase.

But our cash flow is very large for our business, so we think can do the first two, and at least not do much of the share repurchase.

Ian Zaffino – Oppenheimer & Co.

Well I would think if the stock downs sharply here you might want to do something, but.

Operator

Your next question comes from [Tom Hays] – [Microcox].

[Tom Hays] – [Microcox]

Just wanted to see if you would talk about it or not. You had mentioned that a $38 million in increased inventory to meet the need to finance the 410A equipment, I was just wondering have you seen a demand spread across all your geographies, or is there some areas that may be moving a little quicker than others?

Albert Nahmad

Let me put Paul into this conversation.

Paul Johnson

Yes, we are seeing demand all across the U.S. for this, it’s not just in one geography. We’ve had different manufacturers that have been introducing the 410A product at different points, so it hasn’t been uniform throughout the entire organization at large scale, but at this point we have all manufacturers and all locations pretty much stocked with 410 and we’re seeing demands in just about every part of the country.

Having said that we’re also still seeing demand for R22 products, which is the reason why we’re maintaining both inventories to make sure we’re satisfying all of our contractor needs.

[Tom Hays] – [Microcox]

And just one clarification on the $8 to $12 million of future cost savings. Did you say about a third of that was tied SG&A you’d expect?

Paul Johnson

That sounds about right.

Operator

Your next question comes from Curtis Woodworth – J.P. Morgan.

Curtis Woodworth – J.P. Morgan

So I have a form of a question on the SG&A idea that was discussed earlier, and I understand that it’s probably more relevant to relate it to gross profit than total sales given the way it’s compensation structure is done, but if you look at year-to-date gross profit at $351 million, last year you were at $351 year-to-date, so you’re up $10 million year-on-year, but your SG&A is about $15 million, and I know that ACR did have a higher percent of sales, but it feels like there isn’t that much SG&A benefit relative to maybe some of the cost target you announced beginning the year. I’m just trying to figure out is that wrong to think that, and optimally where should SG&A be as a percentage of gross profit, or however you look at it?

Paul Johnson

Well, [Craig], I think a way to look through your question and answer it objectively is year-to-date there’s 9% decline in same-store sales, and the change in SG&A on a same-store basis is 4%, so obviously, optimally that should match each other in terms of being able to react as aggressively as possible.

And there is more heavy lifting, there is more work to do in SG&A, clearly, and I have to also say that the trends running into the third quarter on sales were better, and we ran into again what was a much weaker August with the weather and we didn’t have to react to that, so there certainly is some things we’ve done to formalize our process for the rest of the year and going into the next year in terms of SG&A.

Albert Nahmad

And, Curt, I think you should, just to repeat, we kept our EBIT margin the same as it was in the prior year, even though our revenue declines were the size that we mentioned. I think that’s quite a performance to increase your gross profit margins and decreasing SG&A and maintaining an even margin with what’s happened in the market.

Another thing that we probably haven’t indicated yet, at least I’m not aware of it, is that the market is particularly soft in the West. Californians has entered a period of, first of all California is a very high new construction market relative to replacements, and from what we can see in the industry, in our own performance there that is the weakest of all.

And I would say, go one step further that if California had performed as it normally would for us, we would have met and exceeded the earnings per share estimates that are out there.

Curtis Woodworth – J.P. Morgan

Is there a way you can, I guess, guesstimate what the sales impact was this quarter from what was pretty poor weather in September and August?

Albert Nahmad

Yes, it’s a range I would give you that’s somewhere between $20 and $30 million in sales, which should be about a 6% ,7% change on revenue from last year, that was of the 12% that we’re talking of, so about half, Curt.

Curtis Woodworth – J.P. Morgan

Last question on the gross margin performance, phenomenal performance, maybe not that year-on-year change belt, but how sustainable is, I guess, maybe forward momentum in terms of increasing gross profit margin, going forward for the company, and how much is the increase would you characterize as potentially mixed benefit versus maybe pricing benefit versus just better management of rebates and billing margin activities, or how do you come to characterize or just aggregate that improvement?

Paul Johnson

Well the first we track several items in cost of sales, well the line share is what do we pay for a product versus what do we sell it for in that specific called selling margin, and that’s where all the benefit and gross profit has come from. There may be some benefit in that, for the simple fact that new construction as it comes out, replacement has a higher margin.

There’s some benefit from higher efficiency, it’s not worth driving it, it’s a small component of it. A lot of it is, is just a lot of discipline a lot of detailed work going on at the counter and our sales force and so on in terms of raising profitability, and there is a sense of permanence that can come from that. The other items that are outside of that, rebates, discounts, things like that are actually, has actually worked against gross profits this year as purchases have come down. So the good news is that most of it is sitting in the merchandising of our product and terrific performance.

Curtis Woodworth – J.P. Morgan

Great, and then in terms of commodity deflation we’re seeing, have you heard anything from the OEMs regarding price decreases on equipment?

Unidentified Corporate Participant

Not yet.

Unidentified Corporate Participant

No.

Curtis Woodworth – J.P. Morgan

Do you think that’s likely in ’09?

Unidentified Corporate Participant

A question for them. Paul have you heard anything?

Paul Johnson

Well we’ve seen, obviously I think what you’re talking about,[Curt, is we’ve seen copper go down to what 220 to 225 and seen aluminum stabilize, and those were the reasons why the price is going up as well as freight costs. Obviously the manufacturers are slower to reduce price than they were to raise them. I don’t think we’re going to see much, you’d have to ask the OEMs what they’re going to do. We so far have not seen manufacturers coming at us with across the board price increases. Selectively yes, stock prices yes, but nothing across the board yet.

Operator

Your next question comes from [inaudible]

Unidentified Analyst

Just maybe, you know, talking about momentum through, you know, through September and you know, the early part of October. Have you guys seen any impact from in terms of broader macro slow down that we’ve seen, you know, related to the credit markets or would you attribute most of the weakness there to, you know, simply weather?

Albert Nahmad

Well that’s a very perceptive question and it’s very difficult to separate the two but I would say that if it’s one of repair versus replacement, that’s a short term action, because eventually that equipment will have to be replaced. So you might want to argue that [inaudible] waiting for consumers to feel better. But I would say it’s hard to separate that from the weather pattern.

There are very good financial return reasons why consumers should replace the stock of equipment that’s out there because it’s old efficiency levels, and they could just by simply taking whatever they have, working or not systems wise, and replace with today’s high efficiency they’re going to have material reductions in their electrical bill.

And that is a fact and we have the products to do that, so eventually we think that that will come in no matter what happens to the weather no matter what happens, well I would say not in the matter of what happens to the consumer sentiment, but certainly what happens to the weather and then probably when the consumer has a little more confidence he will upgrade into higher efficiency, because he has a direct return on his investment.

Unidentified Analyst

Right, to the extent that they’re able to finance that purchase.

Albert Nahmad

Yes. We do help with that, we provide third-party funding.

Unidentified Analyst

And then I guess in the same vein there, have you seen any change, you know in the past you know couple of months in your past due receivables?

Albert Nahmad

Very good question we are very, very focused on that and credit and collections and very disciplined on that and I’m happy to say that we’re performing very well in that, and for the reasons cash flow is growing at record levels. We’re improving our inventory terms, and I think we can still improve our inventory terms in the aging of the receivables are still good and we’re very focused on keeping them good.

Operator

[Keith] [inaudible]

Unidentified Analyst

I had a question on acquisitions, you talked about your appetite earlier. Usually Ferguson is one of your biggest competitors for any potential deals out there. As you’ve seen their stance on acquisitions change in the market given some of the things going on besides corporate?

Albert Nahmad

Only what I’ve read and I don’t believe they’re active in that, in acquisitions today.

Unidentified Analyst

[inaudible]

Albert Nahmad

That’s right.

Unidentified Analyst

Second question and this might be hard to answer. But if you remove the weather aspect from your demand, perhaps in areas where the weather was a little more consistent in the quarter, was there a fall off in demand in September given the headlines that we were seeing in the US?

Unidentified Corporate Participant

Paul do you have any of that data?

Paul Johnson

Yes it’s not really data, [Keith], unfortunately it’s more anecdotal at this point.

Unidentified Analyst

That’s fine.

Paul Johnson

As far as what’s happening out there. And anecdotally yes there was a slight slow down as consumers started worrying about their savings accounts and their 401Ks. We’ve seen some reflection of increased part sales, but once again the movement isn’t to a point where I would say that consumers are all out replacing versus, or excuse me, repairing versus replace. So it’s too early I think to come up with a good answer to that question yet.

Albert Nahmad

So we do believe that fundamentally the business that we’re in is as close to the necessity as can be. And you can’t live in the sunbelt without air conditioning, and then in the winter we do have to be able to warm up the houses, the homes and the businesses. So this is not a particularly deferrable item.

You might do a little bit more repairing and replacement and all that does it build up more demand down the road for replacement, because you can’t repair forever. So this is not a particularly deferrable item, [Keith], that’s why we like it, that’s why we’re building our whole, this large network throughout the United States with, right now we have 440 branches, because we like the quality of that demand. And the fact that we’re engaged, and the industry is engaged in producing better improving products to conserve energy and reduce electrical cost to people’s homes and businesses.

Unidentified Analyst

Final question.

Paul Johnson

It’s not like deferring a garment you know that you go to retail. You can do that but you cannot defer cooling and heating in businesses and in residences. You have to keep those systems going.

Unidentified Analyst

I understand I live in the sunbelt too, I’d die without it. The higher efficiency items, can you give us a rough guide on what percentage of sales that is, and whether it’s higher efficiency or the new cooling, however you want to characterize it?

Unidentified Corporate Participant

Sure, [Keith], on the high efficiency side it’s about, it’s between 20% and 25% of our unitary equipment sales at this point, and last year was in the teens. And as far as the 410A products, that’s not just high efficiency that captures the whole array of product, that’s now about, let’s see, yes, about 15% of our equipment sales and growing substantially.

Albert Nahmad

And last year that was single digits is that correct?

Unidentified Corporate Participant

That’s correct.

Operator

And the next question is from [Eric] [inaudible]

Unidentified Analyst

You know, I just had a quick follow up question on the dividend and just sort of how you guys are, more so how you’re thinking about as opposed to, you know, sort of what the dividend levels are. You know, you guys are doing just on your guidance doing roughly $2.25 cents earnings this year, and the dividend is going to be roughly $1.80, and just how do you think going forward about your dividend in context of doing potential acquisitions and your willingness to draw down on that revolver that you guys talked about, and just maybe just the rationale on how you think about that a little bit more?

Albert Nahmad

Well don’t forget that cash per share is $3.89.

Unidentified Analyst

Right, but a lot of that is from working capital right? So over time I don’t know if that’s at the same benefit that you get the following year etc.

Albert Nahmad

Well as I said earlier, we believe that our inventory terms have a lot more to go, so we don’t see any end to improving our performance in working capital, especially on the huge investment that we carry in inventory. And we also like being able to do both , enhance acquisitions every year increase our dividends. I don’t see any reason why we can’t continue that.

Paul Johnson

And just to add some color to that, I mean, if we look beyond, just the last couple of years, if we go back to the beginning of 2000, cash flow in the company has been $500 million while earnings have been $400, so it didn’t take a slower market to produce some working capital gains, that’s something that we’ve been doing over a sustainable period, and that effort is continuing.

So if we raise dividends from this point let’s say 10% or 20%, we’re talking about $5 to $10 million of cash that’s being returned to shareholders out of what’s an increasing amount of cash flow that’s now in the $80 to $100 million range. So it’s something that it’s easy to look at and consider, it needs to be put in context over a longer period of time.

Unidentified Analyst

So in theory to your point in the event of a further downturn you feel like this, particularly on the inventory side, there’s a larger chunk that could keep going if that trend continued and to generate incremental for cash flow.

Albert Nahmad

Yes we do, that’s well said.

Unidentified Corporate Participant

And there’s an inventory opportunity in an up market as well.

Unidentified Corporate Participant

And we’re seeing a lot of efforts by some of our major manufacturers and vendors who want to get involved with us as far as looking at working together to improve the inventory terms so that they have better visibility as to what our demand is from them. So it’s integrating the channel a bit more to manage inventory even better and it’s finally reaching our industry.

Unidentified Analyst

Last thing, are there any other changes, any changes to sort of the terms of your revolver, I forget when that comes due and sort of —

Albert Nahmad

2012

Operator

Next question is from Matt Duncan – Stephens Inc.

Matt Duncan – Stephens Inc.

Just a couple of follow ups, first of all, on R-410A, and maybe, Paul, this is a question for you, you guys say it’s about 15% now, as you move through 2009 how do you think that percentage will change, and then remind us what the price differential is between a similar 410A and R22 unit?

Paul Johnson

We expect it to continue to obviously move towards 410, as far as how fast it goes that’s an estimate right now. We’re seeing it grow substantially as the price basically has come down to almost meeting the R22, it’s 3% to 5% more expensive right now, the 4410 versus the R22. If that price continues to go down I think we’re going to see the 410 demand continue to pick up, and several of the manufacturers are indicating that they would like to convert over to 410A completely. So I wish I could give you a precise percentage as far as when it’s going to happen, but I think that would just be a guess.

Matt Duncan – Stephens Inc.

Okay fair enough and then as you look at your cost cutting plan, you know, it’s now about $25 million of the original $30 to $40 million, and I guess it sounds like a lot of what you have done so far as on the gross profit side. Barry, maybe you can give us some insights into kind of what’s last on the SG&A side? What are some of the things that you guys are working on trying to cut back on?

Barry Logan

I went back and looked back to the beginning of the call and about half their year-to-date savings have come from the gross profit, the other half from SG&A, just to add some accuracy to what I said earlier. It’s really again a search for facilities and works in through branches and works in through branch management and works with a very detailed level, Matt. We have fewer branches today than we had at the beginning of the year, and that’s going to annualize itself throughout really the beginning of next spring.

So that’s branches that have been either consolidated or simply being serviced out of local branches nearby. There’s variable costs that are influenced by sales, obviously, like commissions and incentives and bonuses and so on, and that’s something that’s somewhat of a mechanic that reduces itself as sales happen.

Albert Nahmad

Don’t forget our delivery system.

Barry Logan

And we are down in freight this year, which is again a herculean task as really our branch managers and regional managers have done a good job of reducing freight costs in the face of the market, and there’s more to come simply because of the initiatives that have been taking place incrementally every month and there’s more to come. And obviously something like fuel costs as they come down or something will also have a benefit, so we’ve been kind of answering this question all year, Matt, it’s a lot of little things. There’s no restructuring, there’s no big flings, not big burst, it’s a lot of little things that are going on and still going on.

Matt Duncan – Stephens Inc.

And last question is the housekeeping. Barry, what was the D&A and CapEx both in the quarter?

Barry Logan

CapEx for the quarter was $1.4 million, and depreciation amortization was $3.3 for the quarter.

Operator

Next question comes from [David Manty].

[Kyle Romera]

This is actually [Kyle Romera] I’m for [Dave Manty]. Quick question on the refrigeration type area, I think you said it was down a couple of percentage points. Could you talk about albeit against a pretty difficult comp last year, can you talk about what you’re seeing in the refrigeration end market and kind of your expectations there?

Unidentified Corporate Participant

I should say this to be very clear, in the 12% same-store sales decline is a 1% [inaudible] in refrigeration, if I include that, refrigeration is down about 10% in the quarter, and a lot of that has to do with some of the copper pricing that has come down during the third quarter, if I isolate that. The rest of the refrigeration business is closer to flat. Year-to-date, again it’s physically a flat business where it had been some growth year-to-date, and it’s just simply been flattened out would be the color I would add.

[Kyle Romera]

Thanks.

Operator

There are no further questions at this time, do you have any closing remarks?

Unidentified Corporate Participant

Well thanks for listening and we look forward to conferring with you at the end of the fourth quarter. Thank you.

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Source: Watsco, Inc. Q3 2008 Earnings Call Transcript
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