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Watsco Inc. (NYSE:WSO)

Q4 2008 Earnings Call

February 17, 2009; 10:00 am ET

Executives

Albert H. Nahmad - Chairman, Chief Executive Officer

Barry Logan - Senior Vice President and Secretary

Paul Johnson - Vice President

Analysts

Matt Duncan - Stephens

Ian Zaffino - Oppenheimer

David Manthey - Robert W. Baird

Daniel Whang - B. Riley & Company

Keith Hughes - SunTrust

Holden Lewis - BB&T Capital Markets

[Manish Chapo - Tiger Analyst]

Operator

Good morning and thank you for holding. My name is Sherry and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

At this time, I’ll turn the call over to Mr. Albert Nahmad. You may begin your conference.

Albert Nahmad

Good morning everyone. Welcome to our fourth quarter conference call. This is Albert Nahmad, President and CEO. With me is Barry Logan, Senior Vice President and Paul Johnson, Vice President.

First let me read you the cautionary statement that we always do. This is 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 those various laws. Ultimate results may differ materially from the forward-looking statements.

As all of you know these are unprecedented economic times are just about all factors of the economic landscape have been impacted. Despite the challenges our company had its fourth best year in our sixth year history from operating results and our company’s financial position is the strongest that has been in our history.

Wastco organization has done a good job managing to the opportunities. Available in our market as well as improving selling margins and lowering SG&A in response to a difficult revenue environment, we identified and implemented numerous profit enhancements activities in 2008, which produce earnings of $30 million.

The Wastco management philosophy of local entrepreneurs managing business conditions within individual markets has certainly contributed to our performance. I’d like to repeat that because it’s really tells who we are and that is our philosophy of local entrepreneurs managing business conditions within individual markets. That’s what produces our constantly good results.

A strong indicator of this success is our ability to expand a gross profit margin, which reached all time record for both the year and the quarter and that’s a remarkable accomplishment. We also lowered year-over-year SG&A by 6% on the same-store basis and during the fourth quarter dropped SG&A 10% over the same period last year. Sales reflect higher pricing as well as richer mix of the high efficiency systems and a substantial conversion of equipment sales to ozone friendly 410A systems that’s 410K systems, which both are important accomplishments.

Revenues from the sale high efficiency units, air-conditioning systems that are 14 SEER and above grew 10% during the year. Revenues of 410A products more than double that represented nearly 40% of unitary product sales during the fourth quarter. We are pleased to see this progress in the tough economy as it shows that consumers are now more aware of their impact on the environment and are making buying decisions to improve their homes energy efficiency and reduce the impact on global climate change.

The mandated phase out of R22 equipment becomes effective at that the end of 2009. We anticipated the trends we are experiencing since the second half of 2008 increasing sales of higher efficiency equipment and 410A systems will accelerates as we move closer to phase out date. Our sense is that this should be positive development for our business as the entire systems needs to be changed out when transitioning 410A not just the outdoor condensing units.

Also the new stimulus legislation provides opportunities for our industry. The legislation provides tax credits to homeowners for adding energy-efficient air conditioners or furnaces. The tax credit will cover 30% of the cost up to a total of $1500. The federal tax credit along with local utility rebates paid to consumers for upgrading their AC systems provides us and our contracted customer’s additional callus to improve the sales, makes up high-efficiency product. I might add this; the states are also providing incentives for the residents to move to higher efficiency air conditioning.

We had a monster year for cash flow in 2008, surpassing 2007’s record year and we have raised dividends once again. The Watsco Board approved an additional 7% increase in our quarterly dividends to $0.48 per share, beginning in the second quarter of 2009. 2009 will mark the eight straight year, we have increased dividends, which are now at an annual run rate of $1.92 per share.

This allows for meaningful yield giving our stock price, but more importantly our increasing dividends, our direct needs to retrain value to our shareholders. Our conservative management of the balance sheet is paying-off and we’ve remained in a position to focus our long-term growth opportunities.

We will use our financial strength competitively by offering broad product availability, that’s something that the smaller distributors are going to have trouble doing by the way. We are going to offer this at the local level and continue to aggressively see transactions than enlarge the size of our branch network. These efforts will further strengthen our position to best serve the residential replacement market.

Our balance sheet remained strong; we are at a net positive cash position with debt of $20 million in cash of over $40 million. We also have cash available under our $300 million line through revolving credit agreement, which is in place through 2012 and currently interest costs and such inline would be less than 1%, that’s less than 1%.

Again, we consider our strong financial position to be a competitive weapon in the current market environment and we are actively seeking opportunities at a disciplined manner. Now for the specifics on 2008’s performance

Sales were $1.7 billion and on the same stores basis declined 10%. We estimate sales to the replacement market were flat, that’s a very important point, sales for the replacement market were flat. Sales for the commercial market were down 5% and sales for the new housing market experienced declines of 40% to 50% depending on the specific market.

Gross profit was $442 million with gross profit margin improving, that’s improving 60 basis points through a record 26%. Same-store gross profit margins improved 70 basis points to 26.1%. SG&A for the year was down 6% on a same-store basis. Our operating profit was $99 million on operating margins of 5.8%. Same-store operating margins were 6% versus 6.3% last year. Again we believe this is a good performance given the change in revenues.

Earnings per share declined 10% to $2.18 per diluted share and a net income of $60 million. As for the quarter, sales were $335 million down 15% on a same-store basis. Housing declines in our primary markets approached 50% that counts for much of the impact on revenues.

Now it’s important for me to remind you that the fourth and first quarter were low periods for the replacement market and therefore new construction in the general economy can have a disproportion impact on sales and therefore earnings. This typically balances out as we move into the replacement season during the second and third quarters.

Gross profit earnings for the quarter, now this is the fourth quarter was $86 million in gross margins improved, 40 basis points to a record 25.8. SG&A was down 10%, operating profit was $5.8 million and operating margins of 1.7 %.

Now onto cash flow, again it was a terrific year for cash flow. Operating cash flow was $113 million or $4.09 per share versus $170 million or $3.84 per share in 2007, as well in excess of our stated goal of having cash flow exceed net income. Cash generated in 2008 was use to pay increasing dividends of $49 million or 30% increase versus last year. Debt reduction of $34 million and share repurchases of $5 million.

2008 cash flow results included a $20 million additional investment in new 410A air conditioning systems, which we have stocked in advance of the environmental mandate that takes place at the end of the year. Contractors are actively selling and marketing these new products, well in advance of the mandate. 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 existing systems.

As I mentioned earlier, cash was $41 million at the year-end and debt was $20 million for a net cash position of $21 million. Cash plus capacity into our $300 million credit line puts us in a great position to invest in our business.

Now, in terms of 2009 first quarter, trends are softer than the fourth quarter and because this is the most seasonal part of the year we plan to provide our outlook for the full-year during our first quarter conference call in April, plus we are evaluating and implementing additional profit enhancement activity and we’ll also have a better visibility to the early part of the replacements season at that time and this is a conservative thing to do we believe.

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 only think in terms of maintaining a disciplined approach of building a much larger company using the same conservative principals that have gotten us this far.

During our 20 years as a distributor, revenue has grown on a compounded annual rate of close to 20%. In the market capitalization this company has increased more than 64, but an important reminder our share is just 8% of the estimated $26 billion market, that’s a $26 billion wholesale market for HVAC/R products and we intend to grow our leading market position substantially in coming years.

We feel confident that this is achievable because we already have achieved double-digit market shares in some of the very competitive and very large markets.

Now with that said Barry, 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.

Matt Duncan – Stephens

The first question I’ve got and Al you touched on this a little bit and I appreciate that it’s probably a little bit difficult to give 2009 guidance at this point in time, but I don’t know if maybe you can give us some directionality of sort of where you guys think the year maybe going versus 2008 just as a starting point and then we can wait till April for full-guidance?

Albert Nahmad

Well, I think the long-term nature of our business shows you that our earnings primarily flow in the second and third quarter and that’s based on the replacement demand and if that is normal meaning that the temperatures are normal, I think we’ll be alright for the year.

Matt Duncan – Stephens

Okay, so you think replacements would be up then for the year as long as temperatures were sort of a normal kind of year.

Albert Nahmad

We experience in ’08 no decline in demand for replacement, so even if we seek that I think we’ll be alright. We are getting more efficient as I’ve indicated we took some $30 million out last year and we are already planning on adding more in ’09, so I believe with the usual normal replacement market we’ll be fine.

Matt Duncan - Stephens

Now if I look at the present of unit sales that we are 14 SEER in higher, you toughed on that for the full year. Can you tell what it was there in the fourth quarter and how is that been trending here in the past few quarters.

Albert Nahmad

Barry or Paul do you have that data.

Barry Logan

Yes, almost 40%, 39% for the quarter versus 29 for the year. So 40% are certainly growth and that conversion from an inventory perspective will be largely in places we start replacement season and --

Matt Duncan – Stephens

Barry us that 410A or is that 14 seer and higher.

Barry Logan

I am sorry 410A.

Paul Johnston

We don’t have good data now on what the 14 seer and above was for the quarter itself. I would estimate in fourth quarter wouldn’t be a true reflection of really what the demand is some such in loss. So on quarter for replacement anywhere but year-to-date for the entire year it came in at close to 20% for 14 SEER and above equipment.

Matt Duncan – Stephens

Okay, I appreciate that Paul in then couple more things and I’ll jump in queue. First of all was there any impact of pricing in this quarter with copper prices having come down, are you guys seeing any changes in pricing.

Albert Nahmad

Now we haven’t, bit lower prices do hurt us as we have inventory at the higher prices that’s we hadn’t impact of that during ’08, but we are pretty much out of that situation now and we will contribute to higher margins during ’09 we believe.

Barry Logan

On the equipment side of our business certainly no impact, there is improve pricing in the fourth quarter for environment.

Albert Nahmad

He was asking about steel and copper.

Matt Duncan – Stephens

Okay and then two final things in the press release and then you guys mentioned on the call you are looking at additional cost cuts on top of the $30 to $40 million that program you did already announced. Can you put some bracts around what these additional cost cuts maybe in terms of dollars and what’s the timeframe in instituting those cuts and then one housekeeping items. What was the depreciation and amortization for the quarter and I will jump back in the queue thanks guys.

Albert Nahmad

I think that the ’09 planning is just beginning now, we didn’t want to do it too earlier because we you wanted to experience some parts to first quarter and now that we would experience some of it, there is a serious planning that’s going on at the subsidiary level and we would not be able provide you the information to what the steps are taking to become more efficient because we won’t have it, but we will have it by the April meaning and we will quantify if for the year.

Matt Duncan – Stephens

Okay and then Barry, depreciation and amortization in the fourth quarter was what?

Barry Logan

One point seven-two-zero million dollars.

Operator

Your next question comes from Michael Cox - Piper Jaffray.

Michael Cox - Piper Jaffray

Good morning and thank you. My first question is on working capital, you have done an excellent job taking working capital out and driving cash flows. Where do you think you are and the opportunity there and do you still see working capitals as a source of funds in 2009?

Albert Nahmad

Yes we do because I don't think we mixed that on inventory turns. You might want to contribute to that Paul.

Paul Johnston

Yes. We still have a long way to go on inventory turns with right around 4.1 to 4.2 turns on the subsidiary that we’re taking about, as well as we had to build up that Al indicated during the opening remarks on 410 inventories, but we are still holding 410 inventory of equipment plus our 202. So, it’s an incremental $20 million that we’ve been carrying there.

So, as we get more efficient our companies are more efficient on the inventory side, I think there is still good upside on reducing the inventories without reducing the service levels that we provide our customers.

Albert Nahmad

And we believe we can reach a minimum inventory turn to six [Inaudible] with also the foreign change. Once we six, we’ll then raise the bar even further.

Michael Cox - Piper Jaffray

Okay. At the AHR show, there was lot of commentary from manufactures about getting pushback on pricing, any discussions around manufactures ability to hold price though ‘09 with the lower commodity price environment and some of the weakness in demand?

Barry Logan

Well, certainly there has been weakness in demand Michael and that’s certainly is not influenced pricing, pricing was up this year, last year and certainly in the quarter as well. I think it’s a pretty stable industry from that perspective and I don't this there is going to be a great deal of pushback or difficulty on pricing.

Efficiency drives pricing as well we talk about it obviously not just to drive sales, but also to drive margin and because of the higher pricing and the higher margin is something that stabilizes our industry not just to Watsco’s numbers.

So, the lower commodity of copper is just one component of what these thing cost steel, aluminum and everything else in the system I don’t think it has reacted us as wildly as copper has and that’s just a small component. So, I think it’s a pretty stable pricing environment for this year.

Operator

Your next question comes from Ian Zaffino – Oppenheimer.

Ian Zaffino – Oppenheimer

Good morning. Thanks for taking my question. Just wanted to talk about the comment on the replacement sales, you mentioned they were flat. Is that on revenue standpoint or is that on volume, if you could get it down a bit more?

Barry Logan

It is total revenues Ian, the units are down in single-digits, the pricing is low-single-digits to make it a slight year for replacement.

Ian Zaffino – Oppenheimer

Okay and have you noticed any type of recession increase in some of the higher efficiency units, but have you seen any trend towards to the trade down to look for lower less expensive units or how should we think about that?

Barry Logan

Lot’s of mix has been going on for a year and half or two years Ian, where in each of the manufacturers and each of our locations more importantly have a good, better, best offering and that makes mix change overtime over the last couple of years not just a recent event.

So the industry is managing to that, the prospect of that well showing higher or great concentration of high-efficiency unit. So, it’s some offsetting environment going on for that opportunity. Well, it’s nothing that does stands out; it’s something that’s been a trend I would say over the last year or two.

Operator

Your next question comes from David Manthey - Robert W. Baird.

David Manthey - Robert W. Baird

Could you tell me what percentage of your revenues were new residential construction in the fourth quarter and what percent do you expect that to be in the second and third quarter of ’09, approximately?

Albert Nahmad

Certainly declining, right David. Go ahead, Barry.

Barry Logan

Well the industry at this point, in terms of looking forward it is somewhere around 5 million, 5.5 million units I believe and would certainly be a good teat of that number and the housing has 515,000 units, which is one projection that I have seen. That gives you a ratio of our industry looking forward.

Looking at the fourth quarter, it’s not something in quarter’s days, but my educated remark would be somewhere around 30% during the quarter, during the year. It’s something less than, obviously at this point because of the replacement season.

David Manthey - Robert W. Baird

As you’re looking at the mix of our 410A versus R22, if you can clarify how you see that playing out as we move through 2009 both in terms of revenues and inventories? Did you say that you expect to be fully R410 by the end of 2009 or did you not say that?

Albert Nahmad

No the mandate is at the end of 2009, the manufacturing of R22 product sort for residential uses must stop to federal mandate.

David Manthey - Robert W. Baird

I’m just wondering how long you are going to carry this extra inventory and what point do you cross over completely. I thought 2009 was going to be the year where –

Albert Nahmad

I agree with you, I think we should be out of R22 inventory by now, whatever might be there will certainly sell, there won’t be much.

Paul Johnston

Our company are selling out there R22 inventory. There are a few contractors however who were holding out and we are not going to stop selling them because R22 is still good refrigerant for them, but each one of our companies has developed plans to reduced their R22 inventory and phase it out by year end.

All of these changes worked well for us as the Federal Government moves towards environmental controls that’s what this 410A is and moves towards high efficiency. That’s what the seer levels are moving to 14 and up.

Those are great long-term opportunities for us, and regardless of what’s going on in the economy at this momentum it just mandates wonderful opportunities going forward because it all services when the public wants. High efficiency and more green products from the 410A; the refrigerant which doesn’t pollute the environment as much as R22 does.

David Manthey - Robert W. Baird

Okay thanks and just more question in terms of some color on products. Could you talk about trends you are seeing in your Grandaire product line and then also if you talk about indoor air quality if that’s lost traction here in recession.

Albert Nahmad

Barry I don’t now we want to say about Grandaire, that’s one of our own brands --

Barry Logan

I’d rather Dave talk about the -- rather that pick on a specific brand or a specific product from your point of view. If you just stick to may comment before about the low end of the market, Grndaire’s position at the low end of the market along with other brands are we carry at that end. It’s very unique for us as distributor to have good, better, best at all the locations.

Grandair feels that need in many of the markets that we have and as I said before the low end of the market has been a source of growth for us and it’s a good flexibly that we have with particular product line, we’ve added to it during 2008 as well in ACR locations that we added since last year.

Paul Johnston

That we don’t see any material change indoor air quality Davie, It has not taken off yet.

Operator

Your next question comes from Daniel Whang - B. Riley & Company

Daniel Whang - B. Riley & Company

First question was, regarding the first quarter. We all know it’s still seasonally slow period for you, but could you perhaps comment on kind of sales trends that you have seen so far in the first half of this quarter.

Albert Nahmad

We have the fourth quarter we reported now is 15% decline over the prior year and we’ve said earlier today in this conference call that the first quarter so far is even softer than that.

Daniel Whang - B. Riley & Company

And you mentioned that obviously in the middle of your planning process for the year, probably get a better fell for that in a couple of months, but I’m sure its part of that process, your speaking closely with your OEM partners and could you provide kind of a thought on what they’re saying collectively or some of the data points that you’re seeing from them?

Albert Nahmad

From what we understand, the housing not that, that matters that much to us expect in the four and first quarter. There is pessimism in new housing start, that’s what we hear from OEM, but something I hear much more than that they are all certainly are getting more efficient as we all are than what else I could add at the OEM level.

I know about some of them hedging, not that you would know that as well. As far as I’m concerned every one of the OEMs that we do business with presently is certainly delivering on time and performing as we would like term to.

Daniel Whang - B. Riley & Company

Okay, shift back to the 410A versus the R22 products. I think the relative pricing for those two product categories were equalizing and could you provide one more detail about the relative pricing now and perhaps margins for you?

Albert Nahmad

Paul do you want to take a chance at that?

Paul Johnson

Yes, the pricing has comedown on the 410 or the R22 has gone up to 410 pricing, but basically the outdoor units have a very similar price now pretty much across the Board. The difference that makes the comparison difficult is with most of the OEMs now, anything 14 SEER and above is only 410A. We are not selling any R22 product in the higher efficiency profile.

The second thing that makes unique is that when you change out 410 units, you positively have to change out the indoor unit also, because it’s a higher pressure system that you had with the R22.

So, it’s hard to do a real apples-to-apples comparison overall, the bottom line is; one its efficiency; two, it’s a full system change out whereas some contractors could get away we’re changing out the outdoor unit only with an R22 product. So, its good news for as Al indicated in his opening remarks to system change out and it’s a higher efficiency change out.

Albert Nahmad

It’s more revenue.

Paul Johnson

It really isn’t good Dan, to just make a line item comparison of our R22 product versus a 410 on a prices basis.

Daniel Whang - B. Riley & Company

Okay, got it. Final question was regarding the overall store network and how that could shift this year. I know you’re always keeping a long-term outlook and continue to invest in the right areas, but could we expect any actions, closings, openings in your branch network or store network?

Albert Nahmad

No, earlier as we’ve stated we had our strongest financial position ever in our sixth year of history and have excess cash and a very large credit line at a very low price. So, we are most eager to add to our network by making acquisitions and I remain optimistic that we’ll be able to do some of that this year, especially if the market, as it has been or even if it improves, I still think that given our position, we’ll be able to add to our network through acquisition.

Operator

Your next question comes from Keith Hughes - SunTrust.

Keith Hughes - SunTrust

Thank you. Your comments on the rebate, has the government defined exactly what energy efficiency is? What you have to buy in order to qualify for that tax?

Albert Nahmad

16 SEER or higher.

Keith Hughes - SunTrust

Okay and that’s part of the stimulus goal that’s going to be signed today, is that correct?

Paul Johnson

Well, you probably know as much as we do, it’s just what is supposed to happen if it’s today, yes.

Keith Hughes - SunTrust

I read all 1000 pages of it, so.

Paul Johnson

Either way there’s another part of the government bill that we haven’t disclosed to you. If the weatherization to allocating $5 billion is to assist homeowners typically at a low income level, to weatherize their house with better insulation and we are a major supplier in insulation to the people and we’ll do that to people’s homes.

So, while we seem to focus our comments on equipment, let’s not forget that the supplies in the non-equipment side of our business are also be stimulated by this new federal spending; because $5 billion just go a long way in helping people insulate their houses better and we’re a primary distributor of insulation.

Keith Hughes - SunTrust

I guess following up on that, on insulation and other non HVAC equipment products, you accounted it earlier with commodity cost coming down, the steel and copper products have come down, but I guess a question for Paul, are you saying sort of across the board in more commodity items; things that maybe or directly effected by copper and steel, but are effected by volumes in their industries, just across the board price falls at this point?

Paul Johnson

No we haven’t. In some of the commodities like refrigerants, which we do a substantial volume in; we’ve not seen any deterioration in pricing. A lot of the things like our tape business, our fabricated copper type products that are more highly fabricated, thermostat wire and that type thing; we really haven’t seen the price declines that we’ve seen with just raw copper tubing and sheet metal, flat steel and that type of product.

So, I think the markets held pretty good on those items. The ones that hit the headlines, yes, we’ve seen continues declines, but copper seems like it’s stabilized right now in the $1.50 range which is good. Stability is really what we’re after on those products.

Keith Hughes - SunTrust

Yes, final question, the small players in the industry have to be under severe pressure, particularly given the trends in the fourth and the first quarter. You historically have not Greenfield a lot of the locations and there’s a lot of specific reasons for that, but as business is getting so bad and some of these distributors, maybe not even worth buying in some cases, would you consider a bigger Greenfield type strategy on locations and particularly joint geographic areas?

Paul Johnson

Well, that’s a good question. We do Greenfield from time-to-time, but my preference has always been to acquire branches that have already a customer base and who could use an injection of capital to increase the product offering. I think they still can’t do it, because they don’t have that money to do it. We buy product from over 600 manufacturers and we love to go into an existing branch with customers and begin to increase the offering, so that the contractor has a much higher service level.

We also like adding to the investment by bringing on more sales people to cover the density with more confident and aggressive sales people. So, I think my purpose will always be to acquire a branch with customers and then capitalize that with more people and more products. At least to refer us we certainly have executed that policy real well.

Operator

Your next question comes from Holden Lewis - BB&T Capital Markets.

Holden Lewis - BB&T Capital Markets

I was wondering if I can go into the mix question a little bit more, because it seems like you have some moving pieces here. I mean, specifically you talked about trading down within the mix a little bit, which is negative, but at the same time you talk about the relative growth of the 14 SEER mix, the 410A mix.

I guess I’m kind of curious, when you look at the 2008 results; you had 60 basis points of improvement in gross margin. Was the mix to net positive all in, negative because of the trading down and to what extent did that impact gross margin for the year?

Paul Johnson

Well, I’m going to let Barry answer this, but obviously gross profit margin is been increasing all year long. So we had too many bad things coming on in our gross profit margins.

Holden Lewis - BB&T Capital Markets

I guess pricing was obviously also a key, so I’m just trying to get a sense. Simply because we’re talking about similar mix issues impacting ’09, I’m just trying to get a sense of whether mix is positive in ’08? If it was primarily pricing, just to carry those analogies into ’09?

Barry Logan

Well, Holden first when we talk about the pricing, we’re talking about our equipment business primarily and that’s above 45% of our business. So, when we say pricing is up, we’re really speaking to that side of our business. Pricing and margins are up on all of our businesses, in fact the non-equipment in our margins are behaving even better than the equipment margin.

So, this is not a one dimensional conversation on good, better, best mix or efficiency, it’s across 600 different vendors, 600 different types of product lines and is across the board conversation in terms of what the subsidiaries accomplished in executing this.

If I focus just on equipment, the pricing is up for the year with some measure of passing on price increases, a positive contribution from high efficiency, some pricing change because of the sales mix, but not enough to really move to the needle in the big picture. It’s really 600 stories in one; it’s not one particular product line or one particular product group.

Holden Lewis - BB&T Capital Markets

Okay and if I sort of take that further into 2009, just thinking conceptually, I would guess that maybe the trading down issue is probably kind of where it’s going to be, so maybe that erosion does not continue. I would think that the mix benefits of 14 SEER plus and 410A would actually get better.

So, maybe the mix component would actually be improved in ’09 over ’08, but the pricing fees which was a big deal and which was contributed in ’08, probably you’re not going to see fresh increase in your pricing. Is that sort of the right way to look at the moving pieces in the gross margin?

Paul Johnson

I think so and I think that’s a good analysis. Yes, and I would add to that; I mean we haven’t reported on our planning for ’09, but I don’t why the trend of higher increase in gross profit margins is not going to continue, which probably for all the researchers stating, plus our subsidiaries are always increasing their merchandising skills.

Holden Lewis - BB&T Capital Markets

Then I guess secondly, with regards to the $8 million that you referenced, did you exit Q4 at sort of the $38 million annualized run rate. So that $8 million you’re going to recognize. You kind of saw that recognized in Q4 and then you’re going to recognize it in the first half of ’09, simply because you weren’t at that rate in Q1 and Q2 of ’08 or is that $8 million sort of part of the brand new initiatives that you’re envisioning?

Paul Johnson

Well actually, 2008 planned playing itself out over about five quarters. Now I wouldn’t call it an annualized rate and some of that we’ll push into the second quarters as well.

Albert Nahmad

Okay, alright. So, that $8 million, basically you’re going to realize an incremental $8 million over the course of 2009?

Paul Johnson

That’s correct, over the first half.

Albert Nahmad

Yes, we think the first half and then we expect no initiatives which would tell you more about it as we get finished with our planning process and report in the April timeframe.

Holden Lewis - BB&T Capital Markets

Just for our modeling purposes, can you give some sense of order of magnitude? I don’t want get any specific numbers, but is it going to be similar to the one that you announced before or are you running lien enough that it probably would be unrealistic to think that you’d get another 35.

Albert Nahmad

Yes, the way we work is that these things come from the subsidiaries who’d take it all the way down at the branch and whatever we would tell you at our level would be just guessing; I’d rather not do that.

Holden Lewis - BB&T Capital Markets

Lastly, you typically give sort of the quarterly growth rates for HVAC equipment supply refrigeration and then sort of mix of each, are you able to provide that for the quarter?

Paul Johnson

On the equipment side its 14 equipment, non equipment is 14 and the commercial would be 15.

Holden Lewis - BB&T Capital Markets

And what is the mix of each?

Paul Johnson

45% equipment and 55% non-equipment and refrigeration is 11%.

Operator

Your final question comes from [Manish Chapo - Tiger Analyst]

Manish Chapo - Tiger Analyst

Thanks, my question has already been answered. Thanks.

Operator

At this time there are no further questions in queue.

Albert Nahmad

Thanks very much for attending this conference call. We look forward to talk with you in April. Have a nice day.

Operator

This concludes today’s conference call. You may now disconnect and thank you for using the conferencing center.

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Source: Watsco Inc. Q4 2008 Earnings Call Transcript
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