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Watsco Inc  (NYSE:WSO)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Watsco Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

And I would now like to turn the conference over to Albert Nahmad, CEO and Chairman of the Board. Please go ahead, sir.

Albert H. Nahmad -- Chief Executive Officer

Cheerio. Good morning and welcome to Watsco's third quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A. J. Nahmad, President; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President.

As we always do before we start, the usual cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements.

Now, on to our performance. Watsco achieved record third quarter results. This includes record sales, profits, net income and earnings per share. Sales growth was driven by increased unit demand, price and mix for replacement HVAC systems. We also announced a 10% raise to our annual dividends to $6.40 per share effectively in January of next year. 2018 marks the 44th consecutive year that we have paid dividend. In addition, adoption and use of our various technology platforms continues to grow and our run rate for e-commerce sales now exceeds 30% of total sales.

Now that our selling season has concluded, we are on a mission to accelerate the pace of adoption in customers -- with customers, as well as within our own organization. Further investment into technology was made during the quarter, as we completed the acquisition of Alert Labs, a technology company in Canada. This is a terrific team of entrepreneurs that have talent and products to help our customers grow and become more profitable.

This morning's press release also mentions a companywide initiative to leverage our technology investment, improve productivity and reduce costs. Watsco's culture is to challenge our leaders and provide necessary support. To that end, unprecedented investments were made in technology and our organization to support the launch of our many innovations. Given the results this year, we are now challenging our leaders to use our business intelligence platform to find and execute on opportunities. Progress was made in the third quarter and there's more to come over the next several months.

Our balance sheet remains conservative with a debt-to-total capitalization ratio of 7%. The fourth quarter is a strong period for cash flow and we expect to close the year with very little debt. This positions us to take advantage of almost any size investment opportunity.

Now, the detailed third quarter results. Revenues grew 5%, including a 7% increase in HVAC equipment sales. Gross profit increased 8% with a gross margin improvement of 50 basis points. Operating income increased 7%. Operating margins expanded 10 basis points to 9.4%. EPS increased 16% to a record $2.11 on net income of $79 million including the benefit of long term -- I'm sorry, of lower income taxes.

Looking at our third quarter results a little closer. Profits in our Florida locations were down $3 million after growing during the first half of the year. Margins and mix were all positive, but unit growth was offset single-digit during the third quarter. And in Mexico, profits declined $2 million on lower sales. More importantly all of our other operations had a terrific quarter, achieving an 8% sales increase including its increase in -- including an 11% increase in HVAC equipment sales, along with 18% higher operating profit and expanded margins.

Now results for the nine months. Revenues grew 5% driven by a 7% increase in residential HVAC equipment. Gross profits increased 6% with a gross margin improvement of 10 basis points. Operating income increased 7% to a record $314 million. Our operating margins expanded 10 basis points to 8.8%. And EPS increased 18% to record $5.43 on net income of $203 million including the benefits of lower income taxes.

Now, in terms of our outlook for the full -- for next -- I'm sorry -- let me start that again. In terms of our outlook for this year, we estimate annual EPS in 2018 to be in the range of $6.40 per share to $6.50 per share versus 217 -- 2017's adjusted EPS of $5.54 per share. This represents a growth for 2018 of 16% to 17%.

Finally, let me highlight important fundamentals that differentiate our business from others. Watsco's primary markets are large, fragmented and replacement driven and provide opportunity for steady growth over the long-term. In addition, our conservative mindset toward debt and maintaining a powerful balance sheet provides the safety and the flexibility to take advantage of any size opportunity especially during periods of economic volatility.

And given the large amount of long-term equity held by our leaders, Watsco's culture remains risk-adverse (ph) with a focus on the long-term. We believe our culture and actions will continue to serve well all of our share -- stakeholders, our customers, our fellow employees and their families and our shareholders for many years to come.

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

Questions and Answers:

Operator

We will now begin with the question-and-answer session. (Operator Instructions) The first question comes from the line of Brett Linzey with Vertical Research Partners. Please go ahead.

Albert H. Nahmad -- Chief Executive Officer

Good morning.

Brett Linzey -- Vertical Research Partners -- Analyst

Hi, good morning. Just wanted to focus on the incremental costs on investments. You did indicate they're approaching $25 million this year. How much does that need to step up next year to achieve the fulfillment and continued roll-out of the technology strategy?

Albert H. Nahmad -- Chief Executive Officer

Sure. Let me ask A.J. Nahmad, who is running the technology program.

Aaron J. Nahmad -- President

Yeah. We -- that number has been relatively consistent for some time now. And as I've said on previous calls, it's more about what we see as opportunities and for long-term returns. So there may be some fluctuation in those numbers, but we're probably more likely pretty consistent.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay. And then just shifting to the top line. So I think Carrier realized about 2 points to 3 points of price in the quarter. Your equipment growth was up 7% that does imply kind of low-single digit volume growth for Watsco. Just looking at shipments for the industry, July was up 8%, July up 14% and then September has held up pretty strong. I am just trying to understand what Watsco needs to do from a resource or positioning perspective to help lift that volume number going forward?

Albert H. Nahmad -- Chief Executive Officer

Well, I'm glad you asked the question. Because as you saw in our press release, we're not losing share, we're gaining share. And maybe we should explain the fundamental idea about what markets we serve, and why don't we go to our data guru, Paul Johnston.

Paul W. Johnston -- Executive Vice President

Yes. Brett, we're seeing, you know, the markets kind of split into two buckets. One is where the marketplace is very weather sensitive. And the weather sensitive part of the US was outside of the Sunbelt. It's up in the Midwest, New England, Northeast, Central Plains. It's about 40% of the US market. 60% of the US market is really not weather dependent. And what we saw in the summer, the entire summer, not just the quarter, but we saw it incredibly warm compared to prior year in the weather sensitive states.

Degree cooling days were up 30% to 33% in those areas. And so what we're looking at right now is that the growth in the weather sensitive states, where Watsco frankly doesn't play, were up materially, I would say, mid-teens, low-20s, whereas the Sunbelt states when you look at the replacement demand, it was -- it was fairly flat to up slightly.

Albert H. Nahmad -- Chief Executive Officer

Yeah. It's important for us to explain that, in addition to that, that these are manufacturers that you're reading the data, not distribution data. And in the markets that we serve, which are primarily replacement markets in the Sunbelt, we're doing great. It's not -- it's not -- you should not compare us to the markets that we don't serve, where they're experiencing double-digit growth rates because of weather in those markets. Our markets don't react to weather. It always gets hot. Now, sometimes we'd show a little faster growth than others, but we're OK. We're doing well. We're gaining share in what we serve.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay. And then maybe just a follow-up on my first question on investments. How did operating margins perform relative to your expectations? I guess, another quarter of little or no leverage and just trying to understand where you're seeing pressure on that cost equation? Thanks.

Albert H. Nahmad -- Chief Executive Officer

Well again, we try to explain the concept of what we've done. We designed software and programs to enhance our customers' business. We did the same thing internally with our business intelligence. We told our leadership when we first introduced the technology, do what you need to do, hire whoever you need to go, just go at it, because it's going to be brand new to our customers, and these customers are not used to change. Many of them have been doing the same thing for a long time, very successfully I might add.

So a lot of people were added and that's fine, we supported all that. But now that the platforms are pretty much proven, they should and will produce efficiencies that you'll see the return coming as time goes on. So we knew what we were doing. We said go at it with anything you need. They did, and now we're going to say go at it, but do it with increased productivity and that's what we expect and we started to see it -- we started to see it in the third quarter.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, great. I'll pass it. Thank you.

Operator

Next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Albert H. Nahmad -- Chief Executive Officer

Good morning.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hey, good morning. This is Brad on for Jeff. Hey, just a follow-up on the demand question. You called out some flattish sales in Florida. I guess, just with the Irma (inaudible) from last year and you called out some -- some meaningful disruptions last year. I guess, I would think they would be a little bit better, but just curious if there's any kind of dynamics accompanying that?

Albert H. Nahmad -- Chief Executive Officer

Great question. Great question. Let's go to our data guru.

Paul W. Johnston -- Executive Vice President

Yeah, we're probing into that. We had a very strong front half of the year in Florida and then during the -- during the peak replacement year -- period, we actually saw a flattening and even a slight downturn obviously in single family replacement demand. Lot of theories out there right now. We're interviewing a lot of contractors and obviously looking at the marketplace in total. But I would say, right now, the juries were little bit out on exactly what was driving that and whether it's a trend or just a bump in the road.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Weren't (ph) manufacturer shipments into that Florida also down?

Paul W. Johnston -- Executive Vice President

Yes, manufacturer shipments in Florida are down through September. Even though new construction, which we're somewhat of a player in, but new construction demand is up and total industry shipments into the state are down.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

I guess, so it's just a --

Paul W. Johnston -- Executive Vice President

It's industry wide, it's not just Watsco.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Have you seen any normalization thus far through 4Q that you could speak of? Or do you think it's -- you know like you said a continuation of this industrywide dynamic?

Paul W. Johnston -- Executive Vice President

Too early to tell right now. October is starting out good, but whether or not it's a summer phenomenon. I mean, we look at the season -- the primary season, which is from approximately April through September, and that's really where we saw some softness in demand.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Okay. Great. Thanks -- thanks for the color there. Then just on pricing, what's your view on receptivity in the market? It seems like after a year of kind of really unprecedented number increases from the OEMs, are we starting to hit at that threshold, where you're getting a little bit more kickbacks than you normally would or just kind of broader thoughts around price? Thanks.

Albert H. Nahmad -- Chief Executive Officer

Go ahead, Paul.

Paul W. Johnston -- Executive Vice President

Yeah, it's -- it is unprecedented. I've been in this industry for, I guess since wireless carrier, but I've never seen these many price increases. The first two, very smooth, the third one, probably a little bit of pushback, but pretty much universal among all the OEMs we're seeing price increases. Whether or not, we're going to see any elasticity changes, as far as market demand because of those? I think that's a far stretch because the price increases generally have been cumulative, about 7% to 10% so far.

Albert H. Nahmad -- Chief Executive Officer

And one of the OEMs already announced a price increase next year.

Paul W. Johnston -- Executive Vice President

Correct.

Operator

All right. I'll just pass it on. Thanks for the time, guys.

Paul W. Johnston -- Executive Vice President

Sure.

Operator

Next question comes from the line of David Manthey with Baird. Please go ahead.

Albert H. Nahmad -- Chief Executive Officer

Good morning.

David Manthey -- Baird -- Analyst

Hey, good morning Al. The first question, based on the data that you gave us that sales were pretty flattish, I assume that's sales dollars in Florida for you this quarter. Is it safe to assume that pricing was up low to mid-single digits?

Albert H. Nahmad -- Chief Executive Officer

In Florida?

David Manthey -- Baird -- Analyst

In Florida, nationwide, HVAC equipment, anything you're willing to give us?

Albert H. Nahmad -- Chief Executive Officer

Well, our -- our overall sales increase includes both a mix of unit increases as well as price increases. In Florida, specifically our revenues included price increase, but in the third quarter, unit sales went down slightly.

David Manthey -- Baird -- Analyst

Right. Okay. So in terms of --

Paul W. Johnston -- Executive Vice President

Dave, I would just add to that, and margin obviously -- margin for the quarter is up 50 basis points, that's driven by the equipment business. And we should also tell you in a market like Florida margins were also higher. So in terms of price realization and capture in the market, that's the evidence.

David Manthey -- Baird -- Analyst

Okay. So given that the third quarter, if you look at the state of Florida, precipitation was pretty normal and we had record heat. I'm still trying to get to the why here, in terms of why replacement revenues and unit volumes would have been lower. Do you put any credence in the thought that we're 13 years out from the industry peak back in 2005 that was followed by four years of decline, could we be hitting that part of the curve? Do you think about that at this point?

Albert H. Nahmad -- Chief Executive Officer

Well, well, let's go to our data guru. Paul?

Paul W. Johnston -- Executive Vice President

Yeah. Certainly -- certainly something is built into our econometric model as far as looking at demand. Yes, I do think that has some impact in it. Actually it was not record heat in Florida, it was actually cooler than normal but it was --

Albert H. Nahmad -- Chief Executive Officer

It doesn't matter. Florida is always hot. It's always hot and it's always going to create demand for replacements. What we're trying to say is, outside of the Sunbelt, higher temperatures does improve the demand for HVAC equipment. But in the Sunbelt, it's steady, it doesn't act like the Northern markets do.

So when you hear these great increases, you're hearing them because they participate in those Northern markets, that we don't have a position in, of any size anyhow. So we're trying to explain this, so that you understand the fundamentals that the markets we serve, we are doing well and gaining share. In the markets that we don't serve there -- this particular year, they did really great. The hot weather did drive double-digit increases in those market areas. But long-term -- long-term, we like the markets that we're in. That doesn't mean eventually, we would all go north. But at the moment, we like -- we like the consistency of demand for replacements in the Sunbelt areas that we originally serve.

David Manthey -- Baird -- Analyst

Right. Okay. Yeah. I'm intimately familiar with the weather in Florida, but as you're thinking about these trends and Paul you mentioned it, is it possible that when you look at these unit shipment trends that we could see slower growth, even flatness for years in the equipment business, I'm just wondering how worried should we be about this -- this cycle?

Albert H. Nahmad -- Chief Executive Officer

Trust me, whatever is going to sell in Florida, we'll be doing it. But go ahead and answer that, Paul.

Paul W. Johnston -- Executive Vice President

Yeah, we're going to be -- we're going to be gaining share, plus there's other market segments within Florida, which we're entering. We really have been the stars of the single-family replacement. We're moving steadily into other market segments now, particularly on the commercial side, the multi-family side, there's a lot of other segments beside single-family homes that --

Albert H. Nahmad -- Chief Executive Officer

But I think you've identified well the Florida situation, which is a little unexplainable at the time, but Florida is the largest market for HVAC equipment in the United States, and this is our area. We have more locations here, what is it over a 100?

Paul W. Johnston -- Executive Vice President

Yeah.

Albert H. Nahmad -- Chief Executive Officer

Especially with the technology that we're offering our contractors, they will be able to gain share, whatever business there is in Florida, as they adopt it. And it is a slow adoption, but as they do it, they'll gain share. Plus we're going to enter other segments of this market. So I think your observations are very well taken, but don't count us out in Florida, we're the powerhouse and will continue to be.

David Manthey -- Baird -- Analyst

All right. Thanks very much guys. Appreciate it.

Operator

(Operator Instructions) The next question comes the line of Ryan Merkel with William Blair. Please go ahead.

Albert H. Nahmad -- Chief Executive Officer

Good morning.

Ryan Merkel -- William Blair -- Analyst

Hey, good morning. So why don't I ask about Mexico? What's going on there? Because from my memory --

Albert H. Nahmad -- Chief Executive Officer

Mexico.

Ryan Merkel -- William Blair -- Analyst

(multiple speakers) Mexico was doing really well, maybe last year.

Albert H. Nahmad -- Chief Executive Officer

Yes it does, especially since we bought it from Carrier, it's been a winning combination. Paul?

Paul W. Johnston -- Executive Vice President

Yeah. As you know this was the year of the election down in Mexico, where they elected a new President. He's very far left. I think there was some concern about added investment during the election cycle that probably slowed the market down. Now that we're pass the election and the new President is in office, I think he is moving further to the right. And I think we'll start seeing some activity down there picking up again.

Albert H. Nahmad -- Chief Executive Officer

For example, they have a major renovation at the airport and we're a supplier to that renovation. Well that was put on hold by the incoming President. So we'll see how that develops, but it still a very healthy business. It just had softer sales and that caused the decline in profitability. Long-term, I don't think it's going to be an issue at all.

Paul W. Johnston -- Executive Vice President

100 million people.

Ryan Merkel -- William Blair -- Analyst

That's helpful.

Albert H. Nahmad -- Chief Executive Officer

What?

Paul W. Johnston -- Executive Vice President

There's 100 million people down there and it's a developing country, it's a great market.

Ryan Merkel -- William Blair -- Analyst

Okay. Thanks for that. And then I want to ask about the maturing investments that we've been talking about on these calls for a little while now. But I guess, I want to come at it a little differently. Operating profit growth has been growing mid-single digits. What do you think operating profit growth will be once these initiatives mature? Should it be growing 9% to 10% I guess is my question?

Albert H. Nahmad -- Chief Executive Officer

See, I wish we had precision on that. We just don't. We just are -- we're leading the innovation in the industry. We're spending more money, as we should because we are the largest. We just think it's a very positive thing to do, even sacrificing growth rates in the short-term. As long as we explain ourselves, as long as we explain that our goal is long-term, which it is. What is it going to amount to in numbers? Well it's hard to figure out. We have 90,000 contractor customers now. They employ many technicians. So we're probably talking 300,000, 400,000, 500,000 technicians. How long will it take them to adopt the mobile apps that we have; the e-commerce? All those questions -- we'd like to have answers, we just don't know.

We just think it's a slow-moving adoption, although we're going to try to do better with it. But will I think it will materially improve our performance? Absolutely. And will I think -- do I think it would give us a competitive advantage over anybody else that distributes product in the industry? Absolutely. So I wish I gave you with precision what numbers we're talking about, but we just don't know the -- for the reasons I've just stated. We just can't give you in precision wrong numbers.

Ryan Merkel -- William Blair -- Analyst

Fair enough. And just quickly lastly you mentioned launching productivity initiatives. Any more details you can provide or maybe --

Albert H. Nahmad -- Chief Executive Officer

Yeah. What -- what we mean by that is, for example, the order fulfillment tools that are now in the hands of our locations that improves -- the tools that we provide allows our branches to do more with less. And so the increase in productivity will hopefully reduce our employment costs, as we introduce these tools.

Paul W. Johnston -- Executive Vice President

Which is particularly important right now given that there's all this buzz about labor shortages and labor demand, I think it's appropriate that we put these in place for that, so that we can do more with less.

Ryan Merkel -- William Blair -- Analyst

Okay. Very good. Thank you.

Operator

Next question comes from the line of Robert Barry with Buckingham. Please go ahead.

Robert Barry -- Buckingham -- Analyst

Hi, guys, good morning.

Albert H. Nahmad -- Chief Executive Officer

Good morning.

Robert Barry -- Buckingham -- Analyst

I guess, I want to just follow up on the productivity and just see if you can maybe detail what you think the size of that nudge is over the next 12 months to 18 months or so?

Albert H. Nahmad -- Chief Executive Officer

Well another estimate, Barry?

Barry S. Logan -- Senior Vice President & Secretary

Yeah. Robert, good morning. I believe the press release gives a little bit of color on what we're talking about. About 250 people were added over -- over a few years, and what Al said earlier was important. What he said was, we went through our leaders, we're going through this monumental change, monumental transformation in our business and asking them go do it and figure out how to do it and protect our business and protect your customer and protect the supplier relationships and so on.

So around 250 people were hired, which was about a 5% increase in -- in workforce at the time. And that's the -- that's one of the principal things that's being addressed in productivity, is now to go back to those leaders and say two, three years later, now what? How do we find the productivity that we know is being gained? Let's rationalize what we should be doing in the marketplace and let's make sense of all these investments and how it's played out two years or three years later.

So that's the challenge that went out earlier this summer. Some of those plans withdrawn. We're not ready to say here is what it means. There were reductions by the end of the third quarter. There'll be more to come, as the year plays out. So that's the brackets, I would put around it is around 250 head count additions that were made during that period.

The second bucket obviously is -- our second biggest SG&A item is our facilities. How much square feet do we need in this new paradigm of operations versus what we had three years or four years or five years ago? That's been reduced. It's been tweaked. It's been made smaller. And actually, we have more locations today than we had three years ago with less overall square feet, but that's again a slow grind to produce less space and save some money. So that's in the discussion also.

And the third is freight and delivery. We are the last-mile delivery company for our company. It's about 1,000 trucks across 560 locations. They all have drivers. They all have resources tied up in largely fixed costs, and that's again another third layer that is part of this productivity initiative to rationalize over time. So it's early stage. It's -- we're not ready to throw out a bunch of numbers and wish lists, but that's -- that's the nature of what we're doing.

Robert Barry -- Buckingham -- Analyst

Got it.

Albert H. Nahmad -- Chief Executive Officer

I can tell you what my goal is from an operating margin perspective it's at least 10%, at least. We would like to move our operating margins, EBIT margin to at least 10% and beyond.

Robert Barry -- Buckingham -- Analyst

And do you have line of sight to? (multiple speakers)

Albert H. Nahmad -- Chief Executive Officer

No. I like your persistence, but we really don't. But we see progress. Even now, I mean we've reported progress. But that's never been done in distribution. And I think we have the capability of doing that.

Robert Barry -- Buckingham -- Analyst

Got it. Just to clarify, when you talk about 250 people, the plan is to actually have a reduction in force or are you just able to grow without adding people?

Albert H. Nahmad -- Chief Executive Officer

Both.

Barry S. Logan -- Senior Vice President & Secretary

Obviously, I am sorry go ahead.

Albert H. Nahmad -- Chief Executive Officer

Yes. Yeah, go ahead, Barry. Go ahead.

Barry S. Logan -- Senior Vice President & Secretary

Obviously, there's attrition in every business, and that's how we would always want to intend to kind of carry out that type of program. And it's a brand-specific, location-specific, entrepreneur-driven specific local market thing. This is not a broad stroke of Watsco. This is asking and challenging local markets, local leaders to look at this every day, give them data that they now have that they didn't necessarily have a couple of years ago to make -- to look at those decisions and make them.

Albert H. Nahmad -- Chief Executive Officer

Not only that. If we have attrition, our culture is very much a proponent of fill it with existing employees. If they are unfamiliar with the technology, train them. We'd rather look inside before we look outside to fill the opportunities that are providing by the new technology. That's a cultural thing. We want to give our employees long-term careers. All of this is long-term thinking. So as Barry says, attrition is -- hopefully, our goal is to replace by promotions, with training.

Robert Barry -- Buckingham -- Analyst

Got it. Maybe just a question on gross margin, very nice gain there. Just maybe some comments around how sustainable that kind of year-over-year performance might be going forward. It does sound like the price increases continue to come through and environment generally inflationary, but it's a little bit of a large gain versus what typically, I think for Watsco it's kind of a very stable gross margin performance?

Paul W. Johnston -- Executive Vice President

Yeah. Let me, I would say the -- yeah, I would say the rate of change, it needs continued price increases to see the same kind of results. So you're right. It's outsized increase in gross profit because of price increases. There's more to come this year, next year, which seems to be in the cards. I would hope there would be improvement. But then that flattens out and as price increases works their way through the inventory cycle.

Robert Barry -- Buckingham -- Analyst

Got it. And maybe just lastly from me a question on cash flow and expectations for the year, in particular just how you've been managing inventory levels. I think you've been maybe holding a little more inventory through the season than is typical, just any color there would be helpful?

Albert H. Nahmad -- Chief Executive Officer

Yeah. We have -- our technology is geared toward improving turns, which would contribute to cash flow. Now, pricing of course, the increases in pricing that you mentioned, we are aware of, does increase the value of our inventory. So the turns don't show up because there's more investment in inventory. In every year, we sometimes do pre-buys, but that's consistent. So I'm not sure that's part of it.

So our inventory turns this year did not show much of an improvement. However, it's not adopted across the board yet, particularly Carrier Enterprise's, which is our big player and we expect the technology adopted there, I'm talking about the inventory software that we've adopted at Gemaire and that's really producing some great inventory turns. But more importantly it's improving the -- the ability to provide a contractor customer that comes in, whatever he wants. Our -- I think our ratio is like 98% of the time, when a contractor comes into our location, we have what he needs at that moment. That software is particularly designed to do that as well as to let us plan the inventory levels better.

Robert Barry -- Buckingham -- Analyst

All right. Thank you. I'll pass it on.

Albert H. Nahmad -- Chief Executive Officer

You bet.

Operator

Next question comes from the line of Chris Dankert with Longbow Research. Please go ahead.

Albert H. Nahmad -- Chief Executive Officer

Hello. Good morning.

Chris Dankert -- Longbow Research -- Analyst

Hey, good morning, Al. Thanks for taking the questions. I guess, I'll actually kind of move the conversation to A.J. here. The Alert Labs acquisition, interesting technology, I guess is there any kind of a plan or timing on the rollout getting that to actual customers, any SG&A impact, anything else that you'd really point to as far as app (ph) adoption, contractor feedback. Just kind of update on technology here?

Aaron J. Nahmad -- President

Sure. Specifically on Alert Labs, it's very exciting. As we mentioned, they are just a bunch of really smart entrepreneurs. Their culture is unique and impressive and their skill sets are complementary to ours. As far as products, they have two products in market today that measure water flow and seek out flood and leak protection and help mitigate those costs. The device that we are developing together, which is Sentree, which is the air conditioning measuring and monitoring device is in beta today, and we expect to launch in full force in Q1, and it will be a sort of a surgical launch. It won't be available to everybody at the same time.

But as far as, we do talk show with the contractors all the time and then I think just about every contractor, who sees it, his jaw drops with excitement because there's a lot of potential here. It's very early days though, so I don't want to get too ahead of ourselves in speculating what it might mean in terms of dollars or in a business plan, but we're excited about it. And I think we've got the right team now both to design it, manufacture it and continue to enhance it over time.

As far as the other technologies, we showed that the e-commerce continues to tick up in usage, as far as percentage of our sales. And the early results of people using our technology, e-commerce and the mobile apps and some of the Watsco Ventures technologies, and it is early results still, but it's very positive for our customer base. The customers like it. They continue to use it. Attrition rate of those customers is very low. And the growth rate of those customers that are using it is very high relative to the customers that aren't using as heavily.

So that's why we are very encouraged by the long-term prospects of these technology investments. But like we said earlier, it's a matter of doing this at scale, which is just going to take time because it's new and it's different and then we're introducing enhanced tools into a industry that's been doing things very -- much the same way for a very long time and like (inaudible) and very profitably. So it's a -- it's a matter of scale now.

Chris Dankert -- Longbow Research -- Analyst

Got it. And then I guess, the initial reaction I have to the product would be there also kind of a cross usage of this product to add preventative maintenance information, analytics that type of thing, even further down the road?

Albert H. Nahmad -- Chief Executive Officer

Yes, that is the intention of the Sentree device is that -- we've designed it as a pro product, meaning that we'll sell it to contractors not directly to homeowners. And contractors they can choose how to sell it on to their customer base, which are homeowners and building owners. But what we hear a lot from them is that they would embed this in service plans that they have with homeowners, as sort of a connected service plan or enhanced service plan. And what the device does is real-time measuring and monitoring, but also predictive diagnostics using machine learning algorithms.

Chris Dankert -- Longbow Research -- Analyst

Got it. Well, you guys really hit everything else. So I'll leave it there. Thanks again.

Albert H. Nahmad -- Chief Executive Officer

I would add that that's why we keep saying long-term adoption that's why we have a very young President to see it long term, see it through.

Aaron J. Nahmad -- President

I was going to say something for funny (multiple speakers)

Albert H. Nahmad -- Chief Executive Officer

That's a little funny. That's supposed to be a joke there.

Aaron J. Nahmad -- President

No, I said -- I said just -- no and so -- and so, I am just going to have some fun and add to that, the 55-year old guy on the phone here, is the customer engagement that's going on really over the next six months seems to be very powerful stuff. About nine feet from where we're speaking this morning, there's about 15, 20 folks from the Northeast getting the full treatment on everything we're up to.

Albert H. Nahmad -- Chief Executive Officer

Contractors.

Paul W. Johnston -- Executive Vice President

(multiple speakers) contractors.

Aaron J. Nahmad -- President

Contractors and really listening and learning, and this is -- we're all gaining 10 pounds because we've had mounds of food out here, while customers are doing this over the last several weeks. So we're trying to resist that temptation.

Albert H. Nahmad -- Chief Executive Officer

But it's delicious.

Aaron J. Nahmad -- President

Customer engagement going on -- the customer engagement going on is really extraordinary right now.

Chris Dankert -- Longbow Research -- Analyst

Yeah, glad to hear. Got it.

Paul W. Johnston -- Executive Vice President

I'm sorry just -- it's because they see the value in it for their business. Our message to them is that we want to help you grow because when you win we win, right. If you grow you're going to pull along us with you guys. So that's our mission and that's how we say it to these contractors is, we're in business to help you guys grow.

Albert H. Nahmad -- Chief Executive Officer

Any other questions?

Operator

The next question comes from the line of Steve Tusa with J.P. Morgan.

Albert H. Nahmad -- Chief Executive Officer

Hello, Steve.

Stephen Tusa -- J.P. Morgan -- Analyst

Hey, guys, good morning.

Paul W. Johnston -- Executive Vice President

Good morning.

Albert H. Nahmad -- Chief Executive Officer

Good morning.

Stephen Tusa -- J.P. Morgan -- Analyst

I'm glad to hear you're chipper. Now, there's nobody out there that -- that as excited as you are. It's good to hear. It's good to hear.

Albert H. Nahmad -- Chief Executive Officer

Yeah,

Stephen Tusa -- J.P. Morgan -- Analyst

Everybody -- everybody is so depressed these days.

Albert H. Nahmad -- Chief Executive Officer

We're absolutely not depressed. We're excited.

Stephen Tusa -- J.P. Morgan -- Analyst

Yeah. You've got the life down there in Florida. No doubt about it. Beautiful place.

Albert H. Nahmad -- Chief Executive Officer

Come visit, Steve, especially in January.

Stephen Tusa -- J.P. Morgan -- Analyst

I'll try. I'll try.

Albert H. Nahmad -- Chief Executive Officer

All right.

Stephen Tusa -- J.P. Morgan -- Analyst

So just on the gross margins, I think just remind me, so you guys have some inventory and I know there was this kind of unusual cadence of price increases from the OEMs. Are you guys able to kind of leverage that so, for example, if you bought some product from Carrier in June or July or something and they raised price in August that you can kind of -- you get a little bit of spread benefit on that?

Paul W. Johnston -- Executive Vice President

We do.

Stephen Tusa -- J.P. Morgan -- Analyst

Okay. Got it. Got it. Are you see -- what would you -- I think at a high level, there's a lot of discussion around the consolidation potential in this industry. Lennox talked about Carrier a bit on their call. What would be your take on kind of Carrier and Lennox tie up? They said they wouldn't want to impact the front end of the business, but those guys like to control more of distribution, would you guys thought kind of about the game theory on that at all?

Albert H. Nahmad -- Chief Executive Officer

Well, let me ask you this Steve related to that particular issue.

Stephen Tusa -- J.P. Morgan -- Analyst

Yeah.

Albert H. Nahmad -- Chief Executive Officer

If Lennox say they're going to acquire Carrier or be acquired?

Stephen Tusa -- J.P. Morgan -- Analyst

No, it's basically just consolidation. So would it be like a Reverse Morris Trust or a merger of some sort -- more of a combination. I mean, I think Carrier is obviously too big for Lennox to go out and kind of acquire specifically, but whether it's them or --

Albert H. Nahmad -- Chief Executive Officer

Yeah, or anybody else.

Stephen Tusa -- J.P. Morgan -- Analyst

(multiple speakers) Okay. Anybody else kind of (inaudible). What -- but what's your kind of take on that? You've been around for a while?

Albert H. Nahmad -- Chief Executive Officer

From a distribution perspective, we think it's healthy because think about it, if two manufacturers get together wherever they are, that removes a competitor. It's just one now, and OEMs, whoever are the survivors will be in the game of distribution because we have the largest distribution network actually in the world, certainly in North America. We can't control those kinds of things as you know, the consolidation. If I were to guess, I would say that's difficult because of the antitrust.

Stephen Tusa -- J.P. Morgan -- Analyst

Yeah,

Albert H. Nahmad -- Chief Executive Officer

But on the other hand I suggest that air conditioning is a global market now. I mean there are Asian manufacturers already in the United States. So if somebody were to say why don't we merge, the worry about antitrust wouldn't be so great because if they added all the other manufacturers that exist in the world that are serving the US market, that may not be such an issue. That's my thesis. I don't know how true that is.

Stephen Tusa -- J.P. Morgan -- Analyst

Right. Right. No, that makes sense. And then lastly Trane has actually talked about in their filings now that they're kind of going out and acquiring independent distributors. It's unclear whether it's commercial or residential, I think it kind of sounds as though it's residential. Have you kind of seen them get a little more aggressive strategically and -- around stuff that maybe you guys have been trying to go after?

Albert H. Nahmad -- Chief Executive Officer

Well, I'll let Barry answer that because he's in the market constantly for that sort of thing.

Stephen Tusa -- J.P. Morgan -- Analyst

Got it.

Barry S. Logan -- Senior Vice President & Secretary

Steve, you broke there for a second. Who did you say?

Stephen Tusa -- J.P. Morgan -- Analyst

In Ingersoll's filing, they mentioned that they kind of acquire distributors and it's not even -- they didn't even say from time to time. It was kind of seem like more of a consistent run rate. And I don't -- I don't recall I know, they churn their distribution a little bit, but I don't recall them kind of talking about it that specifically. So just wondering if there's any kind of change in the marketplace for these types of assets and that whether they're kind of more involved or not?

Barry S. Logan -- Senior Vice President & Secretary

Just, and again I'm not them, but in my experience on the commercial industrial side, commercial appliance side, commercial service side, they've been very active for most of my career.

Stephen Tusa -- J.P. Morgan -- Analyst

Yeah, yeah.

Barry S. Logan -- Senior Vice President & Secretary

Operating those types of services and relationships in-house and acquiring -- essentially accumulating those assets. On the residential light commercial side, we've seen very little acquisitions in really a 20-year period. And in the recent period, I can't think of any. As with all OEMs, they are active in making distribution decisions within local markets that's not new. I would say they have been more active than they had been maybe 5 years or 10 years ago, but certainly not competing for M&A type activities in our neck of the woods.

Albert H. Nahmad -- Chief Executive Officer

Let's see, you have to remember from an OEM perspective is that once you acquire, then you have to carry the inventory into receivables that's an enormous -- you need the cash first to acquire, and then the cash second to support it. The independent distributor takes over all that.

Stephen Tusa -- J.P. Morgan -- Analyst

Right. Right.

Albert H. Nahmad -- Chief Executive Officer

If they're operators or independent distributors, that investment all goes to the independent distributor, not only the acquisitions price, but as well as the working capital that follows. So these are significant -- well, you know our record, we've invested billions of dollars in acquisitions. So of course we believe in the independent distributor model for many reasons. And I hope that we have continued opportunity and we see no lack of opportunity. It's just (multiple speakers) see what happens.

Stephen Tusa -- J.P. Morgan -- Analyst

One -- one -- one last -- one last quick one for you. Are you seeing any signs of -- there's a lot of debate around the housing market and direction of the housing markets. Obviously, you guys are more replacement and stuff like that. Any -- any kind of signs that things are turning down when it comes to your -- your more kind of direct read into the new homebuilding kind of sector across your footprint?

Albert H. Nahmad -- Chief Executive Officer

Paul.

Paul W. Johnston -- Executive Vice President

Yeah. As you know, that's a -- not a big piece of our business. It's fairly small on the residential side. This year has been great and it continues to be great through the third quarter as far as increase. Looking at the permits through September, it came out yesterday. It appears -- appears at least from a permitting standpoint, they continue to grow.

Stephen Tusa -- J.P. Morgan -- Analyst

Right.

Paul W. Johnston -- Executive Vice President

If new construction for us is, like I say, more on the supply side than it is on the equipment side. And I think to-date (ph) we've been able to hang on to that.

Albert H. Nahmad -- Chief Executive Officer

He is referring to the industry in general. Do we have (ph) any knowledge about the industry in general.

Paul W. Johnston -- Executive Vice President

I really wouldn't. (multiple speakers). Yeah, I can give you some specifics to Watsco, not just the whole market, but Watsco. And if you look there's three things that kind of are important in gauging that, and one is margin, passing on -- passing through price increases at a higher -- at a higher margin is a good indication of the health of the end market. The other is bad -- is bad debts. We float customers $500 million in accounts receivable every month and it gives us a lot of insight into how they are doing if they pass. And year-to-date I mean, year-to-date our bad debt write-offs are around 3 basis points.

Stephen Tusa -- J.P. Morgan -- Analyst

Yeah.

Paul W. Johnston -- Executive Vice President

And I've done this -- I've done this job when it's 20 basis points, it's a very healthy -- very health credit market, so to speak, within our customer group. And the third is mix. If contractors have the faith and confidence to walk into a homeowner and say, here, spend 10% more on a higher efficiency system and they're accomplishing that, mix is a good indicator of health. And again, we saw an increase in mix this quarter.

Albert H. Nahmad -- Chief Executive Officer

So what you're saying is our contractors are saying was it served in new construction and you don't see our contractors' financial condition getting any weaker.

Stephen Tusa -- J.P. Morgan -- Analyst

Got it. Got it. Great color, guys. Really appreciate it.

Albert H. Nahmad -- Chief Executive Officer

Thanks, Steve.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks.

Albert H. Nahmad -- Chief Executive Officer

By the way, are you going to be our operator from this point on? The gentleman, is he all right, the one that was here before? This is to you operator? All right, kidding.. Emma? Emma didn't hear me. She tuned me off. All right. Many thanks for your interest in our company. I hope you stay with us long-term. That's our methodology always, what benefits we accrue to all the stakeholders here long-term. So I hope, you'll be with us long-term. Thanks for your attention today. Bye.

Operator

Ladies and gentlemen, the conference has now concluded. Thanks for attending today's presentation. You may now disconnect.

Duration: 48 minutes

Call participants:

Albert H. Nahmad -- Chief Executive Officer

Brett Linzey -- Vertical Research Partners -- Analyst

Aaron J. Nahmad -- President

Paul W. Johnston -- Executive Vice President

Brad Thomas -- KeyBanc Capital Markets -- Analyst

David Manthey -- Baird -- Analyst

Ryan Merkel -- William Blair -- Analyst

Robert Barry -- Buckingham -- Analyst

Barry S. Logan -- Senior Vice President & Secretary

Chris Dankert -- Longbow Research -- Analyst

Stephen Tusa -- J.P. Morgan -- Analyst

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