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Watsco Inc (NYSE:WSO)
Q3 2020 Earnings Call
Oct 22, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Watsco Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Albert Nahmad, Chairman and Chief Executive Officer. Please go ahead, sir.

Albert H. Nahmad -- Chief Executive Officer

Good morning, everyone. Welcome to Watsco's Third Quarter Earnings Call. This is Al Nahmad, Chairman and CEO and with me is A.J. Nahmad, President; Paul Johnston, Executive Vice President and Barry Logan, Executive Vice President.

Now before we start, our cautionary statement, this conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements.

Before I report, let me first wish that you and your families are healthy and safe. Now onto our report. Watsco just completed an outstanding third quarter. EPS grew 25% to a record $2.76. Records were set for sales, gross profit, operating profit, operating margins and net income. These results were driven by strong growth in our U.S. residential HVAC equipment business, which grew 19% during the quarter and from operating efficiencies achieved throughout our network, as evidenced by the nominal change in SG&A.

Homeowners clearly are investing in their homes as HVAC replacement sales have remained strong from early summer through today. We also believe that greater adoption of our Watsco technologies has contributed to our results and led to gains in market share. Our best indication of this impact are two simple metrics. first, customers that use Watsco technologies are growing at a much faster rate than non-users. Second, we are experiencing minimal attrition among active users on a year-over-year basis. Now keeping this in mind, we continue to invest in our platforms and to drive for greater adoption by more customers.

Here are some examples of our progress. Weekly users of our mobile apps have grown 31% since last year with over 100,000 downloads. E-commerce transactions have grown by 19% this year to nearly 1 million online orders, which is about $1.5 billion in annual rate at the moment.

Our annual -- our annualized e-commerce sales run rate is 32%, versus 29% at the end of last year and in certain markets the use of e-commerce is over 50%. Our dockside pickup services have expanded to more locations and now include non-contact payment functionality. This technology has only been available for a few months and already over 12,000 orders were fulfilled during the quarter by more than 2,000 unique users.

Two of our newer innovative platforms have gained momentum. We call them OnCall Air and the second one CreditForComfort. These platforms provide digital connectivity for contractors and homeowners when making proposals, and buying and financing replacement systems. Contractors using our -- what we call OnCall Air platform provided digital proposals to over 39,000 households during the quarter, and generated $114 million in sales, nearly double that of last year.

Our CreditForComfort platform process doubled in number of digital financing applications resulting in an 87% increase in third-party funded loans. Investments in inventory management software have also benefited us this year, with inventory turns improving 25 basis points over last year and of course contributing to cash flow and operating efficiency.

All of this is exciting, but we believe, Watsco's technology are only scratching the surface of their full potential. As always, feel free to schedule a zoom call with us and we can further explain our technology and progress.

We also strengthened Watsco's balance sheet this quarter. We generated record operating cash flow of $373 million, which is far away a record for the year, so far, and we have no debt at this time. Importantly, we have the capacity to make almost any size investment to grow in our business. And I always like to comment that we're in a $40 billion industry of which we are only $5 billion, so we have lots of room for growth. And then finally, one more very important thought, our results are a testament to the efforts of our teams across the Watsco network. We deeply appreciate their commitment.

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

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Josh Pokrzywinski of Morgan Stanley. Please go ahead.

Albert H. Nahmad -- Chief Executive Officer

Morning, Josh. Hello?

Operator

Mr. Pokrzywinski, your line is open. Is you're -- are you accidentally muted on your side, sir? Okay. Then we'll go on to the next questioner, he can return to the queue. I see some activity. No, he disconnected. Okay. We'll go to Brett Linzey from Vertical Research Partners. Please go ahead.

Brett Linzey -- Vertical Research Partners -- Analyst

Hey, good morning, everyone.

Albert H. Nahmad -- Chief Executive Officer

Good morning.

Brett Linzey -- Vertical Research Partners -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

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

Paul Johnston -- Vice President

Yeah, I'd like to make sure I understand, everything but equipment?

Brett Linzey -- Vertical Research Partners -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

No you misunderstood. Go ahead, Paul to and explain that.

Paul Johnston -- Vice President

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

Brett Linzey -- Vertical Research Partners -- Analyst

Right, right. Okay and then...

Albert H. Nahmad -- Chief Executive Officer

I think the increases has came in equipment that's what he is -- that's what we're trying to say.

Brett Linzey -- Vertical Research Partners -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

Paul?

Paul Johnston -- Vice President

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

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, all right, great. I'll leave it there and pass it on. Thanks a lot.

Albert H. Nahmad -- Chief Executive Officer

Sure.

Operator

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

Albert H. Nahmad -- Chief Executive Officer

Hello, Jeff.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

Paul?

Paul Johnston -- Vice President

Yeah, that's Barry why don't you handle that. As far as what is offshore versus onshore?

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Sure. Jeff, you're on the right track.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Yeah.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

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

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

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

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Yes.

Paul Johnston -- Vice President

Yeah.

Albert H. Nahmad -- Chief Executive Officer

Either one, jump in.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

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

Paul Johnston -- Vice President

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

Albert H. Nahmad -- Chief Executive Officer

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

Aaron (A.J.) Nahmad -- President

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

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

Yeah. It's -- it definitely is an important piece of our business now. Historically, as you know, IAQ has been something we always talk about.

But I think, definitely the pandemic made it into a frontline product area. It's growing very, very rapidly, two, three times what it was in prior year. Excited about all the new products that we're putting in, we're putting in new lights...

Paul Johnston -- Vice President

UV light.

Albert H. Nahmad -- Chief Executive Officer

Yeah. The UVC lights, air cleaners, filtration, the entire gamut is growing rapidly, it's been very good and I think it's sustainable.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay.

Albert H. Nahmad -- Chief Executive Officer

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

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. Thanks for the color guys.

Albert H. Nahmad -- Chief Executive Officer

And Jeff, what I would add just to A.J. kind of what we saw talked about before on platforms and technology and people and our execution. IAQ is now part of every single recommendation in our platform called OnCall Air.

OnCall Air is the presentation platform that contractors get the homeowners to sell them solutions. And again, that would be an example where old school, a contractor may or may not present that feature benefit, may or may not added to the collection of things he is doing. Now, it's embedded in the technology, embedded in the presentation, embedded in the proposal that's being given. So just looking at the future state, that kind of thing is very important.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

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

Aaron (A.J.) Nahmad -- President

Sure. OnCall Air is a business that we've built that has a software tool, that is sold on a SaaS basis to contractors to help them sell in the house. So it replaces the yellow carbon copy, piece of the paper that they've previously used to make proposals on and it's a full, digital interactive experience with lots of product information and videos about the product offering and enables contractors to sell with a good-better-best offerings.

And all of those add-ons and accessories and recommendations that Barry was hinting at are embedded in the tool. That consumer financing options are embedded in the tool. It's basically a modern sales platform, designed purely for HVAC contractors.

And the contractors that are using it are growing, growing faster, they're getting bigger tickets, they're closing more deals and it's off to a tremendous start.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Thank you.

Albert H. Nahmad -- Chief Executive Officer

And it's also using all of the product data that we've curated for the last five years, it's not just a sales platform, it's an information platform of all the products, all the data, all the SKUs, all the connectivity to e-commerce to allow for fulfillment.

It's really I think again a terrific platform, really go into that future state of how things can be sold in the home.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

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

Aaron (A.J.) Nahmad -- President

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

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Thanks a lot guys.

Aaron (A.J.) Nahmad -- President

Yeah, yeah.

Operator

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

Albert H. Nahmad -- Chief Executive Officer

Good morning.

Christopher Dankert -- Longbow Research -- Analyst

Hey, good morning, all morning guys, thanks for taking my question. I guess, first off, congrats on the U.S. res growth, really impressive.

Albert H. Nahmad -- Chief Executive Officer

Thank you.

Christopher Dankert -- Longbow Research -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

That's a great question. And all the OEMs were stressed in and from our observation is they kept up with us as best they could as they did with other distributors. So yes, did we lose a little bit of sales? Probably, but overall, I think, they kept up with us and as I said with other distributors as well and they're working hard. They're not messing around here.

They know this is an opportunity, so they run hard. Anybody want to add color to that?

Paul Johnston -- Vice President

Yeah.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Yeah. I mentioned it earlier, that the herculean effort in the field, where there was products of shortages. Our team has found ways to fill orders anyway. There is a lot of warehouse transfer is going on. There was a lot of helping contractors find. If they were looking for product A, but we didn't have enough of it, we could substitute with product B and get the best competitive price. There's a lot of little, little wins like that that helped kept our customer fulfilled.

Paul Johnston -- Vice President

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

Christopher Dankert -- Longbow Research -- Analyst

Got it. Thanks for the color there guys, I got to imagine being able to keep up with with customers this quarter, just it's got to breed a lot of goodwill, so nice work.

Paul Johnston -- Vice President

And Al said, and I agree with that.

Christopher Dankert -- Longbow Research -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

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

Christopher Dankert -- Longbow Research -- Analyst

Got you, got you. Well, thanks very much for the color guys, appreciate it.

Albert H. Nahmad -- Chief Executive Officer

Sure.

Operator

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

Albert H. Nahmad -- Chief Executive Officer

Hi Dave.

Dave Manthey -- Robert W. Baird & Co. -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

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

Dave Manthey -- Robert W. Baird & Co. -- Analyst

I'm thinking between brands too Al.

Albert H. Nahmad -- Chief Executive Officer

What?

Dave Manthey -- Robert W. Baird & Co. -- Analyst

Yeah. I'm thinking between brands, one brand was out and that contractor would switchover to something that you had in stock. Do you think you started in there, anything measurable?

Albert H. Nahmad -- Chief Executive Officer

And Paul, do you want to answer that?

Paul Johnston -- Vice President

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

Dave Manthey -- Robert W. Baird & Co. -- Analyst

I think that's well said, yeah.

Paul Johnston -- Vice President

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

Dave Manthey -- Robert W. Baird & Co. -- Analyst

Okay, fair enough. And then, second on the other HVAC products. If I heard you right, Paul, I think you said that the parts business was up mid single, which I guess would imply the supplies being something lower than that to get to the plus 2 overall.

And I'm just confused on why that would be given that we're seeing such a strong push in the new residential construction market, I guess a bigger picture question for all of you is that in that other HVAC products business, do you envision a world where that can grow, it seems like it's been flat or down forever because this offsetting factor between parts and supplies.

Is there a world where that can grow on a more regular basis?

Paul Johnston -- Vice President

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

Albert H. Nahmad -- Chief Executive Officer

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

Dave Manthey -- Robert W. Baird & Co. -- Analyst

Right.

Albert H. Nahmad -- Chief Executive Officer

In other words, don't count us out on parts and supply just cause...

Aaron (A.J.) Nahmad -- President

Yeah.

Dave Manthey -- Robert W. Baird & Co. -- Analyst

No.

Aaron (A.J.) Nahmad -- President

I was going to say some of the things are different, stay tuned. That's a new major data-driven initiative that we're just kicking off now and-our instance that will be kind of a next generation effort on parts and supplies.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Okay. And I'm just....

Dave Manthey -- Robert W. Baird & Co. -- Analyst

Sounds good.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

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

Dave Manthey -- Robert W. Baird & Co. -- Analyst

Great. Well, we'll watch for that. Thanks very much guys.

Aaron (A.J.) Nahmad -- President

You were much more eloquent than me Barry, well done.

Albert H. Nahmad -- Chief Executive Officer

Well Barry is a very eloquent speaker.

Paul Johnston -- Vice President

He is.

Albert H. Nahmad -- Chief Executive Officer

In every way. In every way.

Operator

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

Albert H. Nahmad -- Chief Executive Officer

Morning, Steve.

Stephen Volkman -- Jeffries LLC -- Analyst

Great. Good morning, everybody. Barry, if I can pick on your elegance again for a moment.

Albert H. Nahmad -- Chief Executive Officer

To you...

Stephen Volkman -- Jeffries LLC -- Analyst

Well, you said something I thought was interesting earlier, many things obviously, that I thought were interesting. But one specifically was that the IAQ is now sort of part of all of these OnCall Air proposals that come through. Is it possible to ballpark what -- how much of the add-on would that be like 10% to the project or 20% or 50%? I just really have no idea.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Yeah, it's certainly not 50%, but the OnCall Air concept that differs from the historical sales conferences, giving the homeowner a good-better-best solution, which includes IAQ. It's not just adding IAQ, it's adding a bundle, it's selling higher efficiencies. And then the fact that consumer financing can then make those higher efficiencies and larger bundles more affordable, is part of the holy grail of what we're trying to create here. So I wouldn't say IAQ has, Paul you may know, but...

Paul Johnston -- Vice President

Yeah.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

It's not just 10% or whatever the percent might be, it's presenting this bundle in a very connected way with the homeowner that's going to respond to it differently than if a contractor happens to remember it when he is writing down on paper on a Office Depot form. There are different sales process is really what it's about.

Paul Johnston -- Vice President

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

Stephen Volkman -- Jeffries LLC -- Analyst

Okay, great. That's helpful.

Paul Johnston -- Vice President

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

Stephen Volkman -- Jeffries LLC -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

I've warned Barry that he will answer that. So let's get this done.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Again, every distributor has two things they are managing in SG&A obviously. The fixed costs that you would like to lower over time and the variable cost that you don't mind spending because they're usually, they're driven by by sales or margin growth. So we're no different. The key this year has been to get cost -- fixed cost down. How do we take some of the latent costs in our not just our facilities, but any measure of latent cost in our store is down and that's where we've been accomplishing the most this year. Rent and facilities for example was lower year-over-year on, 6% higher sales would be an example. Some of the fixed payroll where we're examining really the technology benefits that might come. This has been obviously a climate to address some of those costs and then try to push for the permanence of them as they go into next year.

So I'll have a great analytic for you to say X amount of fixed costs has been reduced and will stay permanent, but culturally there is not one of our 30 regional Presidents that hasn't taken the task their own local cost structure to accomplish that. The variable cost will be driven by sales, there will be more commissions, there will be more performance-based comp, there will be more delivery costs as the business is growing the way it is. And that's obviously embedded in our third quarter performance where you see SG&A flat. We have growth in variable, we have offsetting reductions in fixed and again culturally it's just a huge effort to go on to sustain this because they can be more permanent and temporary benefits SG&A and the fixed cost side.

Paul Johnston -- Vice President

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

Stephen Volkman -- Jeffries LLC -- Analyst

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

Aaron (A.J.) Nahmad -- President

I would say TBD, you know?

Stephen Volkman -- Jeffries LLC -- Analyst

Good. Good.

Aaron (A.J.) Nahmad -- President

Yeah, that's the goal right, is to be ever more efficient.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Yeah, the largest...

Stephen Volkman -- Jeffries LLC -- Analyst

Fair enough.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

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

Stephen Volkman -- Jeffries LLC -- Analyst

Yeah. Thank you, guys.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Sure.

Operator

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

Albert H. Nahmad -- Chief Executive Officer

Morning, Ryan.

Ryan Merkel -- William Blair & Company -- Analyst

Hey, morning all. So first off, the resi growth also very impressive in my view. This is probably hard to answer, but I'm just wondering about sustainability. What level of growth can continue, because I have to imagine there were some pent-up demand that deferred work in 2Q that got done in 3Q. So I don't know, it's hard to answer, but what do you think?

Albert H. Nahmad -- Chief Executive Officer

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

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

No.

Paul Johnston -- Vice President

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

Ryan Merkel -- William Blair & Company -- Analyst

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

Paul Johnston -- Vice President

Right, right.

Ryan Merkel -- William Blair & Company -- Analyst

And that's what the annual won't be necessarily out of line.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

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

Ryan Merkel -- William Blair & Company -- Analyst

Yeah. Okay, that's good answer that context helps.

Albert H. Nahmad -- Chief Executive Officer

Just one more point there, whether it comes to industry growth, our share gains, I'll tell you one more detail is that our growth rate to new customers is higher than it's ever been, meaning, we have more sales, the more new customers and we can attribute that a number of factors that we have more customers buying more product from us than ever.

Aaron (A.J.) Nahmad -- President

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

Ryan Merkel -- William Blair & Company -- Analyst

Okay.

Albert H. Nahmad -- Chief Executive Officer

Absolutely.

Ryan Merkel -- William Blair & Company -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

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

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

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

Ryan Merkel -- William Blair & Company -- Analyst

Okay. Yeah, very encouraging. Thanks. Thanks for the answers.

Albert H. Nahmad -- Chief Executive Officer

You bet.

Operator

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

Albert H. Nahmad -- Chief Executive Officer

Good morning, Brandon.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Yeah, it's actually Josh. Sorry for the technical...

Albert H. Nahmad -- Chief Executive Officer

Good morning, Josh.

Aaron (A.J.) Nahmad -- President

Oh my god, an alias an alias.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

And I'll take a shot at the first half of October, strong demand, will that be sustained, I don't know. But first half of October, we got smiles on our face.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. And...

Albert H. Nahmad -- Chief Executive Officer

It because we're gaining share, maybe because the industry is doing better, it's hard to say, but I like it.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

I think most of that would have been completed in the -- during September.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Yeah.

Albert H. Nahmad -- Chief Executive Officer

You sort of backlog at the contractor would have had. So I don't think that's an issue right now, yeah.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Yeah, Josh, I would just add to that. I would say that it's 80% of what we do is in the Sunbelt. People are going to wait till next spring.

Albert H. Nahmad -- Chief Executive Officer

Right.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

I think we've always been and to the extent, we'll always be this kind of real-time. We are looking at us in terms of our sales and our seasonality. So I don't think we see the deferrals. I think where we see deferrals right now is the commercial market that's both the backlog waiting for jobs, waiting for money, waiting for contractors to fulfill backlog in the commercial market. I would say that's the only part of our business where that might be true for next year.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. And -- I anything else right...

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Yeah.

Albert H. Nahmad -- Chief Executive Officer

All right, let him say what he was going to. What was -- what you say, Josh?

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

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

Albert H. Nahmad -- Chief Executive Officer

That's right. Yeah. Although, the indoor air quality is a big theme now of the commercial as well, carrier for example to introduce equipment that's used in the implied world for buildings and that sort of thing. Very useful attack on the threat of the virus.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

And then Paul you had some?

Paul Johnston -- Vice President

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

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful. And then, just shifting gears entirely. Any observation you would have Al or revisitation that you would have on the dividend policy or payout? Obviously you guys have a pretty high dividend payout right now.

But with any potential changes to the statutory tax rate. Does that, is that color you're thinking or is that something that would be revisited if tariffs were to go up?

Albert H. Nahmad -- Chief Executive Officer

That's an easy one. We have consistently followed the principle that we will share our growth with the stockholders. And I have a history of doing that year-after-year for a number of years. We see no reason not to continue that, no reason at all, especially given that we have no debt and strong cash flow.

So I would say that we're going to sustain what we've been doing in the past, unless there's something that comes up that I'm unaware of it. And right now, it looks pretty good to do that.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Okay.

Albert H. Nahmad -- Chief Executive Officer

Don't forget cash flow has been to a large extent a little greater than earnings and that gives us additional opportunity to do more for our stockholders.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Understood. Thanks.

Operator

And we have a question from Steve Tusa of J.P. Morgan. Please go ahead.

Albert H. Nahmad -- Chief Executive Officer

Hi, Steve.

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

Hey guys, good morning.

Albert H. Nahmad -- Chief Executive Officer

Good morning.

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

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

Albert H. Nahmad -- Chief Executive Officer

Thank you.

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

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

How do you kind of get to a higher normalized kind of number than that? What is, I guess what's changed?

Albert H. Nahmad -- Chief Executive Officer

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

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Well and you see, this will be philosophical and then I'll actually answer your question. There are two things that happened this year that are interesting and frankly surprised me.

And, one is that we have another year, where the mix of high efficiency is growing. So there is a consumer risk, this year it's not evident and the mix of products we're selling, it's a positive. And it speaks to the homeowner contractor relationship as that's playing out. Secondly...

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

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

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

That may be a little strong, but round it kind of it's probably fine.

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

Okay. Okay.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

The other -- I think it's probably little high, but that's just my feeling.

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

Yeah.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

The other thing that no one ever asked about is contractor credit. When we sell $5 billion excess to contractors, 80% of that is on credit. So we have to wait 30 days to get our money and it's the best, one of the best leading indicators of how our contractors health is, how...

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

Regarding collections, yeah. Okay, Barry, I know where you're going.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

And we see, we see almost the lowest default rate, lowest bad debt, lowest kind of risk factors and credit than we have seen. And again, it does speak to the idea that contractors are active and closing deals.

And if we're helping them through our technology, great. But just speak I think to the industry and to our contractor relationships, I think in terms of health of that end-market and how homeowners are reacting to what's going on when something breaks or if something needs to get replaced and so on.

So I don't know if that adds to 8%. Steve, market share gains I think will prove out this year adding to that 8%. I feel like that momentum is only getting started. For a longer-term, body of work we're doing with our OEMs right now. It maybe, time will tell. But I think that, we can't underestimate the health of what -- what's going on with the contractor-homeowner relationships that are out there.

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

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

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Yes.

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

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

Paul Johnston -- Vice President

Steve also remember, our customer is a homeowner and the unemployment rate is much lower with homeowners than it is for people who are renters.

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

Right, right.

Paul Johnston -- Vice President

There is facts there.

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

And also...

Paul Johnston -- Vice President

And the second thing that we mentioned, really gaining market share is a combination of two things. One, it's acquiring new customers. But also it's -- indicator, with some of our new technology. We've reduced the attrition rate of existing customers.

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

Right.

Paul Johnston -- Vice President

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

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

Right, right. And I guess to that point, I mean, what changed for you guys on that front? I mean, I don't -- when you just compared factually kind of your growth rates versus the market, they weren't that great ahead of the pandemic, heading into the pandemic.

I mean, did something, did you kind of turn on something here, where because of the e-commerce dynamic like people went to you guys, because you have the technology ready? And was there something that kind of flipped for you guys specifically, because I think the supply constraints in the industry on net probably would have hurt you guys because one of the major players that supplies you guys I heard was kind of out, so that shouldn't have helped you.

Was there something that kind of flipped for you guys specifically here in the last couple of quarters?

Paul Johnston -- Vice President

We're just great leaders, what can I tell you?

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

Other than of course great management, yeah. Other than that?

Paul Johnston -- Vice President

And we -- sometimes I think that Steve that you underestimate the earlier investments we were making and which was affecting growth rates of earnings, maybe others were too short-term orientated. And -- but we didn't mind, because we're in for the long term. And so we may have been hurt by the recent growth rates in recent years. But we're starting to get a payback in what we do. And I'm optimistic that we will do even better.

What the industry will do, I have to say that being home, because of the virus and having in some cases record heat did not hurt demand.

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

Yeah, that is...

Paul Johnston -- Vice President

It's very hot summer and most of us are staying home. We don't go to restaurants. We don't go to movies. We don't go to supermarkets. And that means are using cooling more than you normally would and wear and tear on equipment does, create needs for repairs and replacements.

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

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

Paul Johnston -- Vice President

Al or Barry?

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Yeah, the commercial in the U.S. is down, I would say right at double-digits. And again, a slight improvement over where the second quarter was, international is the larger impact in component, which is where we sell not the contractors internationally, but also other distributors.

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

Right.

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Some changes in that channel internationally. So again I will report what our international component looks like in our 10-Q in a couple of days.

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

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

Paul Johnston -- Vice President

No, really, we had not seen price on the equipment side, no, we have not seen price I think. A big, a big change in the market dynamics...

Albert H. Nahmad -- Chief Executive Officer

Will they increase prices in the new year? Well, might be your question. And -- It's hard to say, but my prediction would be they will.

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

Yeah, yeah, just like every year. Okay, thanks a lot guys. I appreciate it.

Operator

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

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

Duration: 56 minutes

Call participants:

Albert H. Nahmad -- Chief Executive Officer

Paul Johnston -- Vice President

Barry S. Logan -- Executive Vice President, Planning & Strategy and Secretary

Aaron (A.J.) Nahmad -- President

Brett Linzey -- Vertical Research Partners -- Analyst

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Christopher Dankert -- Longbow Research -- Analyst

Dave Manthey -- Robert W. Baird & Co. -- Analyst

Stephen Volkman -- Jeffries LLC -- Analyst

Ryan Merkel -- William Blair & Company -- Analyst

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

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

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