Watsco, Inc.
Q2 2008 Earnings Call Transcript

Published: 17 Jul 2008

[Operator:]

Good morning. My name is Bevaman and I will be your conference operator today. At this time, I'd like to welcome everyone to the Watsco Second Quarter Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Nahmad, you may begin your conference.

[Albert Nahmad:]

Thank you. Good morning everyone. Welcome. This is our second quarter earnings conference call. My name is Al Nahmad, President and CEO. With me are Barry Logan, Senior Vice President; and Paul Johnston, our Company’s Vice President. First let me provide the necessary cautionary statement. This is a reminder that this conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. Now, the highlights. The second quarter performance was the second-best in the 60-year history, behind only 2006’s blockbuster results. Obviously much has happened in the general economy since then. We believe our performances this quarter is exceptional and speaks well of the fundamentals of our business and industry as well as our ability to react to these market conditions. As expected, sales results showed improvement compared to the first quarter with the start of the replacement season. We estimate sales of replacement products in Watsco grew 8% during the quarter. It is also important to note that the sales of high efficiency systems, products above the 13 SEER level grew 22% over the last year. The richer mix helped sales and margins and speaks to the importance of the relevance of these products, particularly now in this high energy cost environment. We also saw continued growth in the sales of new environmental friendly systems that use R410a refrigerants. In 2010, the Montreal Protocol will become effective for the equipment manufactured in the United States. This means that 410a products will become a standard of the industry. The product transition is already underway and we have been actively training our customers on the merits and benefits of replacing systems with the 410a products well before the mandate takes effect. It is great to be in the business with a built-in focus of two important issues

[Operator:]

(Operator Instruction). Your first question comes from line of Matt Duncan of Stephens.

[Matt Duncan:]

Good morning gentlemen and congrats on a nice quarter.

[Albert Nahmad:]

Thanks Matt.

[Matt Duncan:]

The first question I have got, Al, you mentioned that replacements were up about 8%. Is that unit replacements or is that your total replacement related to sales that were up 8% in the quarter?

[Albert Nahmad:]

That's revenues.

[Matt Duncan:]

I mean is that just equipment sales or is that everything?

[Albert Nahmad:]

That’s everything.

[Matt Duncan:]

Okay. What do you think that's driving that? I know, I guess June was a little bit warmer this year than normal. How much of it do you think was weather versus other factors?

[Albert Nahmad:]

Well, we are in season now, so this is a typical demand curve that comes in in the second and third quarter. But what we are noticing is more attention being paid to the high efficiency products that’s why we reported a 22% increase in over 13 SEER equipment. So this is just normal seasonal demand and we continue to emphasize that this is our company's primarily based and fundamentally into the replacement market, which is always a pretty reliable, provides a reliable demand no matter what the economy is doing or what interest rates are doing or anything else.

[Matt Duncan:]

Sure. Just sticking with the normal seasonality knowing that you know, June is usually a seasonally strong quarter or if you were to look at the months, I know the quarter started all cooler and got hotter as it went along relative to the norm. Did that have any impact on kind of a month to month or was this….?

[Albert Nahmad:]

You know, we don’t really look at that. We just know that the things shift between the second and the third quarter, sometimes there are dips and sometimes there are increases in the temperature across the Sunbelt and other parts of the country. But we just know that during that period we are going to have reliable demand and we just know that and expect that sometimes it comes -- we are sure it comes a little later, sometimes it will last a little longer, but during the second and third quarters when we experience our seasonal demand.

[Matt Duncan:]

Sure. Al, if the new construction revenue then, if replacements were up 8% that would seem to indicate the new construction was down pretty substantially. I mean maybe 50% or more. Is that accurate or am I off [multiple speakers].

[Albert Nahmad:]

It was down 40%.

[Matt Duncan:]

It was down 40.

[Albert Nahmad:]

Yes.

[Matt Duncan:]

Okay, thank you. And then last couple of things and I will jump back in queue. Looking at the balance sheet, your accounts receivable and inventories both jump pretty significantly, I know part of that is seasonality. Was there anything else to play there or is that just the seasonality that’s caused that?

[Albert Nahmad:]

No, it's seasonality. We are actually, gradually improving the inventory turns, that’s why we are optimistic that this cash flow streams we are enjoying. We can do better.

[Matt Duncan:]

Sure. Then on looking at the commercial refrigeration business, it was up 1% this quarter based on what was in the release, that’s a little bit slower growth in what you have been seeing. Is there is any change in that end market or anything going on there that we should be aware of?

[Albert Nahmad:]

I really cannot identify anything that to answer that question. It’s just you know, it could be related to the commercial markets.

[Matt Duncan:]

Yeah.

[Albert Nahmad:]

Which it serves, but it’s a pretty steady business and it's been growing consistently through this entire economic weakness. Maybe the rate of Gulf last year -- I haven’t looked at it, maybe it was exceptional in the second quarter. Barry, you remember that?

[Barry Logan:]

Yes. It was double-digits a year ago. So it…

[Matt Duncan:]

Early comps, yeah.

[Albert Nahmad:]

Yeah, tough comp.

[Matt Duncan:]

Okay. And the last thing guys and I will jump back in queue. We look at your balance sheet, you guys have done a great job paying off the debt from ACR pretty quickly, and you are left with very little debt on your balance sheet. Al, you did mention that you know, you guys would like to put that balance sheet to use. What is the acquisition pipeline look like right now and are you getting close to anything or is there anything you can kind of you know, what is this -- what does that acquisition look like for you guys right now.

[Albert Nahmad:]

Well, we don’t like to report transactions until we've done them. But I can give you a sense that because of our strong position as you have just noted, we are seeing opportunities that I worked on for years that are showing interest in talking to us. So I am optimistic.

[Matt Duncan:]

Okay, great. Thanks and congrats again guys.

[Albert Nahmad:]

Thanks.

[Operator:]

Your next question comes from the line of Curt Woodworth of J.P. Morgan.

[Albert Nahmad:]

Hi, Curt.

[Curt Woodworth:]

Yeah hi, good morning. How are you?

[Albert Nahmad:]

Fine, thanks.

[Curt Woodworth:]

Question on the third quarter in terms of the seasonality in the business, and if you look back over the past sometimes second quarter is better, sometimes third quarter is better. It seems like when the weather hits, it's probably a function of that. Maybe Barry can you give us a sense of how you think that could play out this year? It seems like June was pretty strong, as I know maybe that pulled in a little from 3Q, a little bit different than last year perhaps.

[Albert Nahmad:]

But I will take a shot at -- now I will turn it over to Barry, but I like what I see so far in beating over the third quarter. Go ahead Barry.

[Barry Logan:]

Yeah, Curt, really obviously, we are almost like a retail business where we don’t see backlog, we don’t have a great visibility, we just can see consistency over a period of time. And I think you are right, if you average 10 years, you see third quarters would end up being a lot like second quarters, there is no way to predict that obviously because it is again a day to day business. But as I will suggest the trends so far are so good.

[Curt Woodworth:]

Okay. And can you give us a sense of what same store sales growth would like thus far through the quarter?

[Albert Nahmad:]

You mean the third quarter, no we don’t want to do that. It's too early.

[Curt Woodworth:]

But July is the most important month.

[Albert Nahmad:]

I like to phrase it as I said, I like it.

[Curt Woodworth:]

Okay. Fair enough. And after then in terms of ACR, if you look at the margins, if you back out the margins from on a same store basis, it looks like it was about 40 basis points dilutive to the company. But at $0.08 per quarter, which implies a net margin close to the company average. So I am just wondering can you provide a little bit more color on ACR, what the margins look like and where you see that going?

[Albert Nahmad:]

I give an overview and then Barry you can perhaps add something to it. ACR is a great company with great people and great customers and we are very happy to have them as part of our family. They are not untypical. Acquisitions that we make when we first get involved with the acquisitions that the margins were below what we have accomplished historically. And so this -- they are following the same trend. When you scale it as we do, you always see a margin improvement. So every time you add an acquisition, you generally going to add it to the lower margin and it takes time to bring it in and use the advantages of our scale. And that’s what has been happening in ACR and I think that will continue to happen to ACR and overall I believe that Watsco's margins overall still have a lot ways to go in the future.

[Curt Woodworth:]

Okay. And just last questions in terms of sort of sizing the impact of the mix shift to the higher efficiency as well as this higher ASPs from what's going on in passing through the raw material costs. Would you say that a mix benefit plus price realization would be close to 5% for the company, is that a fair guess?

[Albert Nahmad:]

Barry?

[Barry Logan:]

Curt, what we really study is the equipment side of our business. We don’t really study, that’s a duck tape. But on the equipment side of our business, we saw about a 4% price increase.

[Curt Woodworth:]

Okay.

[Barry Logan:]

Versus units this quarter.

[Curt Woodworth:]

Okay.

[Barry Logan:]

And in terms of how much of that is mix versus inflation versus other factors is hard for us to splice.

[Curt Woodworth:]

Okay

[Barry Logan:]

That gives you a big picture sense about a 4% overall price for mix and inflation.

[Curt Woodworth:]

Got it. All right, great. Thanks very much guys.

[Operator:]

Your next question comes from the line of Michael Cox of Piper Jaffray.

[Albert Nahmad:]

Good morning Michael.

[Michael Cox:]

Congratulations on a great quarter guys.

[Albert Nahmad:]

Thanks very much.

[Michael Cox:]

I know that you have closed a few branches here in the second quarter. Do you have any plans to close any further branches? And the branches you have closed thus far this year they have been targeted any specific markets or any specific subsidiary company of yours?

[Albert Nahmad:]

Barry, you know the details of that. I just know the closing branches and opening branches, it's just on occurrence. We are always looking for opportunities to open new branches. We are always looking for opportunities when we think that it's not worth having a branch. But whether it involves any specific regions, do have any feel for that Barry? I don't.

[Barry Logan:]

I do. Part of whole profit assurance plan to get to the 30 to 40 million was to look at branches where maybe something it wasn't performing and could be supported by a nearby branch. In other words, just cut square feet out of the market but not have any loss of coverage in the market. So we have closed a net 12 branches this year. There are only a handful that are remaining, so there is no -- most of the heavy lifting is done. 8 of the 12 are being serviced by local branches and we don’t see a material change in revenues in that particular market. So that’s all part of this year's plan. I think it's unusual that it's that many, but it's all part of again getting to the profit goals that we have.

[Michael Cox:]

Okay, that’s very helpful. And I think in some prior quarters you have given the percentages of unit volume that would be above 13 SEER. I am just curious as to what uptake that has reached at this point and maybe relative to, I know dating back several years, but what you saw the last time around when the efficiency change was made?

[Albert Nahmad:]

Sure, our equipment business itself, it's about 12% of our equipment business is above 13 SEER above baseline, and the last time around when 12 and 14 SEER became what was considered high efficiency above the 10 SEER minimum, above 12 SEER and above was over half the industry volume. So it's going to be a slow creep and in terms of how slow or how quickly obviously we like the dynamic of all of the focus on energy because it should drive what is now 12% of our equipment business to something much greater, but it was over 50% last time around that high efficiency stuff.

[Michael Cox:]

Okay, that’s great. Thanks a lot for taking my questions.

[Operator:]

Your next question comes from the line of Ian Zaffino, Private Investor.

[Albert Nahmad:]

Who is the call from?

[Ian Zaffino:]

Ian Zaffino from Oppenheimer. How's everything?

[Albert Nahmad:]

Really good.

[Ian Zaffino:]

Certainly. A little bit of an interesting question here is, driving the growth of above 13 SEER, can you just get into a little bit more, is that, as people open up their electricity bills now and they seem probably double what they were last year. Is there more of an incentive to go above 13 SEER, is that what’s driving a lot like this or is it more..?

[Albert Nahmad:]

Of course, the higher cost of electricity is a primary driver for demand of – ongoing demand for high efficiency equipment. Offsetting that of course is the cost of higher efficiency equipment to the consumer, but the daily shows that this government data that generally speaking, the 120 million homes that use central heating or central cooling something over 50% is the cost of energy. So it’s a major item. Interestingly enough, there is lot much press on this. You hear about light bulbs and if you change your light bulbs, it makes a difference and you hear about high efficiency refrigerators and things like that, but none of those categories add it altogether equal the electrical or energy demand in the case of gas furnaces. The percentage of electrical bills is substantially higher for cooling and heating, but the media having cut up with that yet.

[Ian Zaffino:]

Okay.

[Albert Nahmad:]

We hope they will put even more demand for higher efficiency.

[Ian Zaffino:]

No, no, I think it's okay.

[Barry Logan:]

Ian, a couple other points on your question is utility is obviously a big role in wanting the upgrade of air conditioning, and one of the function they do is to give rebates to consumers as a way of incentivize and those incentives only started 14 SEER and above. And so, that’s obviously a way to provoke some extra sales in the market is because of the incentives that are provided. Also the warranties can generally be longer as you go up the SEER chain. Obviously the contractor makes more money because there is about a 20% price difference between a 13 and 14 SEER system, and so there is a lot incentive for everybody to go ahead and push higher sale and…

[Albert Nahmad:]

Why don’t you explain what we are trying to educate the consumer through AC Doctor, so he is – we don’t wait for the media, we’re trying to do it directly through the Internet.

[Barry Logan:]

Sure. On AC Doctor, something we’ve added, that’s very important is to let the consumer know about it and learn about it and educate them, but more importantly to tell them in our local market what are the incentives, what are the rebates the utilities do provide, and even in some cases there is local financing available from the utility to upgrade at a lower interest rates and so on. So that's all brought to bear and rather having static Yellow Pages as a source of information but rather having a rich source of information and that’s what AC Doctors have got us to bring the consumer. Now that’s closer to our customer, but closer to the information they need to make a better decision.

[Albert Nahmad:]

And this was launched about two weeks ago.

[Ian Ziffano:]

Okay, that’s very helpful. Thanks again and good quarter.

[Albert Nahmad:]

Thank you.

[Operator:]

Your next question comes from the line of Keith Hughes of the Suntrust Banc.

[Albert Nahmad:]

Hi Keith.

[Keith Hughes:]

Thank you. Two questions, one on 410a, how much of your equipment being sold now is using that refrigerator?

[Albert Nahmad:]

Let’s get Paul into this because I haven't heard a peep from, Paul.

[Paul Johnston:]

Well, I have been just sitting here listening. Learning is always good things. 410 for us is really part big this quarter, and we’re glad to see it, because it's something that we’ve really been trying to push our contractors to move ahead of the curve and do this before the deadline, which is in 2010. And based on what we are seeing right now is roughly 25%, which is pretty much inline with the industry of our equipment sales could move to the 410a product. And getting back to the prior question that also drives us into generally a higher SEER product contains the 410, you’re going to 14 SEER and above. There are several products in the 13 SEER category, which are 410, but for the most part this is high SEER product.

[Keith Hughes:]

And what's the turnout charge on the 410a system versus R22?

[Paul Johnston:]

I mean, it's hard pressed to talk about on an installed basis as you know because the contractor depending on what region of the country he's in has a different pricing metrics. But generally the pricing has gotten very closest within probably 105% I would say.

[Keith Hughes:]

All right.

[Paul Johnston:]

To go 410 versus R22. But the difficult point here is of course you are going to a higher SEER when you get the 410 generally. So there is not a comparative R22 unit.

[Keith Hughes:]

On equipment pricing we have seen numerous announcements of increases from the producers. Is there a pre-buy possibility here to take some margin advantage going into the second half of the season?

[Paul Johnston:]

I would say very little.

[Keith Hughes:]

Really. Are the increases, are they sticking so far or is there any trouble?

[Paul Johnston:]

I would say generally they are sticking right now because of those profit margin. We find ourselves in an inflationary environment when there is one that it doesn't have a negative impact on it.

[Keith Hughes:]

All right.

[Paul Johnston:]

At least not as much as the OEM.

[Keith Hughes:]

Fractures in. Okay. Thank you very much.

[Paul Johnston:]

You bet.

[Operator:]

Your next question comes from the line of David Manthey of Robert W. Baird.

[Albert Nahmad:]

Hi Dave.

[David Manthey:]

Hi good morning.

[Albert Nahmad:]

Is it raining in Florida?

[David Manthey:]

It's real cloudy. I am feeling just a little bit of rain, but trying to warm.

[Albert Nahmad:]

Okay.

[David Manthey:]

Thanks for taking my question. First off, could you talk about the percentage of your mix today that's new construction versus replacement? I don’t know if you want to talk about just the pure residential business setting refrigeration, nice machines on the side or Watsco overall, but can you give us an estimate of what that is in the third quarter and then what would you expect it to be as we tail off seasonally into the fourth?

[Albert Nahmad:]

Dave, in the beginning of the year, it was starting around 25% and then working it's really down to something under 20% by the end of the year just given the freefall that's been going on.

[David Manthey:]

Okay. Would it be in the current quarter, wouldn't it be something less than that so given that though we are (multiple speakers).

[Albert Nahmad:]

21% in the quarter.

[David Manthey:]

21 in the quarter, okay. Thank you. And then your profit initiatives, maybe if you could discuss some of the areas where you are having the most success or the biggest bang for your buck here as you rollout these profit initiatives?

[Albert Nahmad:]

Paul?

[Paul Johnston:]

Yeah, I will take a stab at that. We are seeing it pretty much across the board. I think Barry described it best last year or earlier in the year in the first quarter when we first got into the initiatives. It is a whole laundry list. It's not just one thing that we are doing that magically all of a sudden creates cost savings. But we are seeing definite opportunities that we have been able to take advantage of on everything from advertising to normal travel, supply type things. One that we have done a surprisingly great job at, I got to compliment our operations. We have actually seen a major decrease in our total freight expenses. Our people have been managing that with our manufacturers on trying to consolidate loads in order to save freight expenses, looking at their fleet utilization and retiring trucks early, working at pretty much everything involved in the freight side even though our fuel expense obviously has increased dramatically. So we continue to monitor this on a monthly basis. We review it on a quarterly basis with the CFOs and -- but we still feel very very very confident all of the initiatives.

[David Manthey:]

Great. Thanks very much guys.

[Operator:]

Your next question comes from the line of David Cohen of Midwood Capital.

[Albert Nahmad:]

Good morning Dave.

[David Cohen:]

My questions have actually been answered. Thanks.

[Operator:]

Your next question comes from the line of Jeff Hammond of Keybanc.

[Albert Nahmad:]

Jeff, are you there?

[Jeff Hammond:]

Good. Good morning. I am sorry, I did get kicked out of the call for a short period of time, so if this has been answered I apologize or asked already, I apologize.

[Albert Nahmad:]

Nobody asks questions as good as you do.

[Jeff Hammond:]

Just in terms of the guidance unchanged, I mean I imagine that the second quarter number just given the traction on cost savings and the better same store sales decline that came in better than your internal expectations. So what would it take -- what do you need to see into the second part of the selling season to want to revisit that guidance.

[Albert Nahmad:]

Well, more and like what we saw in the second quarter and as I said I like what -- it’s early, but the third quarter started off nice. So I like (inaudible) through the third quarter to look at the guidance again.

[Jeff Hammond:]

Okay. And then clearly a lot of the OEMs have raised prices here towards the beginning of the selling season. What's the feedback you are getting in terms of those going through, is there any kind of different push levels, push back given the environment or are people kind of recognizing the inflationary pressure and just taking the increases?

[Albert Nahmad:]

Well, it is a competitive market. The OEMs have a lot of capacity and you can't escape that. But I would say that consistently over the years, our business can generally pass on inflationary -- in an inflationary environment price increase, with acceptance at all level that the contractors assume. And we are experienced to have again with you.

[Jeff Hammond:]

Okay. Thanks a lot Al.

[Albert Nahmad:]

Sure.

[Operator:]

Your next question comes from the line of Matt Duncan of Stephens.

[Matt Duncan:]

Hey guys, just one real quick followup. It's just a housekeeping question. Barry, do you have the D&A expense and CapEx in the quarter in front of you?

[Barry Logan:]

For the quarter, CapEx is 1.1 million.

[Matt Duncan:]

Okay.

[Barry Logan:]

And D&A is 1.8. Operator?

[Operator:]

Okay. I am sorry. I thought you are still answering your question?

[Albert Nahmad:]

Are there any other questions?

[Operator:]

Yeah. We have three more questions.

[Albert Nahmad:]

Sure. That is fair enough.

[Operator:]

Okay. Your next question comes from the line of [Karthik Srinivasan] of [Dwayne Capital].

[Karthik Srinivasan:]

Good morning. I had a question. Obviously the price increases from the HVAC OEMs were well communicated and scheduled to take effect this month I believe. Is it possible for you to disaggregate the demand impact that you may have seen in the June quarter from some of your customers wanted to buy ahead of those price increases?

[Albert Nahmad:]

No, I don’t think contractors buy, maybe they do a little bit of that, but I don’t think it has a serious impact on anything.

[Karthik Srinivasan:]

I thought it didn’t had any impact.

[Albert Nahmad:]

Any impact, yeah.

[Karthik Srinivasan:]

Thank you.

[Operator:]

Your next question comes from the line of Holden Lewis of BB&T.

[Albert Nahmad:]

Good morning Holden.

[Holden Lewis:]

Good morning. Thank you. I think last quarter you had commented that the pricing was more -- the pricing mix combination was more in the 500 basis point range and I thought that they have been putting in more price sort of ahead of the selling season and you are kind of staying at sort of 400 basis points this quarter. I guess, I would have expected that to be at least as much of a contribution, if not more. Are we seeing something drop out or why didn’t we see maybe a little more of an acceleration on the price mix component?

[Albert Nahmad:]

Barry, you want to take a shot at that?

[Barry Logan:]

I don’t think there's anything specific Holden that that gets to the answer that I think 4 to 5% is very near range to be talking about, so there is nothing specific that I could think of.

[Holden Lewis:]

Okay. And then can you talk about also the 50 basis point increase that you saw in the gross margin organically, you are able to sort of breakout how much of that was a function of these profit initiatives that you are doing, how much of it was from sort of people moving up in terms of mix and how much of it was from price, anyway just sort of break that out or look at that?

[Barry Logan:]

Give me a broad brush, most of the increases what we call selling margin which is simply part of the profit assurance plan was to go into our systems and look at the pricing to the market very carefully and make pricing disciplines that much more stringent and systematically. So most of what we see in that gross profit improvement is that is sitting in what we call the selling margin. We don’t really have many other components to our cost of sales other than rebate some cash discounts and free it as Paul mentioned. We did see reductions in freight as the component of cost of sales and there are discounts and other items that there is some benefit that lion share is sitting in what we call selling margin which is just merchandising, and merchandising at a store level and making more money.

[Holden Lewis:]

But we are not (inaudible) sort of look at that and determine how much of that was a function of just the mix versus the equipment pricing versus price on non-equipment pieces at all?

[Albert Nahmad:]

It's not something that can be spliced that easily, Holden.

[Holden Lewis:]

Yeah.

[Albert Nahmad:]

What can be easily identified is the SG&A side and that have shown meaningful reduction as part of the profit assurance. The gross profit is little bit more of an art form than an analytical process.

[Holden Lewis:]

And then lastly, I think you commented about -- in the release about your cost savings, you recognized about 11 million so far, which means you got 6 million more in the quarter. And then you said another 20-25 million over the next several quarters. I mean, are you sort of refining the range to that 31-36 or how should we sort of look at that. I think that's still kind of by midpoint of ’09 right?

[Albert Nahmad:]

The answer to your question is yes. It was refining the range and it will take through the first half of '09.

[Holden Lewis:]

Okay. All right, great. Thank you.

[Operator:]

Your next question comes from the line of Curt Woodworth of J.P. Morgan.

[Curt Woodworth:]

Thanks. Looking at the SG&A structure and I know that was definitely part of the profit initiatives plan at the company, it seems just on the math that as a percentage basis on the margin for the company, it hurt you by about 40 basis points year on year, going to 74 from 17. I was wondering is there anything else in that SG&A number and is that simply a function of maybe investments that you've made that frankly you just weren't going to get the return on this quarter?

[Albert Nahmad:]

Frankly Curt, I don’t understand your train of thought. Do you want to try again?

[Curt Woodworth:]

SG&A as a percent of sales year-over-year was up about 40 basis points. Total company reported number. So that was a 40 basis point negative to the total company margin. And I'm just wondering why you saw that type of maybe negative leverage on SG&A. I know on a same-store basis, the absolute decline was less than the same-store decline on the top line. But the margin hit was a little bit greater than we ever forecasting and I am just wondering may be have you thinking about that, was that to be expected?

[Albert Nahmad:]

First, ACR has a much higher SG&A as a percent of sales than the rest of Watsco, so it has to somewhat be looked on a same-store basis. On a same-store, sales still went down about 5%, so there's some pressure on the SG&A line to recover that. And so I think the best way to look at it Curt is there's a 5% same-store sales decline, a 4% SG&A decline. So there's some of the explanation sitting right there in that delta. But it's a great improvement over what we saw last year if you were to look at that same or similar analysis.

[Paul Johnston:]

I think the longer ACR is in the system, the lower that SG&A as a percentage of sales will perform. So it's again a matter of time before ACR catches up with the overall. That's been our experience through all the acquisitions we have done to-date.

[Curt Woodworth:]

Okay, I understand. And then I guess this is somewhat of a hypothetical, but thinking maybe more out, further down the line in terms of your leverage going forward when inevitably top line will go positive on a same-store basis. Conceptually, how do you think about if your same-store sales growth was up 5%, you have the feel for what you think your SG&A would be up? I assume it would trend lower?

[Paul Johnston:]

I see what you're saying. I think our internal thought that we will always improve, the best part of the gross profit margin, it will be incremental, improvements. But I believe the SG&A will show much better performance as we continue to scale up as a percent of sales if that's what you are asking and I think you are.

[Curt Woodworth:]

Yeah.

[Paul Johnston:]

That's why we see an overall trend which we were experiencing through '06 and then that trend coming back as the (inaudible) comes back. That trend is -- we always -- we've never lost sight that that trend will start again. Scaling does bring you that.

[Curt Woodworth:]

It makes sense. All right, great. Thank you guys.

[Operator:]

You have no further questions at this time.

[Albert Nahmad:]

Terrific. Have a nice day and we will talk to you at the end of next quarter.

[Operator:]

This concludes today’s conference call. You may now disconnect.