Good day, and welcome to the Watsco Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Albert Nahmad. Mr. Nahmad, the floor is yours, sir.

Thank you. Good morning, everyone, and welcome to our fourth quarter conference call. This is Al Nahmad, I'm the President and CEO. And with me is Barry Logan and Paul Johnston. Both of those gentlemen are Senior Executives at the corporate level. First, our normal 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. On to our report. Watsco's great fourth quarter completed a strong and record-setting 2013. And a little humor here this morning. I got an email from someone that says, "Watsco rocks." I sort of got a big smile on my face and I think because that's the same sense that we feel here. 2013 sales, operating income and net income, earnings per share reached all-time highs. We say that again: Sales, operating income, net income and earnings per share reached all-time highs in the year 2013. U.S. sales increased 11% during the quarter, including 17% residential equipment growth and 8% growth for other HVAC products. We experienced strong replacement demand with continued movement toward higher-efficiency systems. Sales to the new housing market also improved. Revenue growth matched with higher selling margins and careful SG&A management produced margin expansion and a 22% earnings per share growth. Now for the details. First for the year, revenues grew 9% to a record $3.7 billion. Same-store growth was 7%. In the USA, sales of HVAC equipment increased 11%. Other HVAC product sales increased 5% and commercial refrigeration products increased 3%. Commercial HVAC equipment, which is 11% of total sales, was flat but showed growth over the last half of the year. International sales were down 5%, but produced a 12% profit growth…

[Operator Instructions] And the first question we have comes from Keith Hughes of SunTrust.

A couple of questions. One within the HVAC equipment sales, you had commented that residential systems were at 17%. The segment itself was up around 10. What were some of the offsets of that? I believe international was 1 -- down 5. Are there any other businesses within there that were weaker?

Any other business units you mean?

I mean if your residential business is roughly 17% and the HVAC...

Well, the non-HVAC -- the non-equipment business did not perform as well as the equipment business nor did the refrigeration business.

No, I mean within HVAC equipment. You had mentioned residential HVAC equipment was up 17%. Is that correct in the quarter?

Yes.

[indiscernible] 17%.

What, sir?

Domestically up 17%.

Yes. So it was the international, that's what pulled down the average, Barry?

Yes, that's the biggest chunk.

The biggest chunk, okay. And second question on -- you had mentioned commercial, Al, in your discussion about it improving in the second half of the year. Could you talk a little bit more about that what you're seeing for 2014?

Sure we can. Go ahead, Paul.

Yes, we had some -- we had weakness in our commercial equipment sales in the first half of the year. We had indicated in the third quarter call that it was improving. We continue to see improvement in the fourth quarter. Basically, the year was not stellar, but it was at least -- it wasn't negative. And we hope to continue to see those trends in commercial equipment sales continue into 2014.

Okay. And final question on gross margin, it was up 10 or so basis the last couple of quarters. Anything coming here in '14 on gross margin that would accelerate that faster, cause it slow down, things of that nature?

Well, obviously, the equipment growth rate has been terrific. And equipment does have a lower margin than the other stuff, which is okay. But the reality of it, we'll take the growth because of the earnings contribution that's significant. The non-equipment, which has the higher margin, we did see an improvement in the fourth quarter. I think there's some stabilization of pricing, especially in many of those product lines. So we'll take those 2 things together and believe it can be a better year for that product group next year, which would blend into a higher margin. So there's an opportunity. We haven't seen the full benefit of it yet, but we saw some progress in the fourth quarter.

Next we have Matt Duncan, Stephens Inc.

First question I've got is just with going back to that 17% equipment growth that you saw in the U.S. Can you break that down for us a little bit between what's going on with pricing versus how much may be mix and unit growth contributed to that?

Barry or Paul? Barry?

Matt, it's driven by the unit growth primarily. There's a few points where price and mix, but it's largely driven by pure unit growth.

Okay. Barry, do you have any thoughts sort of how -- if I try to break that down between equipment sales for replacement versus new construction, is one growing much faster than the other? I would assume that it's probably more replacement driven given that we're seeing slower growth in the other HVAC products, which typically are attached to a newbuild. So is it really the replacement market that's driving that, or a recovery in that replacement market with all the pent-up demand we've been talking about for a while now?

Yes. We -- in the fourth quarter, I'll just talk to the fourth quarter. The fourth quarter, we saw a material improvement in our replacement demand far outstrip the increases that we saw in new construction.

Interesting. Paul, do you have any thoughts on maybe what's driving that with sort of why do you think you're starting to see that now?

I just think you can only repair a piece of equipment so long and so much. And I think at some point, people have to do the replacement.

And I think consumer confidence helps with that, too, improving consumer confidence.

Okay. Last thing for me, I know it's a little bit early in the year at this point to probably give guidance. But do you have any high-level thoughts on what kind of revenue and earnings growth you might expect from the business this year? Is it just too early to give guidance?

It is too early, but I can tell you that I feel really good. We feel really good about 2014. I think overall, reaching the scale, the size that we are now, we can do things that -- bigger things than our competitors. And more importantly, the OEMs and manufacturers and know that in their partnerships with us, we can move the needle for them because of our extensive distribution network. So the more we scale, the more we can produce for our OEM partners. And that's going to help us again in 2014 and going forward.

Okay. So Al, should we expect to see you give guidance then probably in the first quarter call?

A little early, I think that I like February, if that continues, I think we'll be in pretty good shape.

Next we have Mark Douglass, Longbow Research.

Are there any updates on the regional standards in the U.S., both on the furnace side, which is the legal entanglements, and then the AC heat Pump, which I guess still set for January '15?

Sure. Let me go to Paul on that one.

Yes, the ones that we've -- the one we really stayed behind and get involved with, obviously, is the split system. Regionals, that is the biggest bearing on it. And we see it obviously being implemented 1/1/15 as scheduled. The question mark, I think, around it is how long of a stay is the government going to provide or the EPA going to provide us with being able to move out the 13-SEER equipment from the south, be able to sell it through. And that I don't think anything has been put out on yet. Still I think it's starting to become clear, but it's still in limbo as far as how long we're going to be able to sell 13-SEER product in the south.

Okay. But it should be a tailwind for the industry in '15?

Absolutely. And obviously, with Watsco, we have the added advantage that we could move equipment among our geographic centers. So if we have 13-SEER stranded in the south, we can move it to the north and sell it.

Okay. And then looks like you're still clearly gaining share in U.S. resi. You're still looking for runway to outgrow the markets, with people thinking looks like kind of low to mid-single digit growth for resi in the U.S., whether you agree or disagree. Can you outgrow 1.5x? I mean is that even feasible or...

Outgrow 1.5x? I'll make a general statement and, Paul, you can deal with it if you want more details. But when we represent a brand of equipment, our highest goal with that partner is to increase share market for that partner. And we have a very, very good track record with that. And I don't think that's going to stop. I think that our entire culture is based on growing share for our equipment partners. Now more specifically in more detail, Paul do you want to deal with this question?

Yes. I think, Mark, share of market is the performance that we have to gauge ourselves on. Just growing with the market is not going to be good enough for Watsco to be able to meet its targets and its long-term goals. So we track market share continually, and there's a lot of parts in the U.S. that we don't have locations yet all through the Upper Midwest, the Northwest. We have a lot more opportunities, I think, in market share. It's -- we're years away from reaching our goal as far as what our market penetration is.

What are you looking at as far as new store buildouts in '14, if you're willing to...

That's something that the operating units actually have in their plans and it's something that they'll execute. And they'll execute it based upon what's the market conditions that they see would make it advantageous for us to put a new store in.

Our management system is decentralized. And as Paul says, they will make decisions on what they see in the local markets. We encourage them not only to organically put up new stores, but also to look for acquisitions that complement their efforts in these geographical markets. So it's a very decentralized process. We like it that way. Decision making should be at that level. And I think they are -- the tone that I get from our subsidiaries and our managers is that they are going to expand the branch network.

The next question we have comes from David Manthey of Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Unit demand is clearly strong. And the increase that you're seeing in efficiency definitely helps that price/mix equation as well. Can you talk about looking into 2014 and the equipment manufacturers primarily, are you expecting low-single digit type price increases from them?

Paul?

Yes, we are expecting low-single digit price increases. Most of those were announced in the fourth quarter early -- in the fourth quarter already. So I think we've seen our price increases for the year. It's just a matter now how much of that price increase sticks. And regionally, where we're able to extract more price from the market, but I think we've seen the pricing increases. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Right. And is that similar to what you saw last year?

Yes, it's almost spot on what we saw the year before. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Right, okay. And then second, could you talk a little bit about these, the commercial equipment and your relationship to manufacturers there? Is it similar to residential in terms of manufacturer authorization that they can -- you can only sell those products where they authorize you could do so, or is it more of an open relationship? Or how does that work?

Go ahead, Paul.

Yes, it's exactly the same as our residential relationship. Basically, what we have is we have different franchises for different sizes of commercial equipment in different parts of the country where in some parts of the country, we'll be able to go to 65 tons on a rooftop unit. Some parts of the country, we actually have an applied charter, but we only have those charters for commercial equipment in the territories that are granted by the agreement. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then last question as an add-on to that. Not quite sure how to ask this, but if you think about Watsco's average share in -- within residential and thinking about how well penetrated in the brands that you have in the regions that you're authorized to sell those products, is the commercial side, is it far below that, meaning with the authorization we have there's a tremendous amount of opportunity....

That's an excellent question, and we recognize that opportunity. And I agree with your conclusion. And Paul, do you want to add some color to that?

Yes, we've got great opportunity in the commercial side. It's something that -- as you know, if you went back, you've been covering us for a long time. Commercial is something in the last 5 or 6 years that we've really focused on, been able to bring in lines that allow us to be competitive in those markets, and we are growing our share there.

And I think you guys like to use the term runway, yes, I think we've got lots of runway on commercial.

Runway tailwind, yes.

We have Walter Liptak of Global Hunter Securities.

I wanted to ask about -- a follow-up, I guess, on the question about 2014 growth. And I was a little surprised by your answer because you said that with your scale that you were feeling really good about -- I thought maybe it would be the consumer getting stronger or pent-up demand, weather or something like that. I wonder if...

First, we don't like to use weather. That's not part of our vocabulary. And I know that weather sometimes impacts certain regions of the country. But what I mean is -- and at the previous Analyst Meeting where we indicated what we think we can grow this to, which the summary of that is $10 billion business earning a $1 billion EBIT. And when pressed for how do we get there, we didn't want to develop -- explain strategies because we don't want our competition to listen to it. But we did say that generally speaking, the ductless market in the United States is underdeveloped, and we'll be developing at a pretty good clip. And because of our scale, therefore, that attracts the OEs. And the ductless manufacturers primarily -- well, actually they're all in Asia to a very high degree. And when they look at -- to see for partners in the United States, with our scale and our size, we're very attractive. And that's one of the ways that we're going to -- I believe a very important, if not the most important ductless distributor in the Americas.

Okay, good. So I guess you're alluding that you're going to be adding brands or OEs and ductless...

Absolutely. Yes, sir.

We'll see some of that in 2014.

I hope so.

The next question we have comes from David Mandell with William Blair.

Does this quarter's international sales result reflect some of the same issues that you guys saw last quarter? And if so, when will those delays and tough comparisons be worked through?

Well, that's a -- we can give you a little detail on that. The Venezuelan market, I don't think is changing much from where it has been prior to last year. So what we're trying to do is depend less and less on Venezuela. And then the Mexican situation has improved, the elections are over, and we are seeing -- and I think we'll continue to see improvement in Mexico. Don't forget, our International business also includes Canada and that's very solid; and the export business, which is also very solid.

All right, that's helpful. And then on the refrigerant side of the business, any color you could add there? Any expectations, kind of, for trends heading into 2014?

Paul?

Yes. It's going to be stable this year. I don't know if you remember last year. We had a huge price runup by the manufacturers where they picked the price way up and then the price virtually fell off the cliff around April or May when the EPA finally came up with their allocations for the year. So that was the disturbing last year. We're not having that this year.

I think the question is broader in terms of refrigeration products. It's not the refrigerator.

Refrigerant, okay.

You want to answer that?

You want a refrigerant or refrigeration?

Your answer was helpful on the -- regarding the refrigerants.

The next question we have comes from Jeff Hammond of KeyBanc Capital Markets.

Just on the non-equipment versus equipment. I'm just still trying to get at why that -- why non-equipment has lagged so much? And as you look into '14, if you think that gap continues.

Well, I think someone earlier, and it might have been you, Jeff, that's indicated that as new construction -- as we increase our participation in new construction market, you will see that recover, the non-equipment. But what we're experiencing now is increasing demand for replacement.

Okay. But it seems like -- if you listen to the OEMs, it seems like, if anything, they have been enjoying better growth in new housing and now we're starting to see a little bit better growth in replacements.

I believe that because our mix is primarily replacement. And we do enjoy new construction when it comes in. But we are basically a replacement house. John F. Kasprzak - BB&T Capital Markets, Research Division: Okay. And then just in my model. Go ahead, Paul.

And if I could add one more thing to that, Jeff. When you look at the non-equipment business, it's not just about the supply business, it's also about the parts business. And on the parts side, I look at this as a positive, it's almost a counterbalance. When equipment sales go up like this we're going to start seeing things like replacement compressors and motors go down.

Less and less.

So there is a counterbalance. It's occurring when we have strong equipment sales right now. I guess I'd rather have it this way, you know?

Yes, we prefer to be in the noncyclical replacement business to be our basic position in the market. But be in a position to enjoy the new construction, not ever be dependent on new construction one way or the other. John F. Kasprzak - BB&T Capital Markets, Research Division: Okay, great. And then just in my model that the JV, I guess the minority interest distribution was a lot higher, which I guess would reflect maybe the Carrier JVs doing a lot better. Did you see -- if you look across your legacy business versus the Carrier JVs, is there much variation in the performance?

Both the Carrier JV and the legacy businesses are doing very well. I would not say that one is doing better than the other.

Okay, great. And then you mentioned ductless, and I know there's been a lot of discussion about VRF. Can you just expand what you've announced or what you're doing there? Or what you've kind of built in terms of relationships and networks that's going to start driving the tremendous growth in that market?

Paul, do you want to deal with that starting with the Carrier-Toshiba relationship?

Yes, I mean we've got a huge initiative going on with Carrier right now. As you know, Carrier has had a long-term joint venture with Toshiba. And we're getting that equipment into the market, the product line is being totally filled out. We're putting people in place in every one of our locations, and we're starting to see some traction there.

Every one of our Carrier locations. And we will have relationships that will be -- too early to tell you what they are, but we will have relationships in the non Carrier locations to fill the gap there in terms of VRF and ductless products.

We are ready, I believe, Paul. If we're not the largest distributor of the -- not the VRF necessarily, but the ductless.

Ductless, I would have to say we would be the largest independent distributor of ductless by far.

Although it's not a material number yet, it will be. We believe very much that the ductless both commercial and residential in the United States markets, it's going to make an increase here of the overall use of the cooling and heating equipment.

As far as the non-Carrier, are you just kind of follow -- I mean it seems like a lot of the OEMs are announcing strategic alliances. So typically, in a Goodman location, you're adopting some of the Daikin product and Rheem similarly?

Yes, we might have spotted this trend earlier than other, but everybody's onto do it now. Like you said, all the OEMs have -- all but one of the OEMs have aligned themselves with Asian manufacturers.

Okay. And then just, if I could sneak one more in, maybe just touch on M&A pipeline. And If you don't get anything done, what point do you have a sense of urgency to kind of move the needle on the dividend again?

Well, we'll move the dividend. We're not waiting for M&A. I mean unless something comes along. But I expect this year we will move the dividend. I have a very high, shall we say, feeling, that we will move the dividend in 2014 regardless of what happens. I mean unless something terrible happens to the economy, that's our feeling. I'll put it this way, we like increasing our dividends. And I'm pretty sure we're going to be able to do it. John F. Kasprzak - BB&T Capital Markets, Research Division: And maybe just touch on M&A pipeline?

Well, we're constant at it, but there's nothing that I can tell you that -- more than that, we're at it, we like it. Our reputation among people that own businesses is very high, so I think we are the go-to buyer if people decide they want to do something. That's all I can say. It's just -- I like the position that we're in. I cannot add any specifics to that.

[Operator Instructions] The next question we have comes from Samuel Eisner from Goldman Sachs.

Just a couple of follow-up questions here. I know you don't like to talk about weather as it relates to your business. But just curious, you've seen a couple of the OEMs talk about weather benefiting their business this quarter. Can you maybe just parse that, if you saw any kind of volume pull-forward from the first quarter or any kind of impact from weather on your business this quarter?

We've got a national footprint. But Paul, if you can give them something...

Weather is something that can move the business around as I think the OEMs have indicated. But for us, it really isn't a big -- winter weather, summer weather, it doesn't really impact our business that much frankly. We didn't see what the OEM saw.

Okay. And then in terms of -- you had given some good color on the ductless and the VRF business. You said it's not that material at the moment. Do you have any numbers that you can maybe provide, so we can understand how big that business is today?

The industry?

Just your revenue coming from...

We don't disclose, we will not disclose our number, but we can give you a feel for the industry.

Sure.

Paul?

The industry, we estimate is over $1 billion now, and it continues to grow. We see it as the fastest-moving segment in our industry, everybody knows that. Everybody has decided to focus on it. It's just at Watsco, we started focusing on our duct-free markets...

I don't want you to be misled. Even though we think we're the largest, it's not a material part of our overall revenue mix.

Not yet.

And then if I go back to some of the comments you guys had made at the Analyst Day, in particular, regarding technology investments. Can you maybe just give us a little bit more indication on what specifically you're doing if you're willing to give information.

Yes, I think the best way to do that is without being too cute about this, Sam, is on the apps, where you can pull down apps. Pull down apps on the Watsco businesses, and you'll see the emerging applications that are coming up for the contractors. That's a good way to know exactly what we're doing with that. And then we've got business intelligence that is massive investment that will be a much better tool than we've ever had. And that the information we're going to be using is pretty close to real time and that is not yet and will not be ready for full implementation, probably for another 2 or 3 years. However, as the parts of it are developed, we start using it. And then there's the e-commerce that we're very focused on. And I think we'll be introducing parts of that this year. So those are major initiatives, the apps, the BI, the e-commerce. And then there's always the consumer website, ACDoctor, which is primarily a service that we provide consumers. And if they want to learn about the products and when they're looking for contractors, is a good reference site from them. It's not an income producing for us, it's the service really to the contractors and to the consumer. And those are the 4 groups where we're investing in large sums. And it's a multi-year thing. It's not something that's going to -- we're going to say, see this year, we produced x dollars of growth because of it. It's just going to go on for several years, but we will be a digital player in this age. That's coming to be a United States economy, and I love it.

Next, we have a follow-up from Mark Douglass of Longbow Research.

Just real quickly, Barry. Was there any -- in the different segments, any new store additions to the growth that you can parse out or was this pretty much all same-store sales across the board?

For the quarter, it was all same-store sales. And for the year, we owned Canada for 12 months this year, 8 months last year. So even the year-to-date performance is largely same store.

Well, at this time, we're showing no further questions. We'll go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

We have enjoyed having these calls with all of you, and we hope that we'll see you at the next conference call. Thanks for your interest in Watsco. Bye-bye.

And we thank you, sir, and to the rest of the management team for your time today. The conference call is now concluded. We thank you, all, for attending today's presentation. At this time, you may disconnect your lines. Thank you, and take care, everyone.