Good morning and welcome to the Watsco, Inc. Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Albert Nahmad. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Good morning, everyone, and welcome to our second quarter conference call. This is Albert Nahmad, CEO. And with me are A.J. Nahmad, President; Barry Logan, Senior Vice President; and Paul Johnston, Executive Vice President. As usual, the 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. Watsco's performance over the last several quarters has been remarkably consistent. This quarter reflects a late start to the summer selling season. June's performance was strong with record sales, profits and margins, but it was not enough to offset softer conditions in the early part of the quarter. July's growth rate so far are in the double-digits and we intend to make hay as the third quarter progresses. We have produced terrific cash flow over the last 12 months with operating cash flow of $337 million or 150% of net income. This comes out to over $10 per share in cash flow. We believe that some of this improvement in cash flow can be attributed to the recent implementation of supply chain technology. Given the exceptional cash flow, our continued confidence in our business and our low debt, we raised our dividend 24% to $4.20 per year effective with our dividend payment in October. We continue to invest in technology to transform our…

The first question comes from Robert Barry of Susquehanna. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Good morning, Robert.

Hey, good morning. Any incremental color you might add on what you mean by up double-digits? Is that 10% or would you have said in the (06:04)? Albert H. Nahmad - Chairman & Chief Executive Officer: Yes, it's a little over 10%.

Got you. And in June and into July, can you comment on how mix and pricing are looking? Albert H. Nahmad - Chairman & Chief Executive Officer: That's tough one, Robert. But I'll let Paul Johnston take a shot at that.

Okay.

Yeah. It really is hard to get your arms around especially July, but at least through June, it was the 14 SEER product. So I think that's what you're trying to reference was holding steady.

In terms of the pricing on it?

Yes. Albert H. Nahmad - Chairman & Chief Executive Officer: Yes.

And then maybe just on the balance sheet or cash flow from operations, it looked a lot better in second quarter versus in recent years. Inventory seem to be down a lot. I don't if that just reflects the strong finish to the quarter or are we starting to see some benefits from the IT initiative's readout there? Albert H. Nahmad - Chairman & Chief Executive Officer: Well, the latter is occurring. There are benefits on our new technology regarding inventory systems. But that's only been adopted now by one of our units which is probably about 15% of our overall revenue. So it had an impact. In addition to that, Paul, you want to talk about the inventory mix?

Yeah. We, obviously, we sold off the remaining inventory we had for 13. So we had a nice reduction in 13 SEER inventory, and as we put 14 SEER back in into inventory to replace the 13 and so we've sold it a lot, we didn't have to put as much in. So we've actually been able to have a reduction in SKUs.

Got you. Thanks, guys. Albert H. Nahmad - Chairman & Chief Executive Officer: You're welcome.

The next question comes from Matt Duncan of Stephens. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Good morning, Matt.

Good morning, everyone. Thank you, Al. Just looking back on the quarter, is there any way you can tell us, April and May, how much were they down, how much were you up in June, just trying to sort of see the trend line here of how things are trending in the business with July now up into the double-digits? Albert H. Nahmad - Chairman & Chief Executive Officer: Why don't we give you a little bit color on June.

That'd be great. Albert H. Nahmad - Chairman & Chief Executive Officer: Because we have that data available. Barry? Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: Yeah, Matt, good morning. Well, first on June, we did see what I would call mid single- to high single-digit growth in June, and as we mentioned in July, it's gone to double-digits.

Okay. So, Barry, then as we look at the third quarter with July up in the double-digits, it seems like when things sort of got started in June, you're seeing let's call that 5% to 8% growth. Should we be expecting something in the high single-digits then for the third quarter given that it's starting off so strong. And really the point of it is, are we going to make up for lost time, is that essentially what's happening right now, or do you think the July growth rate is really an indication of what the day-to-day market's like right now? Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: Well, I think what (08:58). Albert H. Nahmad - Chairman & Chief Executive Officer: We want to know that one, Barry. I'm listening to this answer. Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: Well, I'll answer it this way. Matt, what we do know is there was a late start to the season and the strength and momentum that we see in June and July are recurring and that it disproves that, that the season did start late for in our markets. In terms of what it looks like for the third quarter, we don't know. I mean we fell on demand. August is almost equal in size to July and there can't be insight into August and so we start to creep toward the rest of the season. But in terms of momentum, we can see – we can definitely see what's happening in June and July.

Sure. And as you dissect the late start to the season, was it really across the board, were there some geographies that were more pronounced than others, some business units that were more pronounced than others, or was it just sort of an across-the-board late start? Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: It is very much across the board, Matt.

Okay. Fair enough. And then last thing from me, just on the gross margin. It was down a little bit year-over-year with sales down, should we just assume that that's sort of the impact of less overhead absorption within the business, or are you seeing any kind of change in mix that might explain it, talk a little bit about what's going on with the margin there? Albert H. Nahmad - Chairman & Chief Executive Officer: Paul, you can deal with that one.

Yeah. I mean we obviously – we sold off our 13 SEER inventory in the quarter. And – but the baseline of our business, we're not seeing a deterioration in the margin.

Okay. Very helpful. Thanks, guys. Albert H. Nahmad - Chairman & Chief Executive Officer: Sure.

The next question comes from Ryan Merkel of William Blair. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Good morning, Ryan. Ryan J. Merkel - William Blair & Co. LLC: Hey. Good morning, everyone. I guess just a follow-up to the last question on gross margin. It sounds like it was just selling down SEER 13. I was just curious if you saw price competition increase just given the slow start to the quarter. Albert H. Nahmad - Chairman & Chief Executive Officer: Paul?

We really did not see a – generally, we're not seeing that happening. Very fortunate. Ryan J. Merkel - William Blair & Co. LLC: Okay. No, it's a good sign. And then just as it relates to other HVAC products down 3%, is that primarily a weather issue too? Is there anything else going on? Albert H. Nahmad - Chairman & Chief Executive Officer: We hate the words weather issue. We talk about seasons. It's just part of the slow start. Ryan J. Merkel - William Blair & Co. LLC: Okay. And then I guess... Albert H. Nahmad - Chairman & Chief Executive Officer: If you think about it this way, last year first quarter, we had a unbelievable start with a 35% earnings per share growth rate and people thought, well, why don't you extend that to the rest of the year. But we know better, this is such a seasonal business. We don't like to put out quarterly estimates because we know this. This is the history of the industry. If things move around all year along, generally speaking, the year ends up very good. Ryan J. Merkel - William Blair & Co. LLC: Okay. And just lastly, as it relates to the mobile app, are you in a position to just tell us how many users you have now and then has the early experience been that customers are ordering more at higher margins, is this something you can share at this point? Albert H. Nahmad - Chairman & Chief Executive Officer: That's pretty closely held information. I'll just generalize that several thousand are on it and I won't comment on margin. Ryan J. Merkel - William Blair & Co. LLC: Okay. Fair enough. Albert H. Nahmad - Chairman & Chief Executive Officer: But I can tell you there are more orders, more items on the order on e-comm than they are the traditional way. Ryan J. Merkel - William Blair & Co. LLC: Right. And that's what we all would have expected, so it's good to hear. Okay. Thanks, Al. Albert H. Nahmad - Chairman & Chief Executive Officer: Sure.

The next question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Hi, Jeff.

Hey, good morning, guys. Hey, just on, so I think in the past you've historically commented on guidance, you didn't really say anything in the prepared remarks. Albert H. Nahmad - Chairman & Chief Executive Officer: That's right.

I mean, clearly, the first half is kind of running flattish, I mean do you – just with the weather normalizing here, do we kind of get back to double-digit earnings growth here in the second half or how do we think of any kind of guidance frame? Albert H. Nahmad - Chairman & Chief Executive Officer: Well, the season has started late. Sometimes it starts early and sometimes it starts late. This year, it's late and all we have visibility to is the first part of July and that's roaring. It's just up double-digits across the board and we're very pleased.

And is that up double-digits? Is that just on equipment or is that for the full business? Albert H. Nahmad - Chairman & Chief Executive Officer: The whole company is up.

Okay. And then I noticed if you back into kind of the JV income, the JV was down 10%, kind of the legacy-based business was flat. Any kind of reads or color for why the disparity between the two? Albert H. Nahmad - Chairman & Chief Executive Officer: Barry? Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: Yeah, Jeff, good morning. Again, there is the international business and the JV and that would have a disproportionate performance relative to the domestic, so that's the only reading I would give there.

Okay. So the domestic, your JV one, I guess was consistent with the legacy business? Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: Yes.

Okay. Okay, great. And then just on the non-equipment side, any of that weakness tied to any deflationary pressures around copper, refrigerant or anything?

No. Jeff, this is Paul. No, we've not seen any deflationary pressure. Copper products are holding steady and moving up and obviously refrigerant is going up. So we're not seeing that right now. Steel prices are up. I mean it's pretty good right now.

Okay. Thanks, guys. Albert H. Nahmad - Chairman & Chief Executive Officer: Sure.

The next question comes from David Manthey of Baird. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Good morning, David. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Hey, Al, good morning. As it relates to the technology spending, if the technology tools that you've developed now are in early stages of the launch phase and implementation, does that imply that at some point, we'll hit peak IT spending levels as it relates to those initiatives? Albert H. Nahmad - Chairman & Chief Executive Officer: Why don't we let A.J. answer that. Aaron J. Nahmad - President & Director: Hi. How are you? David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Hey, A.J. Aaron J. Nahmad - President & Director: I would say, so these technology programs, they're not develop the technology and then we start the program and see how they go. There are continuous improvement programs internally and the software we're developing and then the platforms we've bought is continually making them better and more useful for our customers and for our teams internally. So I don't know if there's a peak level where we see opportunity to invest, and there's an opportunity for return, we'll invest. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. So, even out over the next three to five years, as you look at the timeline, and the – your plan for technology, you don't see a peak in spending at any point in the next three to five years? Aaron J. Nahmad - President & Director: No, no, we don't think of it in that term. We think of it as where there's opportunity, then it can make an impact, and we prove the impact, we're very comfortable…

The next question comes from Brett Linzey of Vertical Research Partners. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Good morning, Brett.

Hi. Good morning, everyone. Hey, just coming back to the full year framework, obviously, your visibility very limited on the top line given the short lead of the business. But just in terms of what you can control, productivity, SG&A leverage. I mean can you frame for us how we should be thinking about incremental growth or operating leverage in Q3 and then really into the heating season, just to kind of help us frame the year? Albert H. Nahmad - Chairman & Chief Executive Officer: Barry, you want to take a shot? Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: Sure. Well, first, culturally, you should know that our leaders are all driven incentive-wise to grow profitability. And at this point, where you see flat profits for Watsco, none of those leaders are happy because they're not accruing a bonus and they want bonuses. So, culturally, there's a lot of pressure and a lot of intensity in the field to derive profit growth. As we use the expression in the call about making hay, that's the revenue line, but there are plenty of activities going on in the field in terms of cost structure and reacting to kind of what's going on in the short-term here. So I think again profit growth is not just revenue driven, it's also operationally driven and there's a lot of that going on in the culture right now.

Okay. And I guess shifting just to the $0.06 tax benefit on the FASB changes on share-based comp. I mean how should we think about that windfall into the second half as we see here today? Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: Yeah. It's actually very little. It's – the timing of vesting of our restricted stock plan that creates the tax benefits was really driven into the first half of the year. There is not much to come in the second half of the year. So, you should not impute very much at all into the second half of the year.

Okay. And I just want to come back to the HVAC equipment category, I mean down 1%, I guess are you able to unbundle that in terms of volume, then price and mix. I mean, presumably, I know you've got some price in the quarter and mix should have been positive. Were volumes down kind of mid single-digit, is that the way to think about it? Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: Low single-digit.

Low single-digit. Okay. All right. Great. That's all I had. Thanks a lot.

The next question comes from Joshua Pokrzywinski of Buckingham Research. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Good morning, Joshua.

Hi, good morning, guys. Just on the pricing trends in the quarter. I guess with steel looking to be a little inflationary, looking back half of the year and the next year, are you getting any sense from the OEMs, the appetite for price, or clearly, sitting in your shoes, you guys don't mind price increases at all, but are you getting the sense there's some debate in terms of how that looks? Albert H. Nahmad - Chairman & Chief Executive Officer: I don't think so. But, Paul, do you want to take a shot at that?

Yeah. It's early. Everybody is in the middle of the season right now and we're all pushing for sales. So conversation really hasn't started about where we're going with the price of the product going forward with the OEMs. I'm sure we'll have those discussions later in the year.

Got you. I mean, I guess, looking back historically, given that on net over the past, I don't know, three, four years, these guys have enjoyed a pretty nice price cost gap. Would you expect them to go to the market for more price, just based on history?

I certainly hope so.

Fair enough. And then, I guess, maybe to come back to 2Q and the trends there and I get that a late start on weather is always going to be an impact with the seasonal business such as yours. But what did you see on, I guess, mix trends or any other behavioral indicators of the customer that would inform kind of the health of the market beyond anything on the weather side, whether it's, I don't know, (21:33)... Albert H. Nahmad - Chairman & Chief Executive Officer: Well...

...higher efficiency or repair rates or just any other anecdote? Albert H. Nahmad - Chairman & Chief Executive Officer: One thing that we want to remind everyone is that we consider ourselves primarily and fundamentally an aftermarket distributor. The new construction business which is always a lower margin business and always very cyclical is only 10% of our business and that's by design. I mean we'll take whatever new construction comes when we can get in, that's an OEM general effort, and we'll certainly fulfill whatever the OEM arranges. But we believe that the future is our aftermarket business, considering the 89 million installed central cooling systems in the United States. And that's what our culture is, grow in that market, stay out of the cyclicality business which is new construction.

Right. And I guess... Albert H. Nahmad - Chairman & Chief Executive Officer: Stay off it, not stay out, but just not emphasize it.

I guess even within the replacement market though you can have ebbs and flows in consumer confidence or mix. Albert H. Nahmad - Chairman & Chief Executive Officer: Yes, but...

I guess that's what I'm getting at is that weather was really a... Albert H. Nahmad - Chairman & Chief Executive Officer: Yeah, what happened...

...headwind, what else is going on in the market? Albert H. Nahmad - Chairman & Chief Executive Officer: What happens to demand for aftermarket is, when consumers lose confidence, they have a tendency to replace. And of course, we'll provide the replacement compressors or whatever else the system needs. As distinct from – I'm sorry, they'll service it as distinct from replacing it. So we feel that in the revenue line, this is what happened after 2008. But when consumer confidence normalizes, they go to replacement rather than repair. And that's just the nature of the business, but the repair business is also very profitable. Barry S. Logan - Secretary, Director, SVP & Head-Investor Relations: And so I'd like to add one thought, Josh, to kind of what you're driving at also is, as you said, behavioral, what behavioral things are going on. Well, mix obviously is one. We're still seeing improved mix beyond the 14 SEER product group. The other thing that I've highlighted in the past is we have 88,000 customers that owe us $600 million. So we give credit to our customers. We service that credit. We help our customer grow his business. The health of that portfolio remains in a very, very high quality state as good as it's been in our career. So that tells us that our customer is healthy and the end market is healthy. That's a key indicator for us.

Got you. Appreciate the color, Barry. Thanks.

The next question comes from Charles Redding of BB&T Capital Markets. Please go ahead. Albert H. Nahmad - Chairman & Chief Executive Officer: Good morning, Charles. Charles Edgerton Redding - BB&T Capital Markets: Good morning, gentlemen. Just wondering if we could drill down briefly on the strength in refrigeration. It looks like a pretty solid total year, just given the early quarter weakness. Any drivers here and maybe how we think about potential catalyst over the next couple of quarters? Albert H. Nahmad - Chairman & Chief Executive Officer: Paul?

Yeah, it was – we had an excellent quarter in refrigeration. It's a very small percent of our total business, but a very important one. And we were driven primarily by our ice machines which were – had an excellent quarter. Charles Edgerton Redding - BB&T Capital Markets: Okay. Thanks.

And we – hopefully, this continues. Charles Edgerton Redding - BB&T Capital Markets: And then maybe any brief update on either Central America or Cuba. How do we think about upside here just in terms of spending power or willingness among the consumers there to replace or retrofit existing units? Albert H. Nahmad - Chairman & Chief Executive Officer: Well, Latin America as a whole, as you know, we have branches on the ground in Mexico, and we also have branches in Puerto Rico. Puerto Ricans, Puerto Rico revenue and profits are down, but it is not a material impact on the company. Mexico is surprisingly strong for us. It seems like whenever there's a little bit of dip, it comes back even stronger. And then our export business, we export all over Latin America, is steady. I'm really pleased with what we're doing south of the border. The Canadian market has a little bit more of an issue with currency. We're doing the best we can with that. Charles Edgerton Redding - BB&T Capital Markets: Okay. I appreciate the time.

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 - Chairman & Chief Executive Officer: Well, thanks again for your interest in our company. And those of you that want to have technology conversations, please come down in December. We'll try to make a nice day for you. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.