Good morning and welcome to the Watsco Third 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.

Hello. Good morning. And welcome to our third quarter conference call. This is Al Nahmad, Chairman and CEO. With me is A.J. Nahmad, President; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President. As I always do, I'd like to read 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. Now for the news. Watsco delivered solid third quarter performance. Growth trends improved after slower than typical start to our selling season. We achieved record sales, profits, operating margins and earnings per share while continuing to make significant investments in technology. Over the last 12 months, we generated terrific cash flow or $268 million, which is equivalent to $8.22 per share, far exceeding our net income. As a result, we have reduced debt over last year by $86 million and recently increased our annual dividends by 24% to $4.20 per share. As mentioned earlier, we continue to invest in several innovative technologies to transform our business, and more importantly, or as importantly, and that of our customers into the digital age. The annual run rate for tech spending remains at approximately $23 million. During the nine months, incremental tech spending had a $0.06 impact on our results and $0.01 for the quarter. We see early progress on technology as our customers and our organization adapt to our new technologies. Examples are an increase in number of customers that our using our apps and using our e-commerce to gain speed and efficiency. We also continue to build the largest source of digitized HVAC product information, which now holds over 400,000 SKUs mastered in our database. Our supply chain initiatives have…

The first question comes from Matt Duncan of Stephens, Inc. Please proceed.

Good morning, Matt.

Hey, good morning, guys. This is Will on the call for Matt.

Hi, Will.

Hey. Can you talk about your sales trends throughout the quarter and what changed in the market from the end of July when sales were tracking up roughly 10% and what happens through the end of the quarter?

Sure. Generally, we don't like to talk about month to month, so we can't give you a sense for the quarter in how it trended. Paul?

Yeah. The quarter started out very strong and then we just saw some – a little bit of a slowdown in September where things started to just back off a little bit. Nothing serious, nothing dramatic. It's just didn't sustain itself throughout the entire quarter the way it started out in July.

Were there any geographies or regions that were noticeably weaker than others that might have stood out to you?

No, not really. I mean, obviously, there are differences between regions, but nothing material.

Okay. And on the pricing front, on 14 SEER remain steady in June, did that continue throughout the quarter as well?

Yes, sir. We're not seeing any deterioration right now in pricing. We're seeing it hold itself.

Okay, great. Thanks, guys.

And hopefully, we'll see some price increases.

Appreciate it.

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

Morning, Jeff.

Hey, morning, guys. Hey. So I think you're continuing to talk about a $23 million kind of annual run rate, so does that put us up like $3 million, $4 million year-on-year? Is that the right way to think about incremental cost in 2016 for tech spending?

Didn't I report that number, that incremental spending for the year? Remind me, Barry.

Yeah. For nine months, it's around $2.9 million, so I would peg it right around $3 million, Jeff.

Okay. And then, is that a number that you think is up incrementally again in 2017, or do we start to level out or even see it back off?

Well, this question has been asked in prior calls and my answer to that is that we will not set ourselves at certain figure, but more set ourselves according to the opportunity. We just think that there's a dramatic change going in the entire United States economy. So we want to lead it in the HVAC distribution industry. So, we will focus on the opportunity that we think will have a profit return.

Right. But as you look at the pipeline of opportunities, does that support -

It changes all the time. We have, for example, Watsco Ventures that if any one of those things – well, I don't want to speculate too much, but we're very excited about the possibility and I emphasize possibility of a breakthrough in Watsco Ventures.

Okay, and then just stepping away from that. I mean, it sounds like, in general this year, mix has been favorable. I think the industry has at least been able to get some price. But even if you back off some of these tech spending, though, your leverage on your sales growth is coming at a little bit less than normal, maybe just help me understand what's going on there.

I'll give it a try. I don't know that I agree with your conclusion, but, Barry?

Yeah. Well, Jeff, first of all, there are some investments that go beyond just technology. There's a commercial product, VRF, that's been launched. And it's required hiring and people and the team and market coverage and brand support across really all the Sunbelt markets for Watsco would be one example of some SG&A that is being invested in products. There are also five new branches this quarter, for example. There's some G&A that applies to that initiative that's expanding the network. And so, investments is not just a technology story, there's also certainly some business investments going on. And, Jeff, just going back to your technology question. At last year's Investor Conference, we had 15 minutes of conventional discussion and two hours of technology discussion, and laying out the opportunity, laying out the initiatives was its purpose last year. And this year we'll lay out the same concepts and develop it even further. So, not to put you off on answering your question but, obviously, we'll spend a lot of time and you'll get a lot of substance out of the Investor Day.

Jeff, it's warm here in December. But I also want to point out, Jeff, I read something in your report this morning, in terms of new residential construction. I've said it in the past and I continue to say it, we're an aftermarket business by focus, and the new construction business runs 10%, if not less. So, let's not get carried away with new construction. For example, I believe higher interest rates eventually will come up. That's why you see us retiring debt. That's why you see us focusing on the aftermarket. That's what we've always been.

Okay. Just a quick one, any impact favorable or unfavorable near-term, medium-term from Hurricane Matthew?

Well, it used to be when you had a hurricane, it would materially move the needle for us, but that doesn't happen anymore because the company is so big and spread out over the United States. Of course, we'll have some benefit of replacing the systems that need replacement. But overall, given our size, I wouldn't think it's going to move the needle that much.

Okay. Thanks, guys.

And, Jeff, congratulations on Cleveland tonight.

Thanks so much. Go Tribe.

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

Morning, Ryan. Ryan J. Merkel - William Blair & Co. LLC: Morning. So the first question I had is it looks like the big issue for the quarter was the non-equipment, the parts and supplies. The growth rate was only 2%, and that follows – I think it was down 3% in the second quarter. So just talk about what the puts and takes are there and why didn't we see a bigger lift in the growth rate for that part of the business?

Go ahead, Barry or Paul.

Well, first, Ryan, in the U.S., it was a stronger market than the 2%, and we saw some international weakness in that market. And I think that's just the timing in terms of how that business operates in international markets. The U.S. was a stronger market. And I think in some of the potential inflation that we might see in that market is something maybe in front of us versus what we saw in the third quarter. And so those products, again, have not broken out in terms of, I would say, pricing the way that maybe the equipment business has. The last thing I'd say is on parts, whenever we have a growing equipment business, the parts business itself has some weakness in it, which we do not mind given the strength of the equipment margin and total dollars and so on. So, there's about 120 product lines, 600 vendors in that category, so a lot of moving pieces, but that'll give you some color. Ryan J. Merkel - William Blair & Co. LLC: Okay, and just a follow-up. The international weakness, is that primarily Canada, or what else would you include there?

We have really two businesses. We have Latin America, primarily export in Mexico, and Canada. And I would say it's fairly spread equally across those two markets. Ryan J. Merkel - William Blair & Co. LLC: Okay. And then, organic sales this year, looks like it's going to be up 3%, 4%, which is the slowest we've seen in about four years. So, I'm wondering, do you think this reflects that pent-up demand is potentially running out of steam or is this just tough comparisons after a few good years of growth? How do you think about that?

Well, let me start with that and then I'll turn it over to the two of them. The established systems in people's homes is 90 million. Those are machines. They will wear out, and they will need to be replaced or repaired. And the refrigerant is changing, which means there'll be more replacement. There are all kinds of huge force factors causing this replacement cycle to continue for, as far as I can tell, for years to come. I don't believe there's any better place to be than in the replacement market of air-conditioning and heating. That's not the same with new construction, but as I've said earlier, we're in the aftermarket and that's our focus. And we're getting better at it. So I would not see any lack of opportunity long-term in the aftermarket. I would see a strong ongoing opportunity. And Paul or Barry, you want to add to that?

Yeah, I think on the resi equipment side at least, we have a little bit of a tough compare. In that last year, we were still showing the dry charge 22 units. When I – to Al's point, when I net out that old business, the base fee is going away and I look at our 410 [R410A] sales up double digits, low double digits, which bodes well for the replacement market going forward, I think. Ryan J. Merkel - William Blair & Co. LLC: Okay. So as far as you can tell, just steady as she goes cycle, it's not running out of steam.

Not at all, not at all. Ryan J. Merkel - William Blair & Co. LLC: Continued consistent results. Okay.

Yes, sir. Ryan J. Merkel - William Blair & Co. LLC: Just lastly and I'll pass it on. A few of the HVAC OEMs have announced price increases for 2017. Are you seeing this and do you think that the price increases will stick?

Paul?

Yes, we are seeing the same price increases that the OEMs are announcing. We represent most of them. Do you we hope they stick? Obviously, we hope they stick. It's always been kind of a wait-and-see as far as we're concerned whether or not they hold or not. Right now, everything looks very good. Ryan J. Merkel - William Blair & Co. LLC: Okay, very Good. Thank you.

Sure.

The next question comes from David Manthey of Baird. Please go ahead.

Hello, David. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Hey, Al. How are you? Good morning.

Thank you. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): So it sounds like the strong cash flow that you saw this quarter is not just a timing issue, but your technology tools and other improvements are leading to a more lasting change there. Could you talk about longer term? Do you have any working capital goals that you can share with us?

Well, we have an inventory software system that last time I think I reported on it, it was into just part of our business. It still continues to be in part of our business because the installation and the adoption takes time. And I think that will continue to impact cash flow. Do we have a goal in mind? I don't know. Barry, do we have a goal in cash flow? Our stated goal has always been to – over net income. Do we have anything beyond that?

Yes. We've stated is inventory turns historically have been around four times, and the interim goal after technology was five times...

Five times, yeah.

...which is about 20%, 25% reduction in inventory. And as we said in the call, 30 basis points of improvement against the 100 basis point goal that we have. And as Al mentioned, it's not fully implemented across all of Watsco's business units and locations. So it's nice progress. That's a cash flow story long-term. Also, long-term can become a cost story where what cost associated with carrying a less inventory can we achieve in terms of reduction. So that's probably a longer term story and – but it's certainly part of the potential and part of the intent for all this new initiative. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. And then, as it relates to the refrigerant, this HFC thing, it seems like it's out there a few years. And I guess R22 pricing continues to push higher. It looks like your placement trends are very strong right now. Any reason to believe that that trend shouldn't remain intact or maybe even get more, I know you answered that question earlier, but I just want to reiterate it. It sounds like...

Yeah. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): ... they're lining up replacement to continue to outpace repair in the near-term. Is that -

Let's give it to Paul Johnston, sine you've heard from Barry now.

Yeah. I think the trend is going to continue long-term where we definitely have seen not only the pricing of 22 go up, but also the availability of 22 going down. So, with this vast population of R22 in our install base, obviously, I think it's going to all have to be replaced with 410. So I feel very, very bullish about the replacement market at least for the next four to five years. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. Last question, if I can. Despite the incremental tech investment that you're making here, which seems to be on a year-over-year basis diminishing in terms of magnitude, if you grow mid single-digits give or take in 2017, should Watsco returned to double-digit earnings growth?

That always has. We leveraged our sales into a higher growth rate of EBIT and I don't see any reason why that shouldn't continue. And then, of course, the offset to that could be the incremental technology spending. As I said earlier and as I said in prior conference calls, everything we think about is long-term. So, we're going to take this technology thing and change what we do help our contractors be much more efficient and more loyal to everything that we're doing. And that's just the goal and it's a long-term goal. So that's the variable, how much are we going to spend for that. But eventually, these things that we spend produce something. Right now, we're seeing the benefits in cash flow. We're seeing the benefits to our contractors that are getting and taking up their products much quicker, and they're ordering any time they want now, seven days in a week, 24/7 on e-commerce. There are all kinds of things that are in the initial adoption. So, that's the only caveat. I just think that we got to see – we got to continue to look long-term on investment spend and just follow the opportunity. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): All right. Thanks, Al.

The next question comes from Robert Barry of Susquehanna. Please go ahead.

Morning.

Hey, guys. Good morning. Hey, nice to see the IT investments start to read out into the cash flow.

Yeah, I think that's going to continue.

I wanted to start by just following up on a point I think Paul made earlier. Did you say that the ex the R-22, the 410 sales were up low double-digits? Was that in the quarter?

That was in the quarter. Yes.

So like several points plus of headwind on HVAC equipment from that R-22 comp?

Just when you make the comparison from prior year, I'd consider it to be very strong that the 410 is up double digits all by itself year-over-year.

Yeah. Yeah, me too. And I guess a little surprised to think that lapping the R-22 could have such an impact on slowing it down in the quarter. But okay. I had a big picture question. So, externally a lot of us look at this HARDI data, right, and I know you guys are not in HARDI and a lot of the big players are not in it. But those little guys seem to be growing very quickly. In the quarter, I think they were up about low-teens, and year-to-date, it's been quite strong as well. So I was just curious from an industry perspective if you had some comment on reconciling what appears to be very strong growth among a lot of these little players versus what you're seeing at Watsco.

Go ahead, Paul.

I haven't spent any time even trying to reconcile. I don't know what their database is, what their geographic locations are. It's wonderful that they've grown, but Watsco is a national company. We have our consistent financials that we have to report year-after-year. So it just isn't something that we follow. I don't know what the sales mix is of those people.

Yes. Okay. I could follow up with you online in more detail. Quick question housekeeping item on your EPS outlook, does it include the tax benefit this year from the FASB change, and how much is in there? Is it $0.06 or $0.08?

Well, again, we – the answer is yes, Robert. For the quarter, for the fourth quarter, there's very little benefit to it, so most of what you've seen year-to-date is what it will be.

Got you. And then just finally on the parts and supplies business, R-22 availability, refrigerant availability. There was some talk at some other vendors of not having it, it weighing on growth. I mean, was that a factor at all impacting that part of the business?

No, it wasn't. There's a couple of drop-in replacements for R-22 that are available from the three big refrigerant manufacturers. So you can get it. It has slight degradation as far as the capacity and the efficiency of the equipment, but it's available.

Great. Thanks a lot.

A year ago, we had a short period to sell R-22 product before manufacturers wouldn't make it anymore. And we did have a real nice bump from refrigerant-free equipment last year. And that's the comparison this year. That's why Paul is saying, we grew double digits in equipment sales this year, but when you compare it to the prior year that had refrigerant-free equipment that we could sell before the deadline, we didn't have that repeating this year. But fundamentally, if your equipment sales are growing at double-digits, that's a very healthy thing, we believe.

Yes, agreed. I'll see you in December. Thank you.

Great.

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

Hey, guys. This is actually Josh Nelsen sitting in for Chris.

Good morning.

I just had a real quick question. Of the equipment sales growth, how much of that was volume versus pricing in the quarter? Thanks.

Paul?

Most of it was volume. We had some price pickup, obviously, as we switched over to the 14 SEER, but we also had a lift in unit sales.

All right. Perfect. Thanks.

The next question comes from Walter Liptak of Seaport Global. Please go ahead.

Hi. Thanks. Good morning, guys.

Morning.

Wanted to ask about the tech spending and the $23 million that you're spending and the smaller incremental for this year. I have done some work and it looks like the rule of thumb is like tech spending of 1% to 2% of revenue, which means that you're underspending kind of – it looks like there are other – so...

I think A.J. really likes that.

So, A, the question is do you bucket it differently? Like, is there an innovative IT spend that's in that $23 million and maybe branch spend that might be more like ERP system or software implementation that's a different bucket?

Why don't we have A.J. answer that?

The answer is, yes, of course, we have visibility into exactly where dollars are being allocated. And the growth in spending over the last several years has been on new platforms, new technology to enhance the customer experience, to help make our operations more efficient, more profitable, and then hope to create some new profit streams through these Watsco Ventures programs, which are more speculative at this point. But, yes, we have visibility for that, of course.

Okay. But I guess, the question is, does the $23 million, is that just the innovative corporate IT spending? And if there's other spending at the branch level, how much are you spending? Is there an incremental spend going on there?

It is not just the new programs, but the spending that happens at the branches and ERPs are now, of course, influenced by the new programs and technology. So they should be looked at as a whole because it is part of ongoing programs.

Okay. Okay, great. All right. Thanks, guys.

The next question comes from (28:46) of Buckingham Research. Please go ahead.

Good morning, Joshua (28:49).

Hi. Thanks for taking the call. This is Matt on for Josh. Just wondering if you could help us understand your equipment growth of 7% a little bit more, given that Carrier just reported 11% growth in residential?

Barry and Paul?

Hi. I have no idea what Carrier reported.

There's a global sales anyhow I presume.

Yeah. We're just talking our domestic.

Okay. Okay. I mean could -

I saw in their slides release, North American residential up single-digit, so that's a reference point that I saw in their disclosures this morning.

Okay, okay. I guess we'll follow up with you on a call later. Thanks.

The next question comes from Robert McCarthy of Stifel. Please go ahead.

Morning, Robert. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Good morning. How are you doing? I guess a couple of questions. I mean, one, just thinking about from a messaging standpoint, you came up with – you articulated your guidance for the full year in the third quarter, and I think in years past, you've done it as soon as the first quarter and the second quarter depending. Was it something specific about this year that made you reluctant...

Yes. That's a good question. Yes. We noticed, and it doesn't happen very often, a late season that didn't occur in the second quarter. So, we were very conservative and said so at the last conference call that we were not going to provide outlook until we got a better fix on it. We didn't know whether it was a late season or something different than that. And as it turned out, it was only a late season because demand came in very strong beginning of the third quarter. And now that we have a better feel for thing is we're providing the guidance. We don't like to reach out there unless we have a good sense of it. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Right. So that'll be the driving factor going forward on how to think about it in terms of the cadence of when you give your full year guidance.

Yes, yes. I would say generally speaking around the second quarter. Yeah. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Okay. All right.

Good question, though. Yeah. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: And then, obviously, listen – underlying demand in sales sound pretty good, particularly given in the context of the R-22 compares and we've kind of picked over the bone around the trends of the quarter. I guess, longer term, in terms of the technology spend, I mean, could you comment on – are you doing anything on the sensor side with basically trying to create intelligence in the products you sell into the home from that perspective? Because we've heard that some big-box retailers and also some component suppliers are actually looking into that to basically get a better sense of the install base by – the idea would be putting in something that would link up to Wi-Fi, and then all of a sudden you would have a much better sense of the ease of life, whether the machine was – or the equipment was put in properly, getting a lot more data around that.

You've got somebody that's working in our company that's giving you our information? I'll let A.J. answer that one. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: I'm going to laugh at that one. I'm going to laugh, hardy har har. But I guess anything you could talk about that or anything along the lines, what you're doing with the utilities that's kind of innovative?

A.J. Go ahead, A.J.

Yeah, that's the real fun part of the Watsco Ventures vehicle that we've created is that we get to dream, we get to explore, we get to learn about what others are doing, we get to try some things internally. And of course, IoTs, the Internet of Things, is very much on our minds. And I'll answer this question a little generically in that, if and when, and I think it really is a when, for all of the HVAC systems in the country or the world are connected, and there is visibility into the data and the health of the systems and the ability to measure and monitor and meter those systems, it can only be a good thing for us because we are very well positioned to leverage that data and build business models on top of that data, both for, well, all of stakeholders. So, yes, we love that idea. Some of our OEM partners already have some of that measuring and monitoring technology in their highest-end equipment. And there's some fun stuff happening in the Watsco Ventures portfolio where we also are taking a deep dive into that. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: I'll leave it there for now.

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

Well, once again, thanks for your interest in our company. We'll speak to you at the end of the year when we have our year-end numbers ready for you. Bye-bye.

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