Good morning, and welcome to the Watsco First Quarter 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, President, CEO and Chairman of the Board. Please go ahead, sir.

Good morning, everyone. As you may have noted, I'd like to add the leaders of the company on these conference calls. And today, we have Barry Logan, Paul Johnston and Ana Menendez. The new one is Ana Menendez, she is the company's Chief Financial Officer. This way, you get exposure to not only me, but several of our corporate leaders. First, the cautionary statement. This conference call was forward -- 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 quarter. Watsco had a solid start to the year, delivering record sales, operating income and net income, along with strong EPS growth. Operating margins increased significantly from a combination of sales growth, higher selling margins and operating efficiencies. Residential HVAC products showed a 6% growth rate for the quarter, which reflects the continuing trend toward systems replacements and a better sales mix of higher efficiency systems. Our managers keep -- kept close watch on SG&A during the quarter. Some of our markets had volatile weather during the quarter, and expenses were well managed to produce terrific earnings growth. The ability to quickly match expenses to market conditions has become a way of doing business for Watsco. A remainder, and this is important, that the first quarter represents the lowest seasonal time of year for sales. So we are satisfied that we are off to a good start to what should be, what we believe, is a great year for Watsco. And now the numbers. Revenues grew 13% to a record $714 million, up 3% on a same-store basis. Residential HVAC equipment sales were up 6%. Commercial HVAC equipment was down 5%, following a 20%-plus comparable…

[Operator Instructions] The first question comes from Ryan Merkel of William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: A couple of questions. So first, why give annual guidance early? Is there any increased visibility you have? Or what was the reason for that?

Ryan, we can't win with you. No, we're pretty -- we're feeling pretty good about the year, even though there are weather volatility and, all of a sudden, geopolitical stuff. But we're just feeling good, so we thought we come out early. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. And can you give us what is your organic growth assumption in the guidance? Is that something you can share?

Sure. Let's go to Barry.

Hey, Ryan, it is a good start to the year. If you look at the last -- really, this last quarter, the revenue growth rate for residential is 6%. By the way, that is 1 less day in the first quarter, so it's even closer to an 8% growth rate. So that's a good start and it was the off season. And we really do not provide specific revenue guidance, but I think that gives you some inference into the trend. What we saw in the quarter in terms of our confidence for the rest of the year. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. And then as I did some of my channel checks for the quarter, I was hearing things like weather was truly ugly. And so I'm just curious if that -- if you think that impacted growth this quarter?

Well, that's what we tried to represent in the earlier comments, that where the markets were impacted by the volatile weather, we did manage SG&A, which improved our margins. But it's not abnormal. I mean, this is -- our coverage now is so great throughout the United States that I feel very diversified so that weather changes or weather volatility in one section of the market remain -- is over -- we have other markets that compensate for that. So we've taken out pretty much volatility to geographic areas. That was our goal, is to diversify away from geography, diversify away from equipment brands. Those are 2 big goals that we have achieved.

Okay, and then just last one for me. What drove the year-over-year gross margin increase?

Barry?

Ryan, there's a few things. First, when a residential business does outgrow the commercial business, that's a tick up in margin for the overall Watsco business. We also saw some price improvement, which helps margin in the big picture. Again, it's early in the year, I would not impute what you see in the first quarter for the entire year. But again, in the early part of the year, it's a good start.

We're one of those few companies that likes price increases, right, Ryan? I mean, we still want to be competitive in the market, but if the market moves with prices, we do better.

The next question comes from Matt Duncan of Stephens Incorporated.

The first question I've got, Al, on the growth rates that you gave for residential, commercial equipment, et cetera. Were those total company or were those same store?

I think we reported both ways. Are you talking about the equipment? The equipment growth rate?

Yes...

Excellent question. And once again, Barry.

It's on a same-store basis.

And remember, that's 1 day less than in our quarter than the comparable last year.

Sure, sure. On the Carrier Canada business, I know when you guys first bought that, the profitability was a little below what you had hoped for. Can you talk about what you've been able to do?

No. Those question were asked before. We're not going to comment about specific units.

Okay. Do you have any view on how much a lift on residential construction may be helping your equipment sales and parts and supply?

Excellent question. Let me turn to get a little diversity in the questions here to Paul Johnston.

Okay. Yes, first quarter, we got a nice lift from residential new construction. It's still a small piece of our overall business, but it was enough to offset maybe some weakness that we had in the replacement business.

Okay. So, Paul, the replacement business, do you think it was down year-over-year? I'm assuming weather would've played a role in that, if so.

Yes, it probably was down a bit.

Okay. And the last question I have, can you talk a little bit about mix, both in terms of 14 SEER and above versus 13 SEER? And then what are you guys seeing in the mix, for R-22 versus 410A right now?

Go ahead, Paul.

Okay. We saw some definite improvement in the higher SEER products in the first quarter. It's, like I said, it's a very small quarter to get any trends off, but we definitely did see those. Better news, I think we saw in the 13 SEER product, we saw a little bit of a pickup in the mid-tier 13 SEER. As you remember last earnings call, we talked about not only but was it going to 13 SEER, but was it going to the low end of the 13 SEER. And as far as the dry charge, it still is not even a blip on the map. It's very, very small. It hasn't grown. Hopefully, we're going to sing the death knell of that product line this year.

Paul, does the EPA allowing more version R-22 production this year than it'd been originally assumed? Does that have any impact on how you think?

They did allow for more virgin to come in. I think it we're up to around 63 million pounds, as what the allocation is for 2013. Higher than what we wanted, higher than what the industry wanted. But still, you've got an 80 million pound demand out there, so it still leaves a nice gap. I think the -- I don't think it's going to revitalize the dry charge unit sales in the marketplace just because we have a few more million pounds of 22 [R-22] than we anticipated though.

The next question comes from David Manthey of Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First off, there's the rundown of the 4 different product categories. Can you give us what percentage of sales each of those categories were this quarter? You usually give that data.

Do we do that, Barry, usually?

Yes, we do.

Go ahead then.

Yes, the 61% is the total HVAC equipment and 4% is the commercial refrigeration. And the remainder, 35%, is the non-equipment HVAC. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Great, okay. And then of the non-equipment, other HVAC segment, could you remind me what percentage of that is approximately related to new construction versus repair parts? And if you just want to give me bigger-than-a-breadbox, that would be helpful?

Yes, David, it's a guess. I mean, if we sell a box of duct tape, we don't know necessarily where a box of duct tape goes. And that would be an example in that category or a thermostat or a piece of copper tubing, so that's something we necessarily track. Our good guess would be around 20% of the supplies business would be a good guess. If equipment would be less, supplies would be something more. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay, you're saying 20% is related to -- what is the 20%, Barry?

20% of the supplies business. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Is new construction?

Yes, that would be a good guess. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay, all right. And then the gross margin. So you discussed a little bit in terms of the mix implication there, and you said not to necessarily extrapolate. Could you talk about where you think pricing came into that? I mean, is a good chunk of that gross margin improvement something that, as the price increases went in early in the year, you were able to capture some of that in GP and it'll burn off as we move into the selling season? Or any other help you can give us there as it relates to pricing or mix on GP?

Again, the...

Paul? You want that, Paul? Barry. Okay, go ahead.

Oh, go ahead, it's fine.

Go ahead, Barry.

On the price increase, it does impact the earlier part of the year more so than the proportion for the rest of the year. And just in terms of how the price increase is executed. Again, I don't want to give the data as a guess. Pricing is probably in the 20%, 30% range of the change. And again, that's what would tend to diminish as the year would go on. The product mix, both in terms of SEER and residential versus commercial, if that trend sustains itself, then that has a longer-term benefit to gross profit. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Great. Okay, that's helpful. And then the final question is in relation to dragging these segments down to EBIT margin. When you think about the incremental variable SG&A cost related to sort of the other HVAC stuff, the thermostat, duct work, registers, that sort of thing versus HVAC equipment, is there any reason to believe that the -- there's more parity between equipment and non-equipment at the EBIT line? Or is there still a profitability gap for you? So that if the mix shifts towards systems, that it would be somewhat dilutive at the EBIT line as well to margins.

Well, we do earn more on non-equipment in terms of the margins. What is the overall impact, Paul? Have you got a sense for that?

Yes. I don't have an exact number, we've never tracked that all way down to the EBIT line. But obviously, there's a lower expense to selling the supply business than there is to sell the equipment, as far as sales coverage and that type of thing.

The next question comes from Josh Pokrzywinski of MKM Partners.

Can you just give us a bit of an update on what you're seeing so far here in April? And then I have a question on the commercial business when you're done.

Well, I'll give you a general impression: looking good.

Fair enough. And then, I mean, are we feeling like weather has normalized enough to have a view on kind of underlying demand or that [indiscernible].

I don't like to -- we don't -- Watsco doesn't like to comment on weather because we don't want to be a weather-driven business. We are diversified geographically. When weather volatility impacts us one place, we have something else going in a different part of the country. So we're not going to comment on weather. We're just going to tell you that it looks good, and we're feeling good about the year.

Right. I guess, I meant the question more from a weather-agnostic perspective of have you seen at least enough noise come out of that to where you feel like that's a market comment and not a weather comment. And that seems to be your answer is that, yes, it feels good.

Yes, yes.

And then on the...

I mean, it took a while to diversify away from being focused on a single geography. And, that, we have accomplished. That was a goal, a long-term goal. And now we operate throughout the country. I know we have a focus on the Sunbelt, but the Sunbelt goes from coast-to-coast. So we're taking the weather dimension not as much as we can.

Got you. And then on the commercial business, obviously down on the quarter for equipment.

Those are comps, primarily. Because last year, it is up.

What I was trying to get at is how much of that do you feel like is -- or what's your sense of how the market is doing kind of better or worse, about the same?

Good question. Go ahead, Paul.

Yes. Part of the commercial business, obviously, is a lot of -- it is project-driven for us. And so, we had some good comps last year. Obviously, we were up 20% last year in the first quarter. This quarter, yes, some of our -- our business was down. I don't think it was market-related. In our particular case, I think we're making good traction there. As you know, this is a business that we entered into full throttle about 2 years ago, so we're more concerned about our activity within the market as opposed to what the market actually is doing right now. But I'm not taking -- down 5% in the first quarter, it could be a matter of a project slippage or project moving out. Not getting concerned at this point.

For one quarter to another is what he means, the cutoff for the quarter. There may be projects that might have been delivered in the prior year, just before the end of the quarter, which this year are being delivered at the beginning of the second quarter.

Right. And I guess, to the extent that there's a notion out there, the nonresidential construction is getting better. Paul, would you say that, that's fair based on what you're seeing? Or is it still too early to tell?

It really is too early, Josh. Right now, I could say our business is, I think, is good in this area. And because we've been in it for 2 years, I think we're more concerned about our own internal metrics of growing against ourselves, as opposed to what the total...

Because of the share gains that we are expecting.

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

You mentioned the res HVAC equipment and then commercial HVAC being down. I just want to make sure we're clear. Because in the past, you gave HVAC equipment, HVAC non-equipment and commercial refrigeration. So can you give us those -- the growth rates on those 3 buckets?

The HVAC equipment is up 3%, and that's the composite of the residential and commercial. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Okay. Okay, great. The non-equipment?

And I think that was in the script, but I'll give it to you. It's up 2% for the non-equipment.

Okay. And what's the rough mix of HVAC equipment now, commercial to...

Residential?

To residential. That 61% that's HVAC equipment, what's the rough split?

Look -- we're just looking. About 20% is commercial.

Okay. Okay, great.

By the way, it might be helpful to let you know that if the non-equipment business starts to grow at a faster rate, that's going to be an indicator of new construction down the road. What would you say, Paul, about an 8-week lag?

About an 8-week lag, and our supply business only runs about 5x bigger on RNC versus a replacement job.

Okay. So if you take -- if you kind of extrapolate your commentary that new housing was strong in the first quarter and replacement was slightly down, should we start to see it accelerate?

Did you say that, Paul? Did you say that, Barry?

I did.

Yes. It's Paul that said that.

Paul, I don't think that's an accurate comment. I think we're still a replacement-driven business in the first quarter.

We are. Definitely, definitely.

Yes -- no, it's the replacement business that contributed to our performance more than the new construction. The new construction is still in the -- overall, it may be as, I don't know, less 15%, probably. More like 12%. So -- no, the impact is coming. As I continue to say, we are basically and fundamentally a replacement-driven business. And we do take advantage of new construction. Our shares are very good, but it's not ever going to be -- have the impact of replacements. And we like that, because the overall industry market is still and will ever continue to be in the replacement business.

Okay. And then just on the outlook. Just how are you thinking about just the replacement market from an industry perspective within your outlook? And then also, do you comment just on how much this commercial comp issue may impact the year? And does that continue?

Gee, that's a lot of forecasting. I don't -- it's hard to -- it's a good question, but it's hard to give you the answers for that. I just feel good. I mean, not great, good. Great will be when the industry starts to grow at a much faster rate, which we used to have, and that's what we think is what the pent-up demand is all about, that we're still expecting down the road. Paul, have you got a better answer than I just provided, or imaginative answer?

That's an incredibly difficult question, Jeff. I wish I had the right answer to that.

But I mean -- I guess, good kind of equates into a normal kind of replacement growth as opposed to pent-up -- you're not really counting on a lot of pent-up replacement to end?

Well, we are counting, I would say, more this year than last year. But still not to the levels that we expect when the pent-up demand lets go.

Okay. And you mentioned the dividend in the release. When might you address the dividend again?

Yes. It's an excellent question. We are -- we like increasing dividends, that's been our history. We paid a special dividend at the end of last year because tax rates were changing and I think our shareholders appreciated that, and then we reinstated a smaller dividend. And we're just looking for an opportunity to start again on increasing dividend policy. And I would say, a specific answer to your question is, let's wait through the third quarter, I would say, unless something extraordinary happens before that.

The next question comes from Rohit Seth of SunTrust.

Keith Hughes, SunTrust. I've got 2 questions. First, on the acquisition model...

Could you take it off the speaker, please?

Yes, please.

I'm sorry, can you hear me better now?

Yes. Oh, much better. Sure.

Okay, sorry about that. It's Keith Hughes, SunTrust. Two questions. One on the acquisition market, if you can kind of characterize what you're seeing there now? I know we're seeing a lot more building product and consumer durable deals in variety of sectors coming to market...

Yes. For us, on the acquisition market, we've changed our thinking. We need to do large transactions. And, well, I'm not too excited about what we see. I know that I was more excited than -- at previous calls, but I'm not as excited about that. I think this will probably be -- this year will be driven -- well-driven by what we already own.

And could you kind of comment on pricing? Any price increases from your suppliers and acceptance of that into the market?

Go ahead, Paul.

Yes, we had several price increases. As you know, in the fourth quarter, with several of the OEMs. And most of them have been rolled out and we saw some impact of that in the first quarter.

Do you think we'll see a greater impact in the second quarter?

I don't think we'll see a big impact in the second quarter. I think we pretty much have seen what the price increases have rolled through, so far, are going to continue to be in effect in the second quarter and third quarter.

That's certainly through keep of the equipments. The OEMs and the equipment, I think, are done. The other, the non-equipment guys, you may see a little bit of that.

I guess, my question was on the positive benefit from that for you. Did you not realize that in the first quarter? Am I correct?

Well, it might last a little bit longer than the first quarter, but it's not -- we don't expect equipment price increases through the end of the year. Is that correct, Paul?

Yes, that is correct.

OEMs, I don't believe are going to do that. Now, on the non-equipment, which we also benefit from, if the market absorbs the price increases, that's a different story. They're much smaller manufacturers. And generally, the market does absorb those kind of price increases.

Keith, I do want to make one comment on the acquisitions. Just a reminder, we obviously do have a second option to buy 10% more of Carrier Enterprise or Sunbelt Carrier Enterprise joint venture July of next year. So it is a date certain and an amount certain in terms of making what we consider a good, meaningful contribution to earnings in the company beginning in July 2014.

I assume, is your intent is to exercise that when it comes due. Is that correct?

It is our intent.

The next question comes from Sanjay Shrestha of Lazard Capital Markets.

Great. Some of my questions have been answered guys, but 2 questions, if I may. Can you actually give us some more color in terms of the mix between the high efficiency versus the low-efficiency product? One, in this quarter, expectation for this year? And as we start to sort of think about the high-efficiency product going forward, what do you think is going to be the customer uptake rate is going to be, and how does that end up impacting your overall revenue margin, just along those lines?

I think we've seen a correlation between consumer confidence and sale of high-efficiency product. If consumer confidence is high, their tendency is to spend more for efficiency savings. If it's low, they want to just get by with as little as possible to keep the cooling or heating going on in their residences. Paul, have you got anything more than that?

Yes. It's been fairly stable here for about the last 5 quarters as far as what the mix is between 13 SEER and all else. And as I indicated earlier, the only kind of good news we had this quarter was we're starting to see a migration up to the mid-tier of the 13 SEER. But outside of that, with -- like Al said, it's all about consumer confidence and how they feel about their income.

One follow-up on that, guys, right, I know you briefly mentioned it in your prepared remarks. But this whole notion of the pent-up demand in this industry, right. So the expectation is that it starts to sort of release a bit here this year, and if the consumer confidence stays up, it sounds like we're finally at that tipping point where we could really see a pretty meaningful growth contribution to the industry [indiscernible].

That's being forecasting more than we're prepared to stand by now. We're just seeing some elements of that. They're -- we always report there are 80 million homes that have equipment eventually has to be replaced. But I would not say, conclusively, that we have spotted a normalization of the industry growth rate in the aftermarket, it's just too early.

[Operator Instructions] The next question comes from Steve Tusa of JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: I guess within the non-equipment stuff, were compressors down in line with that number? Or up in line with that number?

Barry, do we answer that kind of question?

Generally, we haven't, Al. No.

We'd rather not provide that sort of information. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Yes. And I guess you talked about pricing. You said the OEMs are already -- have already kind of put most of their price increases through. With copper kind of going in the direction it's going in and the commodities down, do you sense that your customers are going to start to maybe push back a little bit more or...

Well, if they do, I think the OEM will react. If they don't, the OEM will do very well, I guess. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Do you think the OEMs would ever like take price down?

Well, I think every distributor has a relationship with the OEM. It depends on who they are, what the competitive posture is of that particular distributor. In our case, we're very share of market driven. And we have, historically, had good support from the OEM as we drive share gains. And we -- I don't think that -- there may be an exception to that, but all OEMs will participate in wherever the market pricing is so we can gain share. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Are you seeing any impact from Daikin, Goodman yet? Anything to speak of as far as what's going on in their communications or have...

I don't think Daikin's released any product yet. So it's all still Goodman, and then no... Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: No real change there?

No. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: So -- and sorry, one last question. What is the organic growth assumption in your guidance?

Barry, did you provide that? Or do you want to provide that?

Steve, really, we're providing an earnings outlook, not specific guidance on the top line. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. Is there any reason, from a comparisons perspective, it should be a lot different than what you saw in the first quarter?

No. I think I made that...

That's good, Steve. Don't forget, Steve, which was brought out early, the first quarter this year has one less day. So, I don't know, we might have either beat or at least met, I would say, revenue expectations in the first quarter, had they been a comparable day.

The next question comes from Matthew Dodson of JWest, LLC.

What's the name of the company?

JWest, LLC.

Okay.

The EPA had the issuance of R-22 on March 28. Have you seen any price increases or decreases, excuse me, for R-22 since then? Or has it stayed pretty much flat?

It has stayed flat.

And then what is your expectation of R-22 going forward? And how will that affect your replacement market?

What do you mean by your question?

Do you mean in the equipment sales? Is that what you were --

Gas? Or what are you talking?

Yes. So if R-22 goes back down, how will that affect your replacement market in your R-22 equipment sales?

No, it really won't.

No impact at all.

The 2 are really not related.

Andrew?

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

Well, as always, thanks for your interest in our company, and we look forward to more conversations at the end of the second quarter. Goodbye now.

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