Good morning and welcome to the Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Albert Nahmad. Please go ahead. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Good morning, everyone. This is Al Nahmad coming to you from sunny Miami, Florida. With me is Barry Logan and Paul Johnston. First, what we normally do, 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 onto the business. Well, in the second quarter, we made more money than any quarter in our history. That's a great way to start. What makes me feel particularly good is that we are operating at record levels. At the same time, we are making significant investments in our business that are focused on long-term value of our company. We expect these investments to benefit our customers, our partners, and our shareholders. During the quarter and for the first half, we established new records for earnings per share, net income, operating profit, operating margins, and sales. The results reflect consistent growth in replacement demand and continued movement toward high efficiency systems. We see this momentum continue in July and expect 2015 will be a record year for our company. And now, for the details of the quarter. The performance says a 16% increase in earnings per share to a record $1.85; an 11% increase in operating income to a record $125 million; a 50 basis point expansion in operating margins to a record 10.2%; a 20 basis point improvement in gross profit…

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

Good morning, guys. So, Al, the first question I have is just sort of trying to break down the sales growth a little bit. Did you guys noticed any geographical differences in your growth rate, specifically either in Canada where the economy appears to be a bit weaker and you probably have some currency translation issues? Then also, it was pretty wet in Texas and a little cooler in the Northeast. Did any of those things impact you guys in the quarter? Albert H. Nahmad - Chairman, President & Chief Executive Officer: For sure, they did. That's not uncommon. It goes on all the time. But when you wrap it all up, we reported record everything. So we're very pleased with what we did and it's consistent with the outlook that we provided for the year.

Sure. I just didn't know if those things had served as a noticeable irritant to revenue growth. In other words, was the underlying growth in the business maybe a bit better but those things hurt a little? Albert H. Nahmad - Chairman, President & Chief Executive Officer: Well, some things hurt and some things help. I don't like to sort of dissect things. I look at the overall picture and I like what I see. We made more money this quarter than we ever have in our history. And we're going to have a great year. So it's nothing that I can tell you that's fundamentally wrong anywhere. Just the opposite.

Sure. Albert H. Nahmad - Chairman, President & Chief Executive Officer: We're in pretty good shape.

Okay. And then a last thing and I'll hop back in the queue, just on the technology investments. Sort of where are you guys in the process, Al, of rolling out the iPad apps to all the operating units and what are you hearing back from your customers? Albert H. Nahmad - Chairman, President & Chief Executive Officer: That's a great question. I'm going to give you some data that I've never provided before. Our employee count is 5,013. 3% – roughly 150 people – that work in our company are dedicated to technology. And what they're going to do and are doing is to improve significantly the efficiency of our company as well as helping the contractor improve his efficiency. And that all drives share market gains for our OEMs. And that is an investment that will increase, not decrease. We're way ahead and we want to stay ahead.

Okay. Great. Thanks, Al.

The next question comes from Mark Douglass of Longbow Research. Please go ahead.

Hi. Good morning, gentlemen. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Good morning.

Can you break down the equipment sales growth in U.S. resi versus international resi and then commercial? Albert H. Nahmad - Chairman, President & Chief Executive Officer: Have we done that, Barry? Barry S. Logan - Senior Vice President, Secretary & Director: Yes, Mark. What I would say is this, that if I – rather than giving again a dissection, I would say this. Both residential, commercial, international, domestic is all very close to the overall growth rate. There's really no highlights beyond that. The consistency is across really all the product group and markets.

Okay, helpful. And then, how much was mix a benefit to you? And within that, was the move from 13 to 14 more significant or was it moves from people just moving up to 16 and even higher? Albert H. Nahmad - Chairman, President & Chief Executive Officer: I don't know. Paul, do you want to take a shot at that?

Yeah. We've always been a more high efficiency rich company than the industry report. So, for us, we did see, obviously, the change in industry standards with the regionals did tend to push more sales up into the 14 and 16 and above category. So, we were unusual before the regional changes and then the trend continued strongly in the quarter as it has for the year to move towards more high efficiency products.

But with the 7% growth in equipment, it was 1% price mix, 2%. Can you help with that, Barry? Barry S. Logan - Senior Vice President, Secretary & Director: Mark, we haven't given out specific data like that. I would add to it by saying that since really the end of 2012 we saw a shift in mix occur since that time very consistently quarter-after-quarter and all the way through into the beginning of the selling season. And as those unit growth and mix growth and some price growth that has added to really what has been an 8% year-to-date number, I would look at things maybe as year-to-date, not just in a single quarter.

Sure, sure. Barry S. Logan - Senior Vice President, Secretary & Director: So what's important is that consistency has been occurring with the help of the new standard that plays itself out between now and sometime next year. And along with the economy, there's no reason to think that consistency shouldn't continue.

Right. Thanks for taking my question.

The next question comes from Samuel Eisner of Goldman Sachs. Please go ahead. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Hello, Sam. Samuel H. Eisner - Goldman Sachs & Co.: Hey. Good morning, everyone. Yeah. I just wanted to understand on the SG&A line, obviously, this 30 basis point reduction. I wanted to understand a little bit more what's really driving that? I have recognized the technology investments are doing that. But is that more leveraging of the head count? Are you physically taking anything out? If you can just give some more details on that that would be great. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Well, Barry, you want to take a shot at that? Barry S. Logan - Senior Vice President, Secretary & Director: Sure. Well, Sam, about two-thirds historically of our cost structure is fixed. So any sales growth and gross profit expansion is very productive to earnings growth. Our rent does not change in that environment where sales and margin is increasing. We have been reducing some of those fixed costs over the last several years, not just recent times, over the last several years. Those reductions have allowed and accommodated all the technology spending we're doing. Al mentioned the head count number to you. Two-thirds of that did not exist two years ago, to put in perspective. So, as the business expands, efficiency occurs, but also, importantly, there's a lot of investment that have gone on that have been accommodated by savings. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Just a practical example. We now have the technology at any given warehouse and we have 566 of them. And using technology and methodology that we now have not only improve the efficiency of it but…

Ryan (14:30), is it possible that your phone is on mute?

No. I shouldn't be.

Okay. Albert H. Nahmad - Chairman, President & Chief Executive Officer: I could hear him.

Okay. Go ahead.

Oh, I didn't hear that I was called. Okay. Thanks. So I guess first question for me. Why was the non-equipment growth rate so weak? Is there anything standing out there? Albert H. Nahmad - Chairman, President & Chief Executive Officer: Paul?

Yeah. There's a lot of – a lot of things go into our non-equipment sales as you recognized. This is where we have the 900 plus vendors in a lot of small buckets of sales that we do. And basically it was a little bit of a mixed bag. We had some good upticks as far as pricing on refrigerant, but demand was slow on refrigerant. We had good demand on copper in copper products but the price went down. So when you wrap it all up, there's parts of it that were growing nicely and parts of it that just didn't grow and the balance was pretty much almost a flat quarter. But nothing - Albert H. Nahmad - Chairman, President & Chief Executive Officer: And then also, in the end, our business is primarily the replacement business. We have a very small part of it in new construction. New construction takes a lot of that non-equipment supplies. So it's a combination of those two things.

So just a follow-up then. The new construction really isn't helping the business all that much? Albert H. Nahmad - Chairman, President & Chief Executive Officer: Yeah. It's correct.

Okay. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Yeah.

And then, secondly, what's driving gross margin up year-over-year and can that continue in the second half? Albert H. Nahmad - Chairman, President & Chief Executive Officer: Well, who wants to take that, Barry or Paul? I'm going to give you a quick yes, but let them explain it. Barry S. Logan - Senior Vice President, Secretary & Director: Barry. We have a very simple cost of sales. I mean for the most part, it's product cost versus what we can sell it for. So, both commission programs, technology investment, discipline, the ability to get price for service, things like that have always been the blocking and tackling that can keep going. There's no reason to say it shouldn't keep going. On the technology side, that's where, I think, we're still very young in carryng out strategy to improve it further. And young meaning some of the investments that have just been made and deployed into the field. So, we certainly think there's the ability to keep going. And it's been a great record over the last three years or four years, not just the quarter.

Right. Okay. I guess just, lastly, how did SEER 13 perform in the Southeast versus SEER 14? Was there any noticeable trends there? And then, did the price of 14 compress down the 13 at all?

This is Paul. We had what we consider to be an expected sell-through of a lot of our 13 SEER product. We still have some inventory obviously left, but pretty much everything went, fortunately in this case, the way everybody had planned it to go. As of yet, we have not seen – we've seen the price of 14 SEER holding its own and not compressing to 13 SEER. We've taken kind of a wait-and-see attitude on that as people start depleting their 13 SEER inventory. At that point, we may or may not see some compression.

Right.

But as of right now, none.

Okay. Thank you.

The next question comes from Josh Pokrzywinski from Buckingham Research. Please go ahead. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Hi, Josh.

Hi, Al. Good morning, guys. Just, I guess, first question here. On the guidance, I understand that the second half, you don't have a ton of visibility and your business walks in to the counter every day. But there were some irritants in the second quarter, particularly in Texas, which is a big market for you. I know you said that you have puts and takes around the horn. But it just seems like with the end market growth, the margin expansion you guys are getting, is there anything that you're seeing out there from a mix or price or market perspective that would suggest that this 20%-plus pace that you guys are on is not sustainable or there was something in the quarter that gave you pause? Albert H. Nahmad - Chairman, President & Chief Executive Officer: We do not see – let me put it a different way. We feel good about our 20% expectations. And we feel good about our guidance. I mean, the guidance is between 16% and 20%. And we feel – we wouldn't put it out there unless we felt good about it. And July is strong, started July strong.

And then just to ask the mix question maybe a different way. Is there any uptick or change in adoption rates that you guys can attribute to yourselves or other competitors in the space having different levels of access to 13 SEER inventory in the Sun Belt? Is there something that's pushing that adoption faster or is this just regular consumer feels better? He's buying higher SEER or willing to look at higher SEER than he was a year ago? Albert H. Nahmad - Chairman, President & Chief Executive Officer: Yeah. I don't like – this whole 13 SEER thing is such a short-term thing that I don't focus on it too much. And so I can't answer that, but maybe Paul can.

Yeah. I don't think we spent a lot of time looking at the psychology of why the 13 SEER has gone to plan. It pretty much is rolled out. As we see a lot of contractors are moving up and stepping up and adopting the 14 SEER and just going with it and foregoing a little bit of this 13 SEER rollout. Albert H. Nahmad - Chairman, President & Chief Executive Officer: I mean, we sell everything...

It's very short term. Albert H. Nahmad - Chairman, President & Chief Executive Officer: We sell more equipment than anybody in the industry. And we have what they need or want, whether it's 13, 14. Whatever SEER they want, we have it. That's our advantage. We're not a factory. We buy it and we sell it. The factories got to think more about what you're referring to.

Right. I'm just trying to understand if the consumer who still has access to 13 SEER or the contractor... Albert H. Nahmad - Chairman, President & Chief Executive Officer: I assume he does. I assume they do.

And it sounds like he does and it sounds like he doesn't necessarily need it. And then - Albert H. Nahmad - Chairman, President & Chief Executive Officer: It's a very short-term story.

Yeah. And then, just one last one. I know this is a little farther afield, but is there anything preventing you guys from getting into Cuba if we were to open trade relations there? Obviously, it would be a very small market, but just - Albert H. Nahmad - Chairman, President & Chief Executive Officer: Well, let's say that probably I'm guessing now what percentage of our employees in Miami speaks Spanish. But I would say it's over 50% and they would be delighted. But like you said, 11 million inhabitants of Cuba versus what – I think we serve 550 million through the Americas. It's nice. And if the government allows us, we'll be there.

All right. Thanks, guys.

The next question comes from Keith Hughes of SunTrust. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Hi, Keith.

Hey. How are you? Just one question on this longer term on VRF. I know how you work a lot on this. Where do we stand on that, your product offering, percentage of business? Any kind of details you can give us on where you - Albert H. Nahmad - Chairman, President & Chief Executive Officer: Yeah. It's a good product. We like it a lot. And we're very active in it. Because we are the largest distributor in the Americas, the manufacturers of these products come from Asia. And they come here because we give more bang for the buck. Perhaps Paul can fill you in, in some of the important details of that.

Yeah. It's not only VRF, Keith, but it's also the ductless version of it, the multi-split that we're starting to see move into a lot of other applications. For the first half, it continues a torrid growth. I just wish it was a larger percentage of the total sales of Watsco. But at the rate of its growth, at some point, it's going to be material. And we're going to spend more time talking about VRF and our duct-free splits than we talk about today on this 13 SEER versus 14 SEER issue.

Are the duct-free splits – is that the majority of your business right now in this world?

Are the duct-free splits?

Let me say another away. Is the duct-free split (23:28) than the VRF systems?

Actually, it's – with Watsco, it's fairly close. Our split but is more on the duct-free than it is on the VRF, but the VRF is growing at a faster rate than the duct-free.

And from an acceptance perspective on the VRF, is this going to be just an evolution over time or will there be some sort of turning point where it starts to become more accepted amongst the contractors?

Well, my response here is going to be more philosophic than it's going to be factual. And yes, I think it's been evolutionary, but it's been a rapid evolution, as you know, in the last several years. And, of course, my hope and dream is that there is a tipping point where it starts accelerating even faster. Albert H. Nahmad - Chairman, President & Chief Executive Officer: But also, Keith, you have to remember all the major U.S. OEMs have – with the exception of one, have associated themselves with an Asian manufacturer to bring those products in the United States. So it will have growing attention in the U.S. market.

Okay. Thank you. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Yeah.

The next question comes from David Manthey of Robert W. Baird. Please go ahead. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Hi, David. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Good morning, guys. First off, a question for Paul, I guess. Do you have an idea what the mix of 14-plus SEER is today? And then the reason I'm asking that is if we look out a year from now, where do you anticipate that being? And I know you're going to say it's higher, but can you put some guard rails around it, an idea what the percentages are?

Yeah. It's well over 50% of our business. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. And a year from today, what, 60% or -

It should be because the 13 SEER in the majority of our markets is phased out. The only place where we'll have access to 13 SEER is going to be in the Upper Midwest and the Northeast right now. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Right. So.

Naturally, it's going to increase with us. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): But I'm trying to get an idea of how much it's going to increase by. Would it go to 80% or – again, given your concentration in the Sun Belt, it would seem like it could go up that much. Is that reasonable?

Dave, I'd have to do the math on that. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay.

I really would. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. And then, on the technology, is there any timelines we should know about or can you give us an update on where you stand on these things? Is there - Albert H. Nahmad - Chairman, President & Chief Executive Officer: That's a great question, Dave. And I would say that we're at the beginning. We now have provided apps to our contractor customers, which they can use to be very efficient in their work. They can determine what models look like, what their building materials are, what their – use it for diagnostic purposes, order what they need on their smartphone from us. And those apps are being revisited and improved constantly. We have what we call business intelligence, internal use of data. We now have real-time data in the hands of many, many people in our organization, so they can see how they're doing, how they can do better. We also have e-commerce. It's just emerging all the way across, hopefully, to cover our 577 locations because e-commerce is a wonderful way for our customers to do business with us. And then we also have sites that we're experimenting with, with consumers to see what their appetite is for air conditioning on consumer sites. But this is all just beginning. As I say, I don't think our investment is going to get any less. I think it's going to grow. And I think that's good for the shareholders long-term. We have the scale to be able to do this. And, so far, we've been able to do that and still report record performance. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): And are there any metrics you can give us as it relates to the contractor-facing technology in the apps in terms of users or dollars you're driving... Albert H. Nahmad - Chairman, President & Chief Executive Officer: We have that data, but we're not ready to provide that. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): All right. And then the last question on the head count additions, 100 year-to-date. Are those sales-focused or are they technology people? And what are your goals for the remainder of the year? I think you said in the release they're mainly field. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Well, the first part of the question is it's all of those things. And, secondly, we will be – particularly in the technology area, as we find talented people, we will be adding them. And I expect our talent in technology will grow. As I said, I still think it's beginning. We have 150 more or less in that world and that should grow. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Got it. All right. Thanks a lot, guys.

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

Hey. Good morning. Hey, Al, you mentioned July was off to a strong start. Can you just talk – was that an acceleration out of 2Q, maybe talk about equipment versus non-equip? Albert H. Nahmad - Chairman, President & Chief Executive Officer: Not going to get into that detail. I can just tell you revenues got stronger towards the end of June and they're continuing in July.

Okay. That's helpful. And then, I guess on your comment about M&A, I mean, I guess you haven't done straight deals over the last few years, but you have had some nice bump in earnings growth as you bought the additional stakes in the.... Albert H. Nahmad - Chairman, President & Chief Executive Officer: Yeah. We had one of those.

Yeah. I mean I guess you had one in 2012 and 2014, but I mean – so if that provided 3%, 4%, 5% incremental earnings growth, where do you see replacing that if you have a period of lighter M&A? Albert H. Nahmad - Chairman, President & Chief Executive Officer: Well, Keith, I'm going to give you the long – look, over the last 25 years, our total shareholder return, the compounded growth rate is 20%. 25 years of 20% while we've been in the distribution business. The last five years, it's been 20%. And I don't believe that we have to be buying any companies to continue that growth rate. Now, this doesn't mean that if a large one doesn't come along and we like the business, that we won't pursue it. We've demonstrated that we can grow for 25 years at a very high rate. So, I'm not one to – and I know you do. You feel that we have to be making deals to keep our growth rate up. And I don't believe that. I believe we've demonstrated just the opposite. I mean I know you like Lennox. I don't see what they're buying that bumped up their earnings. They're doing it internally.

Okay. Thanks, guys.

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

Hi. Thanks. Good morning, guys. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Good morning.

I wanted to ask about some of the consistency that you've had around your growth rate and see if we can learn something about whether it's the health of the Sun Belt end market growth or if you're starting to get some initial market share from the investments into technology and investments into people. Albert H. Nahmad - Chairman, President & Chief Executive Officer: All right. You're asking me, are we getting growth from our geographic position versus our technology?

Yeah, right. Is it market growth that you think you're getting or is it market growth plus some market share gains? Albert H. Nahmad - Chairman, President & Chief Executive Officer: I think it's both, yes. I think we are gaining share market growth and gaining share. We're pretty good at gaining share. Barry S. Logan - Senior Vice President, Secretary & Director: Walter, I would – just add to that. I would say our markets – the markets we participate in and do so well in add to the stability of the company. I mean being in the Sun Belt year-after-year is a great place to be from a stability point of view. We still have very demanding, intense customers with intense competition. So, the only way there can be outsized growth is through market share gains. So I think the markets give stability, performance gives the market share and that's what we've been doing so well at.

Okay.

And if I can add one more thing to that. And that is in the last three years to five years, we've been able to state that we have gained market share because we had confidence that we were gaining market share. This year, we haven't mentioned market share only from the viewpoint that there is so many unusual activities going on in the market share with the 13, 14 SEER transition. It has been hard for us to get a read on industry numbers. So we feel good about our performance, but we only state what we know.

Okay. All right. That sounds good. All right. Thank you very much, guys.

There are no further questions at this time. Albert H. Nahmad - Chairman, President & Chief Executive Officer: Terrific. Well, thanks for listening. And I look forward to the next conference call. Bye.

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