Good morning everyone and welcome to the Watsco, Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Albert Nahmad. Please go ahead.

Good morning and welcome to the Watsco second quarter earnings call. We are coming to you from sunny Miami, where it’s very warm. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President. As we always do, before we start the usual 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 on to the report. Watsco achieved record second quarter results. Our performance includes record sales, profits, operating margins, net income and earnings per share. Sales growth was driven by increased unit demand, price and mix for replacement systems. In partly Watsco’s results were achieved while continuing to make significant investments in our industry leading technology platforms, as well as the addition of customer facing employees to expand sales and service capabilities. As we mentioned in the release, we are challenging our employees to accelerate utilization of our innovation to build market share, develop more efficient processes and reduce cost. A number of initiatives are under way, all with a goal of improving sales of profitability over the long term. During the quarter we raised our annual dividend to $5.80 per share. 2018 marks the 44th consecutive year that we have paid dividends. Future dividend increases will be considered in light of investment opportunities, cash flow, our financial condition and business conditions. Our balance sheet remains conservative with a debt to total cap of 8%. This positions us to take advantage of almost any size investment opportunity that may come along. As always, the second half of the year will be a strong cash flow period.…

Thank you, sir. [Operator Instructions]. The first question will come today from Ryan Merkel with William Blair. Please go ahead.

Good morning Ryan.

Hey, good morning.

Is it warm there as it is here?

You know, it's been warm in Chicago this summer, so it's going to help the HVAC industry I would think. So a couple of questions on gross margins if I can. Firstly, can you quantify the year-over-year impact from the non-recurring refrigerant boost? Just wondering how big that was?

Sure. Barry?

Ryan again, there was a spike in price that was temporary and short term last year. It was about a $4 million impact on last year's earnings that did not recur this year.

Which is $0.09 per share, is it not?

That’s correct, yeah.

Got it, okay, that’s sizeable. And then secondly, the timing of vendor incentives, what was the impact there in the quarter?

Again, it’s driven by the timing of purchases and it's probably a similar magnitude Ryan and again, it's a matter of timing of when we make purchases and when we pay vendors.

Okay. So then the important question is, as we look to the second half, it sounds like given the pricing environment and maybe the timing of vendor incentives, should we expect the gross margins could improve year-over-year in the second half, such that you might get that flat for the year.

All this is moving pieces. I mean Paul you may want to comment on refrigerant, but I can take a stab at it. And first, we do think that's a temporary thing from last year and is somewhat not in the cards going forward. The purchasing side of vendors and rebates and discounts, things like that that should flatten out over the course of the year. Something I think we just needed to deal with this quarter, in this conversation, and pricing also has been introduced across most of our OEMs for the second half of the year. Obviously there was momentum in pricing and margin for equipment in the first half and it’s an opportunity to do that incrementally in the second half. So where it plays out at the end of year I can't say, but we like the general conversation of this.

Okay, just lastly and I’ll turn it over. How much did price contribute to the 5% total company sales growth this quarter?

Most of the energy we talk about is on equipment, equipment being about two-thirds of our business. And so if I dial in on the 6% as Al's comments suggested, both unit volume, price and mix contributed to the 6% and generally speaking we'll leave it at that.

Very good. Thanks a lot.

The next question will come from Dave Manthey with Baird. Please go ahead.

Good morning David.

Hey Al. Good morning everyone. So first up on this refrigerant issue, I guess the $4 million is the difference between the current price for R-22 of $11 or $12 versus something like $20 last year. And Barry, based on what you said, are we to assume that might be the case in the third quarter as well?

No, we're not suggesting that. There is an overhang to this for the rest of the year, no.

Okay, and this is all price. There was not some volume influx in the second quarter last year, it was just the price?

That's correct.

Okay, alright, and then on the price mix impact on equipment this quarter, you said it contributed to the 6%, but you're not saying how much. But we should assume that you'll pick up something in the third quarter based on the mid-year price increases. Should we assume another percent maybe, 2%, I’m just – any idea as far as what the incremental might be from second to third quarter.

Paul, maybe you have some insight. I think again we said – go ahead.

I can't calibrate exactly how much it is, only because the OEMs stayed with their price increases across the board. So we had OEMs going up in June, July, May, August and so it's going to be a difference for us in the mix as well as you know when the timing of the price increase actually occurred. Very unusual, I've never ever seen a price increase in season before.

Right, do you know Paul the increase in the number of units you shipped this second quarter versus second quarter last year.

Yeah, we don't – we do not disclose that.

Okay, alright. And just overall I guess you’ve over the past couple of years, you’ve not provided any guidance at this point in the year, but I think from, I don't know going back to 2010 or even before, you normally give some level of guidance. Is there anything you want to provider or qualitatively discuss about the year at this point out?

Well, we're not going to quantify anything, but we do want to tell you we are expecting record performance obviously.

Right, okay, thank you.

The next question comes from Brett Linzey with Vertical Research Partners. Please go ahead.

Thanks, good morning. Yeah, just wanted to come back to some of the technology strategy rollout. In terms of the business intelligence and the data analytics rollout, what percent of the footprint currently has those tools and is live and what's the cadence of that penetration look like here over the next several quarters.

Good question. AJ?

Yeah, the answer is 100% has the tools and the technology and data at their fingertips now, but the data and the insights and the dashboards and scorecards and reports and analytics will forever evolve, right. There is more data sets being added to the mix, there's new math and new dashboards and new ways to torture that data to derive insights and eventually see trends and patterns and opportunities and so while everybody has it, the usage and the value creation and realization of the usage should continue to increase.

And then I guess just in terms of SG&A leverage, I mean how should we think about as that rollout or you know a big portion of that rollout is now live how does SG&A leverage or SG&A as a percent of sales look into 2019 and 2020? What are some of the expectations and targets there?

You know it’s hard to quantify that because we are open ended with respect to technology investment. We are also long term orientated; we are not a quarter-to-quarter sort of investor. So I would not to venture to say, to answer the question directly just to – we just think we are going to continue to operate at record levels while we continue to make for us anyhow very large investments in technology because of the long term focus that we have.

And then I guess just in terms of the higher customer facing investments.

Yeah, that's a lot of people.

Yeah, another year-over-year headwind in the quarter.

Well, that I can answer. We’ve added – what is Barry, 300 people?

In the last two years almost 300, about 140 give or take.

I think that’s top off.

And what was the drag from that – or I mean in the first half or in the quarter?

I don’t know. Did you quantify that Barry?

Yeah, it’s about $3 million to $4 million of impact in the quarter.

In the quarter, okay. Great! I’ll pass it along, thanks.

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

Good morning Chris.

Hey, good morning Al. Thanks for taking my questions guys. I guess first up, just any kind of update on Sigler as far as the coordination with the other owners there or kind of how you’ve been working with the guys on the ground. Just any commentary would be helpful.

Yeah, we can add. Barry, tell them about the small addition.

Well first, we did close on a purchase to add 1.4% to our ownership, so we are at 36.4%. The concept and the process, the technology we designed with the family worked and we’ve added a small piece to that. As far as the remaining ownership, again it's up to the family of when and how and to what magnitude they want to sell. From the business perspective Al, I don’t know what you want to cover beyond that.

They're doing very well. Their performance is very good and it should be, it's a great company.

And then just thinking about you know on the ground, I mean obviously we see the price increases coming through from the vendors. But as far as that dealers you are working with and that kind of thing, how’s acceptance been there? I mean, has the pushback been as severe in years past or are they just kind of pushing it onto the customer at this point?

Paul?

The acceptance obviously has a little bit of a snarl to it, but generally speaking the customers are accepting the increase. There is such strong and compelling evidence out there with the tariff change, with some of the freight issues that we are all running into to justify and rationalize and increase in price.

Got it, and just a last one for me. Since we are kind of coming up on the hurricane comp from last year, I think it was $0.10 if I remember correctly. You guys expect – you’ve already recovered most of that repair damage over the past 12 months or is that something that’s still going to be a meaningful benefit on a year-over-year basis here?

Well, the hurricane affected only parts of our market, I mean obviously important parts, but that's a very hard question to quantify. I just think we're going to have a very good year and it's hard to say how much of that comes from the hurricane impact last year.

Thanks again guys.

I think there is two words in hurricane discussion. There is the world disruption and that is what happened last September and some of that business came back in the fourth quarter. The second world is destruction, and there certainly was destruction in some limited markets in Florida and Houston. But we said many times now in the big picture, that's not a material thing to all of Watsco.

And that's a better explanation than mine.

Thank you.

[Operator Instructions]. The next question will be from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Good morning Jeff.

Hey, good morning. Carrier mentioned in their call some issues in June with trucking shortages. Can you just speak to what you're seeing there and if that’s impacting momentum of the business?

But that might reflect itself in the amount of inventory we are caring, but go ahead Paul.

Yeah. There has been a lot of conversation in the press about truckers and the lack of drivers, and to-date – knock on wood, yes there was a little bit of an issue that Carrier had. We compensated for it obviously by pre-buying the inventory and bringing it into stock in anticipation of the trucking shortage. So to-date Watsco really hasn't been impacted by a shortage of inventory because of truckers.

Okay, great. And then just on the margins, I mean I understand the refrigerant dynamic, but you know we're certainly in a good environment. You seem to be getting price and mix. I’m just wondering what might be holding back a more meaningful improvement in the margins?

I'm not sure I understand the question.

Well, I mean if you kind of pull out the Sigler, the incrementals were like 9% in the quarter and I think you guys typically are around 15%. It just seems like with price and mix you know you would be able to hit that bogie.

Barry, I don't get it. Do you have an answer, is it?

Yeah, first of all it’s the first half of the selling season and we need to have a conference call to talk about our second quarter. I think the whole of our selling season when the third quarter offers that opportunity to have better and better margin expansion, I think we called out a few items in the second quarter that did.

I mean I – excuse me for the interruption, but even margin is at a record high. Are you aware of that Jeff?

I mean, I have margins down year-over-year and you had Sigler and other adding to that which was...

Watsco EBIT margin is at a record high. It doesn’t mean we don’t have opportunity to get better if that’s your inference, yes.

Okay thanks.

[Operator Instructions]. This concludes our question-and-answer session. I would like to return the conference back over to Albert Nahmad for any closing remarks.

Thanks very much for your interest in our company and we look forward to some of you visiting us in Miami to get a first-hand look at our technology platforms and our culture. We really wish you would come and thank you for your interest in our company. Good bye now.

And thank you sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.