Albert Nahmad - President and Chief Executive Officer Barry Logan - Senior Vice President and Secretary Paul Johnston - Vice President.

Josh Pokrzywinski - MKM Partners Ryan Merkel - William Blair & Company Matt Duncan - Stephens Inc Keith Hughes - SunTrust Winnie Clark - UBS David Manthey - Robert W. Baird Walter Liptak - Global Hunter Securities Samuel Eisner - Goldman Sachs.

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. Please go ahead..

Good morning, everyone and welcome to our first quarter conference call, where today will be all good news. This is Albert Nahmad, President and CEO. With me is Barry Logan and Paul Johnston. As we always do, here is the cautionary statement.

This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the Safe Harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. Watsco continued to perform very well during the first quarter. The momentum from 2013 is continuing.

Sales, operating income, net income, earnings per share and cash flow reach all-time highs. We enjoyed another quarter of growing replacement demand and a continued movement towards higher efficiency systems. The combination of sales growth, higher selling margins and improved operating efficiencies produced a 23% increase in earnings per share.

Also, we have confidence in 2014 will be a very strong year of both earnings growth and cash flow. And we are pleased to announce our dividends will increase by 50% to an annual rate of $2.40 effective with our payment in July. Now, for the details. Revenues grew 7% to a record $763 million. Domestic sales of residential HVAC equipment increased 13%.

Non-equipment products increased 6% and commercial refrigeration products increased 2%. Gross profits rose 7% and gross margins improved 10 basis points. SG&A as a percentage of sales improved 30 basis points. Operating profit increased 16% and operating margins expanded 40 basis points.

$25 million of operating cash flow was generated in the quarter compared to a cash use of $17 million last year, a $42 million positive swing. Our net to EBITDA ratio remains under one times and our debt to total cap ratio is 17%.

We will provide an outlook for 2014 during the second quarter conference call when we have a look at trends in the selling season. Now, with that said, Barry, Paul and I will be happy to answer your questions..

(Operator Instructions) The first question comes from Josh Pokrzywinski of MKM Partners. Please go ahead..

Hi, good morning guys..

Good morning, Josh..

Al, could you just talk a little bit about the progression through the quarter? Any interruptions related to weather and then exit rates as we get closer to the selling season here for first question?.

Good question, Josh. Yes, the weather impacted regions of our country, particularly the Northeast, we think that’s temporary, but it did impact us. And I am glad to say I think we’ll recover from that as the year progresses..

So, if I look at the overall U.S.

equipment business, resi equipment business up 13%, should I think of that as being something on the lower end to start the quarter and then progressing higher as we get into March or is that putting too fine a point on it?.

Paul, you have a comment on that?.

Yes, I think that’s too fine a point, Josh, because the volumes we are talking about in the first quarter as you know they accelerate during March. March is half of our sales. So naturally it did increase as the quarter went on..

Don’t forget, Josh, this is a continuation of what we find last year. So it’s just continuously getting better..

And then can you comment at all about how pricing has been on the resi side, are you seeing OEMs coming with price increases how is that sticking.

And I guess on a related point I noticed you guys took in some more inventory was that in anticipation of more increases to come or just timing and build for seasonal demand?.

Go ahead Paul..

The price increase is pretty much across the board had been announced in the fourth quarter. Once again for the first quarter you saw some of its stick, some of it obviously you have a harder time pushing it through, you have some longer term commitments to those contractors.

As far as the inventory is concerned, our inventory pretty much is in line with our sales, it’s up roughly 10% from the first quarter last year and it’s the inventory turns remained pretty much in line. So we have double digit growth in equipment you are going to have a growth in inventory also..

Understood. And then just one last one for me I know it’s still a small part of your business and there is plenty of room to outgrow.

Any comment on how the commercial business did and the sense of what you are seeing out there in the market maybe more broadly?.

Yes, commercial wasn’t widely exciting, it was basically I mean when you look at it in total it was flat, when we look at the individual companies we had we probably had a little bit of shifting around due to some of the weather conditions that we had in the Northeast and the Mid-Atlantic on some jobs that maybe we had a little bit of a delayed delivery there, that’s all..

I would agree with I think the commercial was half – more impacted in the first quarter certainly in the residential..

Impacted by the weather, you said?.

Yes, because of the markets we are in the Northeast..

Got it.

And there are signs now much like residential but that is they are starting to improve as the weather turns?.

Yes..

Excellent. Alright, thanks guys..

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

Good morning Ryan..

Thanks. Good morning everyone, nice quarter..

Thanks..

So want to start off with a couple of questions on sales, could you just give us the growth rate for the international markets in the quarter obviously the U.S.

was pretty darn good?.

Pretty flat..

Pretty flat, okay.

And do you have the Canada number handy, I am just curious?.

We wouldn’t break that out..

You wouldn’t break it out, okay.

Alright and then do you have the volume and price mix breakdown for that strong growth on the equipment side?.

Go ahead, I didn’t know whether we should talk about those things, but go ahead, you start..

I don’t want to give any detail on that but we are – as we indicated in the release we are seeing a stronger presence with above 13-SEER equipment sales, a higher efficiency product.

And as a matter of fact with some of business units we would have go back to 2010 to see those sort of levels of higher efficiency products when we have the tax incentive..

Yes, that market is showing some good things..

Yes, I mean just to answer it a little more directly we did see double digit unit increases in the quarter again which as I have said is really a continuation of what we have been saying for last few quarters now..

Alright, okay, great.

And then last one for me, gross margins I am pretty impressed you are able to continue to inch that up especially given that equipment which is lower margin is growing faster, so what is it you are doing on the selling margins side to have those gross margins or…?.

I think it’s moving towards higher efficiency, most of it, yes..

It’s that and did the price increases in the OEs helped you on the gross margin as well?.

Always helps..

It always helped. Great. Well, thanks guys. I will jump back in queue..

Your next question comes from Matt Duncan of Stephens Inc. Please go ahead..

Good morning Matt..

Good morning Al. Good quarter..

Thanks..

First thing I am curious about is on the equipment side is that still at this point mostly being replacement driven or do you feel like…?.

Yes, by far I mean we are replacement house. On an annual basis the new construction would be at most 10% to 15% so what you are seeing is the unraveling of the demand for replacement..

Okay so it’s just this pent up demand that we have all been expecting for some time it’s just coming through, yes?.

The good news of that is new construction is cyclical, it goes up and it goes down. We don’t like that. I mean we will participate in it that we really focus on the replacement business, that’s our core business..

Sure. Looking maybe this is for Paul at the recent I guess settlement with the DOE on the regional energy efficiency standards. It looks like instead of January 1, 2015 there is now going to be a little bit of a grace period for the install of 13-SEER units in the Sun Belt.

Is that going to cause any noise in the market or is the market pretty much already shifted over the 14-SEER at this point anyway?.

It’s hard for me to talk for the market, I can talk for Watsco. But our people have been moving without the regional standard, so a lot of the movement has been going to the higher efficiency product just for energy rebates that you get or utility rebates that you get or from energy star credits that the builders get in the Southeast.

So we’ve been seeing a movement to that. The real change is you’ve got 18 months now and an extra 18 months to adjust your inventories to make sure you don’t have any standard inventory which..

(indiscernible), it doesn’t matter because we can move our goods throughout the nation..

Yes, I guess that is the thought is you guys have the ability to move product around, but it maybe helped some of the regional guys a little bit?.

Yes..

And then last thing I know we’re early in the selling season if we even want to say we’re there yet since it’s still been pretty cool in a lot of the South. But as you look at equipment growth so far is it – your inventory was up, Paul I think you said 10% in the first quarter.

You’re seeing a good sell-through so far in the selling season?.

I’ll respond to that, April showing mid single digit growth rates in revenues and double-digit unit growth rates..

Okay. Thank you all..

That was early in the April if through the first half of it..

Sure. It’s a continuation of what we saw in the first quarter..

The next question comes from Keith Hughes of SunTrust. Please go ahead..

Good morning, Keith..

Hi, Albert. Our question is on the other age fact accessory sales, it seems a little growth last couple of quarters and we’ve seen in sometime there.

You talked about what’s going on, how much that market and how much potentially cured?.

I’ll give you a general comment. You’ll see that growth whenever we start participating in new construction that’s because of the offering that we have that serves in the infrastructure in the non-equipment.

Paul, do you want to embellish there?.

Yes, the non-equipment part sales obviously are tied to – the non-equipment, non-part sales are the supply side of our business and that’s growing because of new construction.

The other equipment that we saw increasing the parts that we saw increasing they’re pretty much related to some repair activity where particularly in the Mid-Atlantic all the way through the Northeast..

And finally on refrigeration any comments there lower growth small segment for you this, comments thereof what you see in the market in terms of trends for the year?.

Well there are some commodity pricing shifts that occurred with refrigerant. I wouldn’t say that a normalized performance for us particularly you have to wait until refrigeration, refrigerant pricings which is begun to stabilize I think then we’ll get a real feel for what growth rates all for in the future..

Okay. Thank you..

The next question comes from Winnie Clark of UBS. Please go ahead..

Good morning, Winnie..

Good morning. Could you talk about you highlighted balancing the return of cash to shareholders with free investment in the business. Could you talk about the current M&A pipeline I know that you have the option to purchase the additional 10% in carrier in July and you've indicated you are likely to do that.

But anything you’re seeing with independent distributors as well?.

We get that question every quarter and the answer as always we do have a pipeline, we are in conversations constantly and so that’s the best I can do regarding that. And on the question of the auction I want to once again state that we will exercise that option in July, the additional 10% of the joint – the original joint venture..

In terms of the dividend increase so and coming a bit earlier than we actually thought, we shouldn’t read that as there’s you’re not seeing as much in the pipeline so you're moving more in the direction?.

Not at all, I wouldn’t read that into at all..

Okay, great..

I am never been more optimistic about that’s out of the business because we’ve reached a certain size where we have to do transactions that mean something to us and I’m optimistic we’re going to get those done..

Okay, great.

And then you talked about the ductless opportunity, any update there in terms of the trends that you’ve been seeing?.

More of the same. It’s a high growth area but still followed in the overall scheme of things and we intend to be a major player..

Have you ever provided – do you provide the breakdown you’re taking about the higher efficiency and higher sales in the greater than 13-SEER product lines.

Can you tell us how that’s increased in terms of a percentage of the overall mix?.

I am not sure I understand the question..

Just what is the percentage of your mix that’s in the higher SEER….

No, well that’s not something we would provide to the competition..

Okay, perfect. Thank you very much..

Sure..

(Operator Instructions) The next question comes from David Manthey, Robert W. Baird. Please go ahead..

Good morning, David..

Hi, Al. Good morning. First off, I think April is when your mobile app was going to go live and that the customers of Baker were going to be able to purchase from that app.

Is there anything you can share with us on early returns on that effort?.

See, I think not. And I am not sure that we gave that information correct, I don’t know that we went live on ecommerce on Baker, I think we went – we are still in development across the board on all of our subsidiaries in terms of ecommerce or the latest version I should say, but there is nothing significant to report in ecommerce at all, David..

Okay..

Then we are investing heavily to be the best and the strongest in the industry in ecommerce and any other related technology..

Okay. And then on related technologies, what about the business intelligence software, any update on…..

Yes, it’s a good question and we feel very strongly about it. And we are investing in it. And it’s going to take years to get the kind of benefits we want, but we are getting incremental benefits as we develop it. And we want to lead the industry in it. I think we are committed to that..

Okay. And then in terms of this – the price mix question that has been asked a number of ways and times here.

Looking past equipment, which it sounds like you did get some benefit, what about parking supplies and commercial refrigeration, is there any pricing component of those two segments of the business?.

Paul, you want to deal with that?.

Yes, there is some pricing considering they are obviously the margins are higher when you sell replacement parks, but the opposite would hold true if you are selling more supplies, generally don’t have a very, very, very high margin through them. So they kind of balance each other out..

Okay. And then last question if I can here. Could you share with us what percentage of carrier enterprise today is parts and supplies, I think when you bought it was less than 10% or when you went into…..

That’s not something we are going to report on either..

No.

Are you still making progress though and there is still opportunity there?.

Yes, I can answer that as primitively, yes..

Alright.

And then would you share with us what percentage of your sales today is R-22 gas?.

Well, we are going to do well over $4 billion this year. I don’t think it’s a material number..

So low single-digit percentage?.

Paul?.

Yes, it’s low single-digits..

Yes, very low..

Fair enough, fair enough..

I mean, I understand the question because it ties into the earlier question, refrigeration. It did affect the refrigeration profitability and the revenue stream, but we see that as a temporary thing, because prices have stabilized..

Alright, guys. Thanks very much..

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

Good morning, Walter..

Hi, thanks. Good morning and great quarter especially on the leverage..

Thanks..

And I apologize if I read this wrong, but my understanding was that there would be a little bit more guidance for the full year. And I understand that you have some data points here…..

That’s a good issue. We struggle with that, but I don’t want to let this great optimism that I seem to be enjoying right now get me carried away into too early an outlook putting together an outlook for the year. So it was a struggle in my mind, in our minds that we decided not to provide it now.

So we will do it when we see something more concrete in the second quarter..

In your comments today, you did give us some clues about what you are thinking…..

Yes, the first few weeks of April..

Over $4 billion – well over $4 billion in sales, is that what we should be thinking about?.

I think well I can say that. I mean, we feel confident about that belief. I didn’t realize that was in the disclosure, but okay..

And then double-digit EBIT growth….

I mean, that’s how we are experiencing now..

Okay.

Should we think that, that’s something that could continue throughout the year?.

I’d like to hope so..

Can you give us double-digit can be a pretty big range, are you thinking 12%, 15%?.

I think we were fine to comment, I couldn’t do better when I have already done. We just feel good about it. I mean, this is not news here. It’s really continuation of what we saw last year..

Okay, good..

And we feel that we have got the network to take advantage of the new market developments. And then we also feel although we don’t have data enough to substantiate what I am about to say that we are gaining share..

Okay. Okay, good. Well, we think so too. So thank you and we will talk to you by then..

Thanks for your interest..

The next question comes from Samuel Eisner of Goldman Sachs. Please go ahead..

Thanks. Good morning everyone..

Good morning. I haven’t seen you at a restaurant in New York in a long time..

Sounds good. So, in terms of just a couple of clean up questions here, just on the working capital this quarter, it seems as though you are just not investing as much, it was only about a usage of about $10 million or so.

So just curious what the delta is year-on-year? Why was it so much of a build last year and why is I guess there is so I guess little this year?.

Barry, you’re going to answer that?.

Yes, again we pick our timing and we make our pre-season program as we see it and this year is a little more. Lots of the build coming into this year and part of that stem is the pricing, last year’s price increases a little stronger than this year. So again it’s just being a merchant and being effective when we make the decisions..

Understood. I appreciate that. And then just secondly I guess on the guidance question that was just asked, just to follow up on that. I mean in your mind, Al, you said that you struggled with giving guidance; you didn’t want to get too carried away.

What about your business as it stands today, is it different than this point last year that doesn't allow you to give guidance?.

Well, we have done guidance before most of the timing, the second quarter sometimes we do it in the first quarter. I guess don’t want to carried away with my optimism. It’s all good, it’s something in what I am saying..

Alright. Thanks so much..

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 I just want to thank everyone for their interest in our company and I look forward to another positive hopefully positive next quarterly review. Thanks again..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..