Albert H. Nahmad – President and Chief Executive Officer Barry S. Logan – Senior Vice President & Secretary Paul W. Johnston – Senior Vice President for Office of The Chairman.

Michael W Sang – Morgan Stanley & Co. LLC Ryan Merkel – William Blair & Company David Manthey – Robert W. Baird & Co. Will Gabrielski – Stephens Inc. Walter Liptak – Global Hunter Securities, LLC Keith Hughes – SunTrust Robinson Humphrey Jeffrey Hammond – KeyBanc Capital Markets Mark Douglass – Longbow Research Rajan Gupta – JPMorgan Chase & Co.

Samuel Eisner – Goldman Sachs Winnie Clark – UBS.

Good morning, and welcome to the Watsco Second Quarter 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. This is Albert Nahmad, President and CEO. With me on this call is Barry Logan, Senior Vice President and Paul Johnston, Office of The Chairman. First, our 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, onto our earnings call.

Well, let's start off by saying that Watsco continues to operate at record-breaking levels. We will first discuss in this conference call our financial results and then discuss the investments that are being made to accelerate growth, build market share, and bring innovation to our business.

All-time highs were achieved during the quarter in sales, operating income, operating margins, net income, and earnings per share. Revenues grew 4% to a record $1.2 billion during the quarter.

In the United States, sales of residential HVAC equipment increased 8% reflecting market share gains and double-digit growth in sales of high-efficiency systems. Commercial HVAC equipment increased 6%. Other HVAC products increased 2%. Commercial refrigeration products increased 5%. Domestic revenues increased 6% and international sales decreased 4%.

Gross margins improved 10 basis points and SG&A as a percent of sales decreased 20 basis points. Our operating margins increased 30 basis points to 9.7%. Now, 9.7% is a record operating margin for any quarter in Watsco's history.

New records were also set for net income, which increased 9%, and for earnings per share, which increased 8% to a record $1.60. For the first-half of 2014, revenues were up 5% to $1.9 billion.

During the first-half, sales of residential HVAC equipment in the United States increased 10%, from a combination of strong unit growth and an improved sales mix of high-efficiency systems. Gross profit margins increased 10 basis points and SG&A as a percent of sales decreased 20 basis points during the first-half.

Operating margins expanded 30 basis points to 7.7%. New records were established for net income and earnings per share during the half. Net income increased 13% and earnings per share increased 11% to $2.08 per share during the half. Now for dividends, our quarterly dividends increased by 50% to $0.60 per share.

This is the 40th consecutive year that Watsco has paid a dividend. The balance sheet remains conservative with debt to EBITDA of 1.2 times at June 31, 2014. On July 1, 2014, we exercised the second option to purchase an additional 10% ownership interest in Carrier Enterprise for cash consideration of approximately $90 million.

And this marks the five-year anniversary of our joint-venture with Carrier, which has been an unqualified success for both companies. We estimate earnings per share accretion from this transaction of $0.20 to $0.25 per share over the next 12 months. Now onto our outlook. Our 2014 outlook is for – earnings per share of $4.20 to $4.40.

That represents an annual EPS growth rate of between 14% and 20%. And now I want to talk about investments in our company. To begin with we are highly confident in the foundation of our business and the long-term growth prospects of our industry. So we are stepping up investments to accelerate growth and performance.

Now these investments we categorized into four buckets. First, more people to sell products to service customers and build share of market, secondly, our broader product offering to increase our commercial coverage, thirdly, more locations to increase our density in local service. And lastly, more technology to enhance the customer experience.

Over the last 12 months, we have added over 200 persons to accomplish these goals and we earned the market for more great talent. Here is a relevant data. We have added 60 marketing leaders and salespeople. We have added 30 product specialists with the focus mainly in the commercial and VRF markets.

We have added over 80 store personnel to add greater service capacity throughout our network. We have opened eight branches and plans to open 20 more over the next 12 months. We have added over 30 technology positions to develop and launch apps and software that will differentiate our business from our competitors.

This is a great time for our industry and the Watsco team is focused on expanding our market leading position. With that said, Barry, Paul, and I will be happy to answer your questions.

Are there questions, Andrew?.

And we will now begin the question-and-answer session. (Operator Instructions) The first question comes from Michael Sang of Morgan Stanley. Please go ahead..

Good morning..

Good morning..

Thanks for taking the question. I wanted to dig into the guidance model a little bit, and specifically can you talk about how the guidance or what the guidance implies for sales and margins in the back-half? It sounds like you are pretty happy about the top line and maybe you're seeing some step-up investments.

So can you guys maybe decompose that or give us a little bit more color?.

Well, we don’t typically breakdown anything further than that Michael, because it’s very difficult to predict the impact of the markets that we serve from quarter-to-quarter, that’s why we try to look at it on an annual basis. And that’s why we wait until we have some visibility, which is at the end of the second quarter.

Is there any color, Barry, that you like to add?.

I don’t think so, Michael. I mean the trends that you're seeing are really over the last year, the last several quarters with relative consistency in the United States, some inconsistency in the international markets, but as a composite pretty consistence. I don’t think we're thinking much differentially as we go through the rest of the year..

But would you say it’s fair, just the characterization that that you guys are pretty happy with the top line and maybe, July month to-date the trends hasn't gone materially worse?.

Well, I would say that we are always looking for more growth and that’s why we are investing. But I think we have very solid grounds. I think we are a very strong company. I think we are the best in what we do. And you asked about July, I like what I see, it’s early, but I like what we see..

Okay, thanks.

And then secondly, on the sort of your investments comments, did you see these sort of incremental costs as something you need to do to drive growth above market or do you see it more as something you need to do in response to what you are seeing competitively?.

Well, that’s a good question, but no, we are not concerned at all with competitive issues are, because I think we are the leader. And it is exactly what you said. We want to increase our performance for our vendors. That’s a big thing in our thinking. We want to always gain share for them if we can. So we are investing first, because we can.

We have the capability to do that and secondly because that’s what we do. We develop share gains and we develop growth and revenues and earnings for our stockholders..

Great, thanks..

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

Good morning, Ryan..

Good morning, everyone. So my first question is on Carrier JV.

Can you just give us a sense for what you are assuming that adds to second-half EPS as part of the guidance?.

Barry, you want to take that out?.

Yes, Ryan. As we said in the commentary $0.20 to $0.25 is our estimate for an annual period, and it’s pretty evenly split between this year, the rest of this year, and the first-half of next year..

Okay. And then on the international sales down 4%, can you break that out a little bit further, I'm curious how much Canada was down in both U.S.

dollars and in local currency?.

That’s a very good question, and I think you have focused on the international side of the business, and Barry go ahead and respond to that..

Yes, Ryan. There are two markets, there is Latin America, and the Caribbean, and Mexico and so on and Canada. And as a group their businesses were flat in their local currencies. So the decline you see is primarily the currency impact in Canada..

Okay. And then just last one for me, on the stepped-up investment can you provide some numbers? I'm just curious how much of incremental spend you are planning on in 2014 over 2013, for example..

Well, it’s several millions of dollars, but we are not going to get into any specific quantification of that, it’s significant..

Okay, great. Thank you..

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

Hey, good morning, guys..

Good morning, David..

So in terms of the share gains that you talk about here, maybe beyond industry growth, could you talk about, you got split system, the VRF, and your commercial, other things that you are working on, are any of those today big enough that they are moving the needle or are they all sort of less than 1% kind of contributors to growth?.

I don’t think I understood the question.

Did you Paul?.

No.

Are you saying that we got all these initiatives that we talk about on VRF, commercial, et cetera, are they enough to move the needle?.

Yes, it just meaning, I mean in terms of the overall growth rate you are seeing today?.

No, but the investment that we're doing is across the board, it isn’t. It’s across the entire spectrum of what we do. Now if you are asking is VRF yet moving the – so we say the needle, the answer is no..

Okay, great..

So that we've said that over and over again that VRF is a long-term project, and we want to be the largest distribution company in that product offering. But it’s still not a significant part of what we do, it will be, but it’s not now..

So, I mean, just thinking about commercial in general and the split systems, and it seems international is obviously big enough to move the needle right now.

But these other sort of embryonic growth areas, at what point, are we talking three years to five years from now that they come big enough?.

Good question, I don't know. But we're very focused on growing them, and I guess, stay tuned..

Okay..

I couldn't answer that with any accuracy..

Right. But then – and back to the investments in the cost side of the equation, did you say that you hired those 200 people over the last month which would imply that the….

No, no, no, we started this hiring in the second half of last year. We've accelerated some this year..

All right.

So should we assume that, I don't know, 80% of it is in the second quarter run rate SG&A, or is there more coming in the third quarter?.

Barry, do you have a feel for that?.

Yes, Jeff, I would say, second quarter versus second quarter a year ago, yes, there is a reasonable amount of new spend in the SG&A. And that will accelerate some as we finish off the year and we've included those costs in our outlook..

I'd rather call them investments than costs..

You're right. Okay. And then last question, just in terms of the quarter here and I know the people we're trying to get at sort of your confidence as you look forward, was weather any kind of impact for in the second quarter and could you talk about things trending through the quarter and as you look in July, it got better over a year now, not….

I mean, we have consistently tried not to talk about the weather, because we don't want to be a weather-driven business. We know we would not be realistic, not to say that weather doesn't impact, but we don't comment on that. Our goal is to grow our business regardless of weather conditions wherever they may be..

Okay. All right. Thanks a lot..

Sure..

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

Good morning, Matt..

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

Good morning, Will..

Good morning. I just had – most of my questions have already been answered. I just had a couple of housekeeping items.

If you might – if you have depreciation and amortization for us and possibly CapEx spend in the quarter, can you break that out for us?.

Barry S. Logan:.

:.

Is the CapEx in there?.

Yes..

Okay. All right. I appreciate it guys..

Okay..

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

Good morning, Walter..

Hi, thanks, good morning. I wanted to ask just a little bit more detail on the quarter and how the revenue especially for resi-HVAC progressed. And I know June, July are probably the biggest months of the year, if I'm not mistaken. And, just comment on the overall trend.

I know housing market has been a little bit weak, but the unemployment is coming down..

Sure..

Walter Liptak – Global Hunter Securities, LLC:.

:.

I can express this to you. The second quarter started very strong, and then it seem to – market seem to soften as the quarter ended. That's why I'm very pleased that we were able to gain share during that period. Now the third quarter, I'm very encouraged by starting strong.

We're early into the third quarter, so sort of June softness has now become July's strength..

That's great. Yes, that's good to hear. I wonder if you have an idea about the – in your region the market growth, and if you can take a stand, well, what kind of market share you're gaining from these internal initiatives..

No, I don’t think we would go ahead and do geographic things like that. We rather stay with it on the macro level..

Okay. Okay, fair enough.

And then just – I'm curious about the regional standards and how that may impact you?.

That's a good question. Go ahead, Paul..

Okay, yes. There is the regional standards, it's kind of a flip of the coin, right now. What we've seen and been able to hear is there's – the rule making is not complete yet. It probably will not be complete as far as the enforcement of it until the beginning of 2015.

Regardless there is an 18 months window, where we would be able to continue to sell, 13-SEER product for an 18 months period. It’s – nothing really has changed in the last quarter except some – a little bit more confusion coming out of our government, that's all..

Okay, and that's nothing new.

But would you build inventory in the fourth quarter, is there – are you planning on increasing your stock in the older product and then is there a 2015 benefit for them?.

No, I'd say that it's premature to even estimate that right now, based on not having the rules coming from the EPA and the FTC. So, right now, we're anticipating a normal end of the year. If that changes obviously we would react to whatever, whatever the government regs are..

Okay. All right, fair enough. Thank you..

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

Good morning, Keith..

Keith Hughes – SunTrust Robinson Humphrey:.

:.

Well, as you know we have a very decentralized management system. We charge our leaders in those markets to tell us and to identify where they feel they can better serve the customer.

And to understand that, one of our competitive advantages is our ability to increase density in the markets we serve, because with that density you substantially increase the service to the customer, because he has – the contractor has less distance to go and can get a service more efficiently.

So, it's just – it's not any great theory, it's just our regional and local leader saying, here is why I think I can meet the goal of servicing the customer better. It's nothing more than that..

Second question on the res and other HVAC products at 2%, it seems significantly below what you had in U.S. residential equipment.

At homebuilder related what's – what are the trends there and what kind of trends do you see moving forward in terms of the growth rate in that segment?.

Well, we don’t like to think of ourselves as a new construction distributor although we do participate, but it's never a material part of our company in terms of our revenues and earnings.

Paul, can you add anything to that?.

Yes, it's – I think we've indicated before, it's double-digit for us, but it's low double-digit as far as what new construction equipment movement is in residential. We continue to participate in it with several brands and there wasn't really any big ups or downs in the quarter..

So, with other HVAC only of 2%, what's – it seems like it will be closer to your equipment sales. I mean, we've seen this before, a spread between the two. I thought at some point these accessories would sure catch up and the growth rate doesn't appear to be happening right now..

All right..

I guess – what did you see in trends there that cause the big deflection between the two numbers?.

Barry, do you have anything on that?.

Barry S. Logan:.

:.

Okay. Thank you..

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

Good morning, Jeff..

Hey, good morning, guys. I jumped on a little bit late, so I don't know if you've addressed this already. Can you talk about….

You missed all the good stuff, Jeff..

Can you talk about price mix and what the commercial HVAC equipment did?.

Price mix, so we have reported that we moved into higher margin, the product mix has moved towards higher margin which benefited the quarter.

And what's the rest of that question?.

How is kind of pricing going through? I mean, all the OEMs put through price increases….

Paul, you want to answer that Paul, you….

Yes, we have the price increases, most of them hit us in the fourth quarter, and they pretty much have all flowed through. There wasn't much resistance in the market in the price increases, so….

So it worked. Okay. And then the other question was just commercial HVAC equipment.

What was that, what did that do in the quarter?.

That went up – went up 6%..

Okay.

And then it looks like you had a little more working capital build, how should we think about free cash flow for the year relative to kind of your 100% net income target?.

Yes. Our goal is still to achieve cash flow to equal or beat net income for the year..

Okay.

And then just back to the 13 SEER changes, how are you thinking about pre-buying or not pre-buying equipment ahead of the change?.

Well, I mean, Paul gave you a lot of detail on that previously, but the point is that that’s not the decision we've reached and we are not the kind of company that likes to pre-buy in any event, we just sort of see things how they happened.

But there is no way to give you any help with that now, because we don’t know what the government is going to do..

Okay. Thanks, guys..

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

Hi, good morning..

Good morning, Mark..

How are you?.

Good..

Good.

Now, to talk about, you mentioned you added eight branches, 20 more are coming, off of what base, I mean, how many branches do you currently have that you're adding to?.

Barry?.

Yes, about 570, Mark..

570. Okay.

And to talk, you mentioned that you saw double-digit growth, higher efficiency products; is that a real strong mix up? Is that an acceleration from what you've seen earlier?.

Barry?.

Yes, Mark, it is. We talk about and the – our message about the U.S. market being up 8% for the quarter, if I would split that into the standard efficiency versus high efficiency, it’s single-digit growth in the lower-tier and double-digit growth in the higher-tier. So that is a meaningful movement and meaningful trend..

Okay.

With that starting now and being entirely voluntary by the consumer, if you it's accelerating now, I assume they probably also dampens whatever fact that the regulations would actually have on new systems for next year anyways, would you think?.

No, I disagree with that Mark. First, the baseline system is still a majority of what we sell. So to the extent that business converts into a higher-tier system next year by regulation, it’s definitely a benefit to the sales. The mix of today is still is nothing like the mix of, let’s say, four or five years ago, prerecession.

So that’s been part of the recovery of the consumer is to spend more and to upgrade and contractors are more confident to make those recommendations, but you should also get the sense that, that mix is still not where it was, let’s say five or six years ago..

Okay. So, there's still room for improvement, significant room for improvement..

Yes..

And then the effect of – what do you anticipate would be effect on aggregate price on the sales with the regulations hitting next year?.

If I can say one thing that’s, do you realize the regulation is going to effect, but there's an 18-month window..

Right, right..

Where you can – where everybody will still be selling 13 SEER products, so I don’t – I'd love to say there is going to be something coming from the regulations next year, but that’s not anticipated..

Okay. Thank you..

Yes, I mean, Mark, do we have to characterize it as it’s not a get rich quick concept for next year?.

No..

I wouldn’t characterize it that way. This is a slow blend of upgraded products that will enter the market over the next several quarters and that’s called get rich slow..

You mean while the consumer is still mixing up to even 17, 18, even above 20 SEER anyways right? That helps?.

Exactly. .

Okay. Thank you. .

(Operator Instructions) The next question comes from Rajan Gupta of JPMorgan. Please go ahead..

Good morning, Rajan..

Hi. Thanks for taking my question.

Most of them were answered, but just one kind of house-keeping one, how much of your revenue base is from Carrier Enterprise right now?.

We don’t break that out, Rajan..

Just a rough color on percentage or anything or (inaudible)?.

No, we used to call it legacy and the legacy businesses and Carrier Enterprises, but we don’t do that anymore..

Okay, thanks. And that’s all I have..

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

Samuel. .

Good morning, everyone.

Just going back to some of the questions earlier on margins, obviously in the first and the second quarter, EBIT margins or operating margins were up 40 and 30 basis points, should we expect that same level of expansion in the second half of the year?.

I guess we’ll have to wait and see..

Understood. And I think a lot of the expansion is really SG&A driven and that seems to be in the face of some new investments that you guys are making.

Can you talk about where the leverage specifically coming from, is it back office, is it selling expenses that are down, just kind of curious what’s driving the SG&A margin lower?.

Well, that’s what the investments are that we mentioned. We are making investments to produce growth and it’s reflected in the numbers we’re disclosing..

All right.

And then just in terms of the high efficiency sales, how much was that up on a year-on-year basis, I’m just curious what the impact of that was on your margins either gross or operating?.

(inaudible). Barry, go ahead. .

Yes. Sam, as I mentioned earlier, I will leave it at double-digit growth in the high-efficiency category, and for gross profit there’s a moderate benefit, but it’s really more of a dollar revenue benefit for us. That’s something that would drive materially gross profit – gross profit margin performance..

Understood.

And I realize the first quarter obviously is a seasonally weak quarter, but is that double-digit level of growth is an acceleration from the first quarter?.

It’s consistent..

Okay. Thanks very much..

The next question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead with your follow-up..

Morning, Jeff. Hello, Jeff..

Hey, just on this distributed/undistributed earnings that came in higher than my number – my forecast.

Anything going on there to drive that number materially higher?.

Yes, Carrier Enterprise's is really performing well..

Okay. And tax seems to be running in a little bit higher as well. I mean, is that have to do with the U.S.

versus non-US mix or?.

Well, Jeff, first the tax rate year-over-year is almost identical. So I don’t know why you would have something lower for the year. And I went back and looked at it and the tax rate is identical year-over-year. The U.S. obviously did have a better quarter than the international.

So there’s a little bit of tax rate costs there, but it’s not enough to matter. Maybe look at the model for the rest of the year and we can talk about it if you need to..

Okay. Okay, great. And then just, you guys put out guidance today and it was a little bit below consensus.

I mean is it as simple as the international businesses maybe being a little more challenged versus the earlier run rate or is there some other?.

I don’t think so, Jeff. We don’t give any guidance until this time to the second quarter. We don’t guide the analysts, they do their own calculations. This is how we feel and it’s as we feel, we show you that we haven’t adjusted any of our thinking, we have – we don’t think we’re any better, any worse.

We just deal with it as we see it and we do have better visibility now that the second quarter is over, and so we’re telling you what we think we’re going to do. But we don’t compare ourselves with the analysts, because we just – that’s not what we do. We just tell you what we think.

What the analyst did or did not do, well, you’re an analyst, you will have to figure that out, why you did and what you did, but that’s not us..

Okay, thanks..

Those analyst estimates are not our estimates. This is for – for this year, this is the first time we’re telling you what we think we could achieve..

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

Hi, good morning..

Good morning. .

So just to hit on refrigeration, I think last quarter you mentioned that pricing was a bit volatile, so it’s hard to really have a read on the underlying end market.

Has that stabilized and do you have a better sense of, what you’re seeing there?.

That’s a great question. Go ahead, Paul. .

Yes, I think it’s safe to say that refrigerant pricing has stabilized and starting to move back up..

Okay, great. And then just on the international, can you talk a little bit about Canada versus the other regions are you seeing, are they similar or you actually seeing a better performance in Latin America, the Caribbean, and Mexico, for example, versus Canada, if you could breakout the underlying trends there, that’d be helpful. .

I don’t know that we want to do that for you. We can tell you that Canada is – we’re doing well in Canada. But I don’t want to start breaking down international performance. I don’t think we want to do that.

Barry, do you have anything to add to Canada?.

Winnie, as I said earlier I think the business volume is flat in local currency. Their profits are up a little bit in local currency, and I would say there has been a better performance as the year has gone on. So I wouldn’t want to start splitting up countries and markets individually like that..

Okay, great. And then I guess just quickly I know it’s something that’s asked pretty consistently to you, but just on capital allocation, now that you’ve purchased an additional piece of a JV, anyways to comment on what you’re thinking about capital allocation going forward, it would be helpful..

Well, our capital expenditures, because we’re a distribution business, is – I would think it's the tradition that you’ve seen over the years except you may see more of acceleration in technology investment, software, things like that..

Okay, great. 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, thanks very much for your interest in our company, and I look forward to having a third quarter conference call in the future. Bye-bye..

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