Al Nahmad - CEO A.J. Nahmad - President Barry Logan - SVP, Secretary, Director Paul Johnston - VP.

Matt Duncan - Stephens Keith Hughes - SunTrust Jeff Hammond - KeyBanc Capital Markets David Manthey - Robert W. Baird Josh Pokrzywinski - Buckingham Research Walter Liptak - Seaport Global Payton Porter - VB&T Capital Markets Chris Danker - Longbow Research.

Good morning and welcome to the Watsco Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Al Nahmad. Please go ahead..

Morning everyone and welcome to our conference call. This is Al Nahmad, Chairman and CEO. With me is A. J. Nahmad, President and Barry Logan and Paul Johnston. First as always 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 on to our news.

Watsco enjoyed another great quarter and full year during which we established new records for earnings per share, net income, operating profit, operating margins, sales and cash flow. And although the data is still preliminary we believe we also gained share in our markets rewarding our manufacture partners.

We also made substantial investments in technology during 2015 as we continue to transform our business from the digital economy which is increasingly upon us. I can tell you our team is very excited about what we're doing with technology, it's great to see the tools we are providing our customers to help their businesses.

It's great to see the efficiencies that are possible. It's great to offer our products and services through all channels to meet our customers' needs. It's a great time in our company's history and we're very excited about it. Now highlights for the quarter.

Our earnings per share grew 9% to a record $0.75, operating income increased 4% to a record $54 million. Operating margins expanded 10 basis points to a record 6.0%. Sales grew 3% to a record $904 million and increased 4% on a same store basis. Also during the quarter HVAC equipment sales increased 6% including 8% growth in the United States.

Other HVAC products were flat and commercial refrigeration products increased 4%. As to the full year, earnings per shares grew 13% to record $4.90. Operating income increased 10% to record $337 million.

Operating margins expanded 40 basis points to a record 8.2%, gross profit margins improved 30 basis points and SG&A as percentage of sales declined 20 basis points to a record low. In 2015 sales increased 4% to a record $4.11 billion and increased 5% on a same store basis. HVAC equipment was up 7% with 8% growth in the United States.

Other HVAC and commercial refrigeration products increased 2%. We love earnings growth and we love cash flow just as much. For the year operating cash flow increased 53% to a record $221 million or $6.82 per share. And our balance sheet remains conservative with debt to EBITDA ratio of under 1 time.

In January we raised our annual dividend, 21% to $3.40 per share. We hope to continue our policy of increasing dividend and we remain confident in our ability to generate strong cash flow while maintaining a conservative financial position at a low cost of capital.

Finally as for our outlook for 2016, it is our practice to wait till we have some insight into our selling season before providing you our thoughts. With that said, A.J., Barry, Paul and I'll be happy to answer your questions.

Brett?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes today from Matt Duncan with Stephens. Please go ahead.

Good morning, nice quarter.

I was hoping, obviously, I know it's little early in the year to be giving guidance, can you maybe talk a little about the sales trends that you're seeing so far in the year and just sort of how things seem to be shaping up thus far?.

Well, thus far we're growing. .

Pretty similar growth to what you saw last year or is it noticeably different one way or the other?.

No. Just growing, that’s about all I'm willing to say because this is so really, and March is of course twice as big as January. So the big number is March [ph]..

Yes, okay, looking at the breakdown of the revenues little bit, the other HVAC product sales growth continues to lag behind equipment, can you talk a little bit about why you think that is, what's going on there?.

Surely, let’s ask Barry for that or Paul who would like to comment.

Barry, go ahead..

Good morning. First Matt, our parts business is in that number and as equipment and replacement systems grow that does impact and can impact our parts business, the tradeoff is that is higher revenues and higher profitability, so it's not something we're particularly against.

Also there are some commodity products that are in that, it's a small number but it influences that particular part of our business and it's something that has had some price pressure this year from that but not margin pressure, not profit pressure. So it’s something that’s effected sale more so than profits. .

So I guess the summary would be that you're seeing replacement still grow faster than repairs and that's causing the parts revenue [multiple speakers] to decline and then the underlying supplies revenue, so if you were to breakout parts of our suppliers, supplies are probably growing, parts are declining and that averages out to what we got in the quarters, that’s a fair way to characterize it?.

That’s a fair way, yes. .

Okay and then last thing.

We should ask you that question..

Last thing for me guys, just on the technology investments they came in at about 18 million for the year, I think it was a $0.13 impact, can you comment at this point on how [indiscernible] you guys had said at the Analyst Meeting that it would probably grow in 2016, is it still too early to give that some idea and maybe A.J.

that’s a question for you, since you spend a lot of time on this, what should we expect from the technology investment side this year?.

Yes, I think it's fair to assume that the technology investment will grow, to what degree, I don't think we would say, but we're certainly not shrinking in the technology investments. .

The next question is from Keith Hughes with SunTrust. Please go ahead..

So, back in the technology spend, should we -- there is a fair uptick here in 2015, are we going to see it to that magnitude increasing in 2016 and then I guess in terms of revenue that could potentially drive, when would we see any of that coming into the results?.

Go ahead, A.J. .

Yes, similar answer to last question, which is, that the magnitude of the spend and the rate of the increases of the spend, I don't think, it something we want to get into.

As far as the impact the technology can have, it's not just on revenues, revenues for sure, but it's also profitability in terms of our operating efficiencies and also customer royalty. We think we’re enhancing the customer experience in a way that probably our competitors cannot or will not, and as for timing of those, it will be gradual.

This is not a flip-the-switch and everything, it’s rosy, it's an evolution much more than a spread. So I don't want to say, you're going to see all the impact on this day or that day necessarily..

Okay. If we could get some of that in the future that would be really, really helpful because it is impacting the numbers here. Second question was, A.J.

with your promotion of President, from a management structure how are things going to run different in the next year or two than before the move?.

Do you want A.J.

will answer that or me?.

Whoever knows the answer?.

The answer is the same as always, A.J., is part of a succession plan we’ve had in place for quite a while and the way we manage the company and corporate is, we have -- what we called a, HUB and five of us participated in it daily, and we bringing in the co-Chief Operating Officers from time-to-time, we help them with strategy, we help the co-COOs with anything we can think about.

And it's a wonderful system because the five are very experienced and very successful as you can tough the results and that management system will continue..

Keith, I think that's important to just, you know from my perspective as I'll you, the chemistry set that we’ve had in the last several years, you known many of us and the difference in personalities that we have. That chemistry set has been successful and that's what's in place today and that's what moves forward, and I think with A. J.

in particular because the technology initiative is so important I think it is very not just a succession plan, but also a way to bring significance to what's going on throughout Watsco. So that chemistry set, I realized that's not a scientific way of putting it, but it's really critical to how we operate and that doesn't change going forward..

The next question is from Jeff Hammond with KeyBanc Capital Markets, please go ahead..

Sorry I jumped on late, did you guys give any color on how you're thinking about '16, it seems like most of the OEMs are talking about this continuation of a trend of mid-single digits.

But how you are thinking it’s shaping up and any kind of comment early in the year?.

Well, what I said earlier which you missed is that we are growing. Anybody on? Jeff, hello..

I'm here..

Mr. Hammond are you finished with your question..

I guess just a follow up on that, can you maybe just comment, you know early in the year, how it's trending, maybe how you saw or didn't see dislocation from I guess some of the more seasonably warm weather?.

Well, it's early. You missed what I also said is March is twice -- has twice the impact of January, so we don't want to comment on numbers and things like that. We just want to say that we're growing. Because otherwise we'd be speculating which I don't want to do..

Okay, maybe just update us on M&A pipeline, I think we've had a kind of quiet period here, anything you see changing on the horizon?.

Well it's the same answer we've provided in the past, we're very eager to acquire more businesses but they have to be of some size in order to have an impact. Also sometimes we'll do a smaller transaction when we see a real clear path for adding a product line that would enhance the growth substantially. And so we're still at it.

When we have an agreement or intent to do something we’ll announce it..

Thank you, our next question is from David Manthey with Robert W. Baird, please go ahead..

First question in terms of the seasonality in the fourth quarter where everyone sort of experienced choppy conditions. Could you tell what percentage of your sales are furnace and did you see anything in the heat pump area that was plus or minus given the mild winter weather..

I don't think we've done that before, have we Barry, broken it out like that?.

No, not really, first we'll send out driven companies, Dave, so first of all that tells you, heat pump is what drives our business, no matter what the quarter is and if you look at the last really almost two years you’ll see very strong consistency across all quarters, especially in the U.S. market.

So there is nothing that stands out or was peculiar as we ended this year..

Okay, got it. And I would echo the comment in terms of if there's any sort of data points that you can provide to give us the feel for the success of the Tech investments that would be useful, even if it’s [multiple speakers]..

I understand that, we understand and that's a reasonable question, but we don't want to start doing that until we have something significant to report. We just want to give you a feel of what our goals are.

Our goals are to really be the biggest and best in the digital economy and in our industry to be the leader of that development in the industry, so we've employed a 169 people in technology, our run rate of spend is $20 million and we really think we're on the right track and as I said earlier in conversations, this is a lot of excitement here.

We really think we're on to something that long terms will make a huge impact, not only for Watsco, but in the industry. We're very comfortable with what we're doing..

And as it relates to the comment you made regarding share gain in your markets.

If I were to slice and dice that, could I interpret that as being anecdotal evidence that maybe some of these early applications are having success or is that not right?.

I think David that's more related to just the bread and butter business that we’ve historically been doing.

We've been consistently growing market share, based on the numbers that are reported to HRI and we saw in another growth, I attribute that to lot of hard work by our people in the field and a lot of support and hard work that was provided to us by our OEM partners..

Okay, and then final question if I could, thinking about the model including the investments and everything else, over the past three years your contribution margin has come in really consistently in that 15% to 18% range, is there any reason to believe that you’d be much outside of that dividend, the growth you're seeing and how you're running the business today, nothing seems have changed that much..

Do you mean in operating expenses?.

Yes, definitive sales..

Yes, we think long-term, we're going to reduce it even further. .

So you’re still targeting double-digits overall for a year?.

I hope we’re talking about the same thing, operating expenses as a percentage of sales?.

Well, I'm thinking about contribution margin meaning change in EBIT divided by change in revenues and that number has been 15% to 18%, but as you continue to layer on higher profitability of sales that should drive that 8%, 8.2% [multiple speakers]..

I see what you mean. Yes, we’re -- well, if you want to hear a long-term goal, a very long-term goal, we want to get into the double-digits with EBIT margins and I think that what we're doing with the investments in technology, we have a reasonable short at it. That's why we're so excited about the long-term.

Not only efficiencies internally but what we're doing for our contractors to make them loyal, improve their efficiency and all the other channels that we're opening up to the customer through the e-commerce and that sort of thing. .

David I'll add to that, I mean about 60% to 70% in the past several years of our cost are fixed. We had ramped facilities, people in the facilities and so on. And our ability to grow and grow gross profit margin in the last three or four years has created what you've said, which is 15% to 18% margin, contribution margin.

The challenge we're giving our team is how do we reduce that operating cost, while doing all of this and increasing our capability to raise that margin higher. So we've done it with a lot of spending and the question is, lets accelerate the ability to do more of it.

Our next question is from Josh Pokrzywinski of Buckingham Research. Please go ahead..

Just couple of questions from me, first, you’ve seems some of the OEM need to come back for another round of price in Canada given the currency moves and I guess, maybe knowing demand there is a little weaker as well, anything going on there that you care to update us on and I guess, specifically on the pricing environment?.

Paul, why don’t you comment on general pricing environment?.

The general pricing environment, if you look at it not just in Canada but across the board we haven't really seen much in the way of price pressure, downward price pressure on our products splits right now. We have been increasing our prices right along as we see opportunities to increase prices.

Once again we work with our OEMs and non-equipment vendors to be able to manage price in the marketplace and Watsco will always be competitive in the marketplace and that's the position that we're seeing right now with us..

And I'm sorry, if I missed it earlier, did you guys mention what -- how Canada performed in the fourth quarter?.

No. That's not a disclosure we like to make. We don’t for competitive reasons, but I will say generally speaking the domestic business is doing better than the international business, in terms of growth. .

And then just one last one, I think as an extension of this 14 SEER transition in Sunbelt [ph] and there have been thoughts that with the base being a little higher that the opportunity to upsell would be better at the contractual level, is that something you guys are seeing more and more or start to take whole as we truly transition into 14 SEER and is there any number you can attach to that?.

Yes, I'll take that, it's really early to be able to find any indication that we're seeing upscale beyond the 14 SEER. We've just completed 2015 where everybody was selling through their 13 SEER product and transition into 14 SEER.

So I think that's going to be a trend that we're going to see later on this year, probably when we get into the selling season. If it occurs, Josh..

Got you.

Would you expect it or is that -- you still kind of waiting back?.

I can dream of it, but I can’t expect it. I can hope for it, I can’t expect it. .

Fair enough, Paul. Thanks..

Thank you. Our next question is from Walter Liptak of Seaport Global. Please go ahead..

I want to ask about the outlook, a lot of investors are concerned about this slowing economy and I wonder how you think about a slowing economy and how you would change your outlook or change your business given the stock markets been really dim, there is so much international weakness..

We've been through slow economies in the past. After 2008, we did see a slowdown of our business. However the cash flow increased substantially, we also we're able to make the biggest investments we've ever made in our -- in this 41 years I’ve been managing the company.

So it brings opportunity sometime in M&A, it certainly brings lot more cash flow, but sometimes we've done in the past, is increase our dividend even at better rates because of that..

I was going to add one comment to that, just to bring in a thought is, as we think about our suppliers, we are the largest customer of most of them and their dependence on market share growth and overall growth is through us.

So I think any kind of slowing economy gives us the opportunity to have our partners come to us and work with us and be partners to grow the market. So [multiple speakers] that is an attribute that is important..

Okay, sounds good. On the technology budget I wonder if you can refresh us on how much incremental spend is there in 2016 and if the economy does slow, is there some flex in that..

Of course there is. Of course there is, but we're not going to say that we're going to do one way or the other, we're in an investment mode because we believe in the long term payoff. .

Okay, thank you..

The next question is from Charles Redding with VB&T Capital Markets, please go ahead..

Good morning guys. This is Payton Porter on for Charles Redding, thanks for taking my call. .

Peyton Manning, is that what you said..

I wish, Payton Porter.

So you guys in your earnings release you called out residential and commercial markets, I'm just wondering if you could elaborate at all or give some color on some of those end markets where you’re really seeing strength, are you seeing strength in construction, both residential and non-residential? Are you seeing strength in various geographic regions, just kind of anything that you can give us from an end market perspective?.

Well, we can give you some response but not information that’s going to help our competition, but generally speaking, Barry?.

First, we do see consistency in trends for commercial and residential cost avoided, it’s not one worse to the other. It's been very consistent all year and that's true today.

Secondly, as I said earlier we are a Sunbelt company and we love the Sunbelt and its growing and it's been again a good consistent safety place to be given the use of the products and also I think the growth in the economy that's going on in the Sunbelt..

Perfect, great guys, and then just kind of on a regulatory perspective, is there anything that we should be really watching out for, is there anything that you guys are keeping a close eye on just from a regulatory standpoint?.

Let's go to regulatory guru, Paul..

Yes it's, what we're looking at now is what’s going to be the higher efficiency ratings that we're going to be giving in what 2021. We're also looking at what's going to be going on with new refrigerants that have less global warming potential to them, which we know are on the horizon and everybody is working on.

Finally, we're at the final stages of the Montreal protocol where we're finally going to see R-22 eliminated from the market place by 2020. And this year's going to be a light year as far as the ability for our manufacturers to bring in R-22. So lot of good things going on.

All those are good things because they're all changing the market place and generally Watsco thrives on change in the market place..

[Operator Instructions] The next question is from Chris Danker with Longbow Research, please go ahead..

Just real quick following up on the Analyst Day you know e-com really accelerated through 2015 for you guys.

At this point are you guys willing to break out the impacts on 4Q and kind of what percent of sales are from e-com right now?.

A.

J.?.

No. I would say that the trends are positive and have momentum, but we're not ready yet to get into the specifics..

Okay..

I want to add one comment because it's been asked a few times and I just want to get it off my chest so to speak, about the investment going on in technology.

For those of you that know us for 20 years, I mean we're very careful and very selective and very disciplined and very cautious about how we spend money and the growth in spending has been a hundred decisions made over two or three years and we're not betting the ranch and haven't bet the ranch on anything.

So yes we're going to spend more money in 2016 and yes we can change our mind or adapt to what's going on and we will, but I just feel like everyone wants the number and just have -- look at the track record of the company and understand that we're very careful in what we're doing..

I would add to that Barry that, as a company we do have big goals. They're all very measurable goals, all of our business leaders know what those goals are and are working towards them. So you know this is about adoption and implementation and usage of the technology not just technology for technology's sake..

Okay, thanks guys. I guess just one quick housekeeping question.

As far as selling days for the year, can you give us those by quarter?.

Barry you know what he’s referring to?.

Good question, I want to assume the first quarter has an extra day because of leap day, but Chris I'll have to look at that. Honestly, it's not something we’ve -- I’ve got sitting here in front of me..

Fair enough, thanks guys..

At this time, I ‘m showing no further question. So this concludes the question-and-answer session. I would like to turn the conference back over to Al Nahmad for any closing remarks..

Just want to thank you all for your interest in our company. Certainly, hope not to ever disappoint you and we'll continue to build the company. Thanks again, bye. .

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