Albert Nahmad - Chairman and Chief Executive Officer Aaron Nahmad - President Paul Johnston - Executive Vice President Barry Logan - Senior Vice President

Brad Thomas - KeyBanc Capital Markets Matt Duncan - Stephens Inc. Ryan Merkel - William Blair Robert Barry - Susco Hanna Luke Eonc - Merrick Walter Liptak - Seaport Global Chris Dankert - Longbow Research

Good morning and welcome to our third quarter conference call. This is Al Nahmad, Chairman and CEO, with Mr.

A.J. Nahmad, President; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President.

As I always the cautionary statement; this conference call has forward-looking statements as defined by the 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, Watsco set records for net income and earnings per share despite the disruptions in our largest markets. Our cash flow was strong, growing 46% in the quarter and 26% for the year.

We expect to deliver on our stated goal of cash flow exceeding net income gains this year and we will evaluate increasing our dividends at the start of the year. As per the disruptions, 190 locations were closed for some period time during and after the hurricane including our export operations in Miami.

The Mexico earthquake affected our operations in central Mexico, collectively these markets represent 35% of Watsco's annual sales. The markets are recovering and we are experiencing double digit growth.

Our balance sheet remains conservative, with debt to EBITDA ratio under one times, that's a pretty conservative balance sheet and we like it that way. We continue to look for investments to grow our network, constantly looking for investments or acquisitions or mergers with people that do the same thing we do.

Watsco technology evolution continues to make progress. Our long term goals are to help the over 400,000 contractors and technicians that do business with us and to make our own operations more efficient.

Our annual run rate for technology spending remains at $23 million, more customers are using our apps and e-commerce to gain speed and efficiency and we believe Watsco's e-commerce can reach $1 billion this current year. More locations have implemented order fulfillment technology to complete and ship order quicker and save customer time.

More SKUs have been added to our product information database, which is now over 600,000 SKU. Inventory trends have improved and square footage has been reduced with more progress in reducing square footage in the future.

More employees are using our business intelligence platforms to improve insights and decision making. This is a long term evolution that will require time for traditional customers and employees to become fully immersed in what we are and what our technologies in our industry.

That's always a problem, people. These are wonderful people and we're giving them something new to use, so it takes a while for them to adopt.

We expect this to go for sometime before we get considerable adoption. We like what we are doing.

Now, for the quarter, earnings per share increased 2% to a record $1.82 and net income increased 3% to a record $65 million. Same-store sales was flat, including 2% growth for residential products.

SG&A expenses were flat for the quarter, third quarter results reflecting a contribution from 35% investment at Russell Sigler. They're having a terrific year and we could not be happier to be part of their family.

Moving on the nine months, EPS increased 7% to a record $4.62. Net income increased 8% to a record $165 million.

Our operating profit increased 2% to a record $293 million. Sales increased 2% to a record $3.4 billion and are increased 3% on a same-store basis.

In terms of our outlook, we expect continued record performance with EPS in the range of $5.50 to $5.60 per share. With that said, AJ, Paul, Barry and I will be happy to answer your questions.

Good morning, Jeff.

Hey, good morning guys. This is actually Brad filling in for Jeff.

Hi, Brad.

Hey. So my question is surrounding the impact from the storms, just wondering how much of that $0.10 do you get back in the fourth quarter.

It's probably a net positive, just trying to size up a stronger seasonal quarter with the disruptions versus weaker for TOE.

That's not possible to tell you when that is going to come back. I can just tell you that the demand in those markets is very strong as we said, reflecting double digit growth.

But I can tell you also that this recovery, it's not going to be in the next quarter. It's going to be, I believe, over - perhaps as much as two and three years because sometimes people have to have their equipment repaired and they do that pretty fast and then sometimes they've to have their equipment replaced, that takes a little longer.

And also in the commercial side, these things take much longer to do what they have to do, so this is a long term positive for us. I mean I hate to say that something positive has come from the storm or storms, but it has.

So it's long term play for this.

Okay, then along the same lines, just referring to the flat same-stores number in 3Q, were the storms factored in any manner into that number? Just having a tough time getting down to that flat reported number and wondering if that was FX headwind or kind of the puts and takes around that?

Sure. Barry?

Yeah, first there is no FX impact on the quarter or the year to speak of, so that's not ever a material part of our discussion. And you're right, in terms of flat same-store sales growth, it wasn't flat before the hurricanes, we were seeing growth and the interruptions simply turned that into a flat quarter.

So, it really is that simple and I don't have much more color to give.

Alright, thanks.

Hey, good morning guys. May be I'll take another stab at that last question.

I'm sure you guys have taken a look at what you think the revenue impact was? You gave us an earnings impact, but what was the revenue impact of the storms and as you look at your 65% of locations, they weren't impacted versus the 35% that were, what was the difference in revenue performance there?

Matt, good morning. Well, first, there are things we think we know, as the old saying goes, things we know, we don't know, in terms of the impact.

I mean, contractor activity, consumer activity, commercial activity, end market activity in the storm, we really don't know the full impact of that. And looking at $0.10, we try to make a good educated conservative gas added and as we saw, we should say something, but I think the reality is that impact on revenue and the business activity and markets this large, again it's more than a third of our total business in these markets.

And there's no location closures, there were also areas that were under threat and hurricane warnings and that are in that number, which again certainly impacted short term or the business longer term. I agree with Al, it's an immediate repair, replacement activity, it becomes a re-investment activity and then a re-building activity which is all going to take time.

Okay. Barry, may be what was the growth rate in the impacted locations before the storms hit?

How much were they growing, before the storms came through?

In the single digit range.

Okay, and then the last thing from me, just Al you mentioned the balance sheet strong cash flow, obviously you are in a pretty strong position there. Any thoughts on what you might be able to do with that?

Looking ahead, I know there's the other 65% of Sigler you'd like to own at some point. Is it possible that you might be able to get another deal across the finish line here in the next 12 months or just how you're thinking about using the balance sheet?

Well, I said over-and-over again; we think we can significantly grow our company internally and through acquisitions. And we are pursuing companies that we believe, we like to be part of our system.

Again I'll tell you when it's going to occur, it's two or three or four, I don't know. But I do think they will occur and I think they will add significantly to the size of Watsco.

And that's why we maintain a very strong balance sheet and we're just optimistic that the trend in technology will have to be evaluated by some of the companies we love to do business with. And, maybe we can help them with our technology because after all we put over $100 million in the horizon.

It's going to take a while to be adopted by our customers and by our employees. But nevertheless, as a great asset and maybe they'll see some value to that and if they weren't willing to do something in the past, maybe they'll be more willing this time, at least that's my hope and also our expectation.

Hard to say when, but we are certainly in the game.

Got it. Alright, thanks guys.

Hey thanks, good morning everyone. So, the first question from me, nice to hear October's up double digits, is this both parts and supplies and equipment and what's growing faster?

Yeah, it's - we're seeing it in parts and supplies and equipment in October. Obviously equipment is leading, is up stronger than the parts business has been, but parts has been something that we've been focused on all year.

I think, he's referring to October.

That's right.

Okay.

Okay, so it sounds like both are up nicely.

Yeah.

Okay. And then our growth margins, just clarify for us was the year-over-year decline, was that product mix driven?

I'm sorry, one more time.

Yeah, the year-over-year decline in margin, was that just driven by the mix of products or just the parts and supplies was down more than the equipment?

That's correct, that is the mix change for the quarter, yes.

Okay. And then just lastly I thought 2% rise in the equipment growth was a good number all considered.

What do you think the industry grew and then what would you attribute the share gain to, is it technology and the service people you hired?

Yeah, the way we've got the industry pegged is that the industry was probably down on the revenue side, it was probably down 2% for the quarter, so I suppose we ended up 2% would indicate an obvious share gain. I think part of that was just our normal business.

We have a strong position as you know in the replacement market which we continue to push Ryan and that's really where the technology that we've invested on features itself the strongest. And we have a small presence in residential new construction which was up for the quarter also.

Okay, thank you very much.

Hi, this is Jay Clarks [ph] on for Rob. Can you comment on pricing, are you seeing any price come through hitherto is also a fortune?

It's a very good question, go ahead Paul.

Yeah, we are starting to see, there is - I think everybody is familiar that there is a lot of what they call headwind out there with commodity pricing right now with carbon going up, steel going up, we are starting to see price increase announcements in the mid single digit coming from most of our equipment side vendors as well as now, we are starting to see on the parts and supplies side we are starting to see price increases.

Greta thank you and then a follow-up on the decline in refrigeration, was that also storm impacted?

Yeah to a certain extent yes, it was. Probably a bigger piece of our business on the commercial refrigeration is done in the Texas and Florida markets were they did have the impact.

It's hard to get your arms completely around the commercial refrigeration impact because we get into so many different applications for the product that's involved from ice makers to actual refrigerant to compressors and parts and pieces.

Great, thank you.

Good morning, first question is for AJ, this curious what the technology plans are for Sigler in the near term here, just wondering how quickly you can help them adapt to apps, the business intelligence and inventory management tools?

Yeah, that'll be driven by them, mostly. They have come and learned about some of the technologies we have and are sure to meet some of the folks, and the pace will be set by them.

That's very much consistent with our culture is, our job is to be helpful to the operators and listen and react to when they are ready.

And then second just a bigger picture question. Taking a step back, just wondering if there are any other updates you can provide on the VRF and ductless business, either relative to the growth trajectory more broadly or how you're feeling about the strategic business string of that business?

I've been in love with the ductless business forever and I'm glad to say that it continues to grow. We saw a little bit of slowdown in the industry growth for the quarter, for the third quarter.

But, within Watsco, we saw a very strong growth across the board, both in VRF as well as the mini split and the multi split product lines. So still pushing ahead and still that's a major growth initiative within Watsco.

Thank you.

Hi, good morning guys. I wanted to ask about the technology with relation to the weather events.

And I hope I'm not going too far off-track with this, but, did you and your employees learn anything about utilizing the technology during the storms? Did you have better control over visibility knowing where to have products positioned or the cash flow et cetera?

I think that's a great question, my guess is something that's on the horizon? Go ahead AJ

Yeah, I would tell, I mean certainly theoretically that should all be true right. We have better demand planning and inventory optimization, so also we have enhanced our technology in terms of moving products around with the logistics.

I don't have empirical data to share with you, to tell you that all that was done better in the storms and we did not have the technology. But, by the way a part of that is e-commerce as well.

Our stores are open 24/7 with e-commerce, so even if employees were not able to get to the branches or get to work because of the storms, our customers could still find the parts they need and get them ordered. So, no empirical data to support that, but certainly feel like that's a better advantage we have in situations like these.

Okay. I guess thinking about data and did you see on the customer side you mentioned e-commerce.

Was this a better e-commerce quarter because of the storms or just - and gentlemen, I don't know if you track like downloads or other data from customers or customers starting to look at you as in the mobile app and e-commerce and relying on that?

Yeah, we track just about everything you can imagine. And the channels still remain positive, there is continues option of our technology performs.

What's interesting is that - so now that we are out of the summer selling season, this is the season to drive continued option and that culture changed and that change management and driving behavior, digital behavior. So, our customers are contractors and several months they are tied up every minute of every day with installing and repairing and servicing.

Since now they have time to take a breath. We'll be there with them and getting them more and more comfortable buying online.

So the trends remain positive, of course we all want a slope of adoption to be even at a higher storage rate. But, we are - we feel good about the progress we're making.

Okay sounds great, thank you.

Good morning, Albert. Thanks for taking my question guys.

I guess, first of, in the release you guys had highlighted that Watsco made some additional investments in products and people, I guess is that more as a matter of course is that kind of what's quantifying, anything else you could share around that?

Why don't we share the employee increase Barry?

So, well that year-over-year it's about a hundred more people and it's really what I referred to before as increase in capacity, increase in capacity to serve customers, to sell more, to cover markets and it's obviously all in the field and the customer facing a way. So, we've talked about this in the last nearly couple of quarters and some continuation in the third quarter.

But it's all again increase in capacity to sell and serve customers.

Got it, got it. And just kind of circling back to one of the earlier questions on pricing, I guess, you said, you started to see some of those increase notifications work through?

Are those going into effect immediately or is that into 2018? I guess kind of what the timing look like around those increases?

It varies, depending on what the - which manufacturer, what type of products. Some of them are immediate, some of them are December 1, some of them are January 1 and it just depends on that particular manufacturer.

Got it, got it, and I guess just one last one if I could for AJ here, I am wondering right back the annuals day, ticket size for customers you had adopted the app, if I am remembering right like 2x almost what it is for traditional customers. If that's still the case or are we seeing any change to what the benefit is from having the app in place?

That is still the case, it's not 2x, I wish it was 2x, but it is significantly higher and the metric in line is very less, so they are buying more items when they buy online than when they buy offline and yes, that trend continues.

Got it, thanks so much guys.

Once again thanks for your interest in our company and look forward to speaking to all of you in the fourth quarter. Bye now.