Albert H. Nahmad - Watsco, Inc.

Barry S. Logan - Watsco, Inc.

Aaron J. Nahmad - Watsco, Inc.

Paul W. Johnston - Watsco, Inc.

Jeffrey Hammond - KeyBanc Capital Markets Matt Duncan - Stephens, Inc. Ryan J.

Merkel - William Blair & Co. LLC David J.

Manthey - Robert W. Baird & Co., Inc.

Brett Logan Linzey - Vertical Research Partners LLC Charles Stephen Tusa - JPMorgan Securities LLC Robert D. Barry - Susquehanna Financial Group LLLP Josh Pokrzywinski - Wolfe Research LLC Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc.

Chris Dankert - Longbow Research LLC Walter Scott Liptak - Seaport Global Securities LLC

Good morning, everybody. We're having a great day here in South Florida.

Welcome to our fourth quarter and year-end earnings call. This is Al Nahmad, Chairman and CEO.

And with me today is A.J. Nahmad, who's the President of the company; Paul Johnston, Executive Vice President; and Barry Logan, Senior Vice President.

As always, let me start with 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. As I said, we're having a great day in South Florida primarily because I'm pleased to report that Watsco delivered another record quarter and another record year.

2017 sales income and earnings per share reached record levels and we generated cash flow that exceeded net income. We also raised $248 million from the sale of company shares under our ATM equity program and paid off almost all debt.

We now have the balance sheet to make virtually any size investment in our industry. And as all of you know, we believe our future is bigger than our past, so we're going to need that capital.

Given our performance, healthy balance sheet, and continued confidence, Watsco's board approved a 16% increase to our annual dividend to $5.80 per share effective in April. Before I get into specific results, let me also say that Watsco's 2017 total shareholder return was 19%.

19%, that's consistent with a 25-year compounded annual rate of growth. Now let's turn to the fourth quarter results.

Revenues grew 6% driven by a 7% increase in HVAC equipment sales. Operating income increased 6%.

Operating margins were consistent at 6.4% for the quarter. EPS increased 47% to $1.19 on net income of $43 million, including tax reform benefits.

Excluding tax benefits, EPS increased 11% to $0.90 cents per share. Operating cash flow was $117 million.

We reduced debt by $263 million during the quarter to $22 million at year-end. Now looking at the full year, revenues grew 3%, including a 4% increase in HVAC equipment sales.

Operating income increased 2%. Operating margins were consistent at 8.2%.

Earnings per share increased 13% to $5.81 on net income of $208 million, including tax reform benefits. Excluding the tax benefits, EPS increased 8% to $5.54 on net income of $199 million.

Operating cash flow was a record $302 million. These results includes further investment in Watsco's industry-leading technology platform as well as 150 additional customer-facing employees to expand sales and customer service capabilities.

Now on to the technology. The central theme of our technology strategy is simple.

We are convinced that when our customers win, we win. So our investments are focused on helping our customers be more efficient and making it is so good to do business with Watsco that they only want to do business with Watsco.

A few examples. For HVAC contractors, time is truly money and they are constantly on the go, so our technology is delivering mobile-enabled information and solutions on any form factor anywhere on the planet.

Our customers do not have business hours, so our e-commerce platforms are available for information and order processing at all times of day and night. In fact, in 2017 over 25% of e-commerce transactions were outside of conventional business hours.

Customers want products in minutes, not hours, and certainly not the next day, so we are building and deploying technology that improves order fill rates with speed and accuracy. HVAC contractors often require technical assistance, so we have mastered over 650,000 SKUs in our product information system which delivers that expertise via easy-to-use mobile apps.

These are just a few examples. In terms of scale, we serve over 250,000 contractors and technicians from 560 locations and execute over $7 million sales transactions a year.

That's why we stress this is a long-term mission. We've made progress but we're constantly working to further enhance our customer experience and our internal operations.

Said simply, we are having a great time and know that we are truly transforming our marketplace. This morning's press release summarizes many of the important measurements we use to determine our progress.

We look forward to providing more insight at our Investor Day on March 16 here in Miami. It will be a fun and informative day.

With that said, A.J., Paul, Barry, and I are happy to answer your questions.

Good morning, Jeff.

Hey. Good morning, guys.

Yeah, so SG&A it looks like it ticked up here a little bit and was above my expectations. Anything in there in terms of stepped up investments or one-time expenses around maybe the equity deal?

And just on top of that, can you just talk to us about how you think technology spending run rates through 2018? Thanks.

Barry, you want to take that?

Sure. Good morning, Jeff.

At least the first part of that.

Well, first, there is no one-time thing that's worth explaining in the quarter in terms of the SG&A. The reality is, as we said, we've added about 150 people, actually 154 people to be exact, to be part of the capacity.

Adding capacity to our business, it has a cost, and that cost obviously is intended for a long-term benefit. And just a reminder, in a fourth quarter like this, that type of incremental spending gets exposed in terms of it being a slower, smaller quarter.

But in terms of the long-term, looking at 2018, it's important that we make those kind of investments.

A.J., you want to deal with the technology part?

Sure. As far as spending for technology, clearly, technology and process improvements are at the forefront of our strategy.

So I don't expect any material slowdown in spending. And if there are opportunities to do more that has great ROI potential, we will invest.

Okay, great. And then congrats on the equity raise, and certainly the balance sheet in great shape now.

Can you just talk about the pipeline for deals? Other than the Sigler piece, it's been pretty quiet.

Just talk about pipeline and likelihood we get something done here over the near-term. Thanks.

No, we don't have any crystal ball, as we always say. We are active.

We do believe we offer great companies an opportunity to join us. We have a great record in doing that.

And all I can tell you is we're prepared. We have a great balance sheet to do considerably more transactions.

We do want to make it and we expect we're going to make them. I just can't tell you when.

I have a question for you though, Jeff. Are you there?

I'm here.

Tell me why is it that you and others put out estimates and you ignore the estimates that we put out? And then, for some reason, you expect the company to meet your estimates rather than the ones that we put out.

Why is that? It happens all the time.

Yeah. I mean, we're just trying to take the industry data and what we think the market is going to grow at.

And...

Don't you think we know the industry data better than anybody else? Don't you think our information is probably better than yours or anybody else's that's an analyst?

And don't you think when we put together our estimates, we have a much higher-quality way to look at things? I just don't get it.

Yeah, I mean...

So I'm going to ask you to look more carefully at our own estimates in the future, if you don't mind.

But you really just – like you're not giving guidance today. So do we – can you...?

No. But we gave guidance.

And when we did, nobody paid attention. So anyhow, I don't want to get too much into this.

Let's move on. Anybody else?

Hi, Matt.

Hey, good morning, Al. Do you guys have any estimate for how much storm recovery may have helped sales?

And I would expect that to be a nice tailwind for you in 2018 as well. So do you have any view on how much that may be helping and how much it might help this year?

Paul, you want to take a shot at that?

Yeah, I'll take a shot at it. It did give us a little bump.

I don't think in the grand scheme of all of Watsco, it's really a material event. And I guess I always look at it if you get a bump from that, it's...

Did you say material or immaterial, Paul?

Immaterial, immaterial. It is not a material bump to Watsco.

And we saw it in South Florida and we saw it in South Texas.

Okay. And then the second question I've got, just curious on the timing I guess of selling stock under the ATM.

Al, it sounds like obviously you guys are always active on the M&A front and larger deals. Really you can't control the timing on it; it's the seller that does.

Should we read anything into the timing of when you sold the equity or was this really just you wanted to have a clean balance sheet if the right thing came along?

I think that your look at it is correct. We are very conservative in terms of our balance sheet; always have been, always will be.

And frankly, I didn't even know about this ATM product until late last year. And when we heard about it, we've decided it was a good thing to do.

We may do it again from time to time. As I said, we're not in the business of buying back shares because we want the capital to do transactions and to fund technology, and technology may escalate depending on what happens to the Watsco Ventures.

They have R&D projects that eventually might or might not require a lot of investment. We just like conservative balance sheets.

So it's the timing. It had to do more or less with when we find out this is a kind of thing that can happen, an ATM.

Didn't know about it.

Okay, all right. Appreciate it.

Thank you.

Thanks.

Good morning, Ryan.

Good morning, everyone. So I know you're not giving guidance for 2018 at this point.

But just conceptually, should we think about better SG&A leverage in 2018 because in 2017 there wasn't any operating leverage? And I would just think you're going to get more benefits from technology and the sales hires.

So is that the expectation?

Shall I turn that over to Mr. Logan?

Sure. Good morning, Ryan.

Well certainly the long-term track record says that there is a measure of operating leverage that comes, and this year did not to your point. Obviously, that's a factor of sales, again with what you said, and I would expect there to be a better pricing environment this year.

None of us can tell us what the season looks like, but pricing is one of those things that should help the equation should it play out the way we expect it to. From the spending point of view, you're right.

If you spend money, you expect a return, you expect productivity or you expect sales and profitability, and those investments were made this year with that intent. So I would expect so, Ryan.

We'll tell you in July how it went because we'll be getting into our season at that point. But certainly our expectation and some of our optimism certainly points in that direction.

But I would also say from a point of view 50,000 feet, I mean, look at the record. 25 years compounded total shareholder return of 20%.

Sometimes, the seasonality of the business will change impact on a short-term basis. But we're a very stable business with a very strong balance sheet, and I wouldn't get too upset about fluctuations in one number or the other just because we know that this is a business that will always be stable for us anyhow because what we do is very necessary, to provide comfort with our products when the climate is hot or when the climate is cold.

So we take a long-term view about that, and we emphasize our record of total shareholder return. So we're not that focused on next month or next quarter.

We're focused on something beyond that. Very secure, that ours is a very stable business with a strong balance sheet and probably the best-selling organization ever created in the industry.

Yeah, I understand all that, Al. I just think I'm trying to set the right expectation for 2018.

No, I was just saying that in general. I wasn't picking on you, I'm sorry.

No, just want to make sure that we have that in our models correctly, that's kind of what I'm getting at. But moving on, gross margins flat year-over-year was a nice result just given the mix headwind from equipment.

So maybe just talk about what you're doing to offset that mix. And then is that sustainable do you think in 2018?

Paul?

Yeah. Part of the mix issue that we saw last year was a greater increase obviously in the equipment sales and not so great of an increase in non-equipment parts and supplies.

And we have put a tremendous effort into the parts and supply business going into 2018, and a lot of the customer-focused people that we hired are totally focused on that and not just equipment. So like we said earlier about we make investments and expect a payback, it's our expectation that we're going to see a lift in our parts and supply business which has always been a positive for our gross margin percentage.

Okay, thanks. I'll pass it on.

Good morning, David.

Hi, everyone. First off, on the Analyst Meeting coming up, without previewing too much, I'm sure we can expect to hear about industry trends and technology and so forth.

Without giving everything away, any chance that we're going to hear about a new pillar here, something brand new that we haven't heard about before?

Well let's ask the head of that operation, A.J. Nahmad.

We just haven't focused on it yet. We might unveil some new things at our conference.

We haven't got that far yet to be honest with you.

But I think also, A.J., correct me if I'm wrong, is you're going to have some of the leaders of whom you're developing some major initiatives there. Connect with the crowd that's there so that you can see not only what the goal is but whose going to hopefully deliver it and be able to ask questions with them.

Yeah, that's exactly right. We like to show off our smart people that are building ideas (18:11).

All right. And second, Al, you mentioned potential Watsco Ventures investment.

And I know that there's optionality there, but how big would you consider a big investment in Watsco Ventures be if something really attractive came?

Well why don't we go back to A.J. Nahmad without – don't raise false expectations, just call it the way you see it.

Yeah. I mean, that's where I was going, is that these things are so speculative.

But there are a couple that could be big, potentially make an impact on the industry type, Dave. And I think we had this conversation on our last call, but there's not a day where we're going to write one check that's tens of millions of dollars.

This is much more of a lean startup approach where we'll put things out in the market, we'll see what works, if there's product/market fit. And if there is, we'll invest some more and reach new hurdles and so forth.

So it'll be much more of a slow and steady opportunistic investment as opposed to making some giant leap.

Got it, all right. Thank you.

Good morning, Brett.

Hi. Good morning, all.

Just want to come back to the price comment. Maybe give a little bit of color on Q4 price realization versus volume.

Sure.

And then what's your expectations for price realization in 2018 as a lot of your vendors have price increases?

Paul?

Yeah. We started to see a bit of the price increase that we rolled out in the fourth quarter.

It was late fourth quarter when we started pulling it out, so it had a small impact on the fourth quarter. Most of the price increases became effective, however, in December-January as we said at the last call.

We're always optimistic on price increases, but probably a low-single digit is what we think we'll realize out of this increase on the equipment side. A little fuzzier when we get to the parts and supplies, which direction those are going to go.

Okay, great. And then maybe just back to the other HVAC products, up 4%.

It's really the best quarter you've had in four to five quarters. Are there particular product categories that drove that?

And then maybe just an update around that parts and supply initiative. Are you putting more organizational muscle around that?

And then maybe what are your targets in terms of percent of revenue that you would expect into 2018, 2019 for that piece of the business?

Good luck with that one, Paul.

Yeah. Well...

I mean, we're not going to identify products that...

We can't do that.

...we're going to do well. We don't like competition to know what we're up to.

But go ahead, Paul.

Yeah. It's just an emphasis on looking at what customer needs are, following through with what we've already put in place with our technology where we're able to accept orders online 24/7 as well as being able to have more people out there who are talking to customers about what their needs are.

The individual programs, I would rather not disclose, obviously. And as far as a target for what our end result is, hopefully much greater than this year.

Yeah. And I guess is it more of a focus from an incentive standpoint or is this just – and maybe...

Paul, the way we work is we look for opportunity, and we think we have an opportunity and we're going to now act on it. It's not very complicated.

We look at that all the time, opportunity and certain – I mean, we do business with 1,000 vendors. And from time to time, where we look and see where we have opportunity, we design a program and we pursue it.

What Paul is trying to – his goal is to increase margin, and parts and supplies do that well. I should say not supplies, but parts do.

And so we think there's an opportunity and we'll see what happens. But we prepare plans, promotions, and we motivate our selling organization to service the contractor better with parts, and we hope it produces higher margins.

Okay, great. Appreciate the color.

See you guys in about a month.

Sure. Hope you do.

Mr. Tusa.

As they say in Miami, [Foreign Language] (23:01).

I'm not sure I understand what that means, but thanks, thanks.

It means how are you, Steve.

Okay, thanks. Hopefully you're going to treat me a little bit nicer than you treated Jeff.

No, you do the same thing. You don't listen to our own guidance.

You make up your own, and then this is what happens.

Yeah. So first of all on that, I mean, what I'm backing into from the first three quarters relative to the guidance you gave on the third quarter, you are – I think even if we kind of round up, I think a couple pennies were added to the year-to-date number.

If you round up, you're still at the low end of the range, so...

That's okay. At least it's our range.

It's our range. That's what we said it would be.

You missed the midpoint. And by the way, we're trying to do our own – I mean, if you just want us to kind of use your guidance, I'm not quite sure what we're here for or what our...

No, what I'm saying is why don't you pay more attention to the guidance since we know more about the industry than, I would say, anybody in the industry. We have the broadest distribution.

(24:12)

We're not going to get anywhere with this discussion. I spoke what I felt and you do whatever you want to do.

I'm not going to...

No. And then we're – I'm just defending Jeff because I think Jeff does really good work and I don't think either of us, any of us...

Well, the opinions are divided, shall we say.

Okay. On that front, your incremental margin this year has been low single digits, that's just math.

15% is kind of, what, is that a number historically that you've done? Should we be returning to that in 2018 and 2019 or are we still kind of in this low single-digit incremental margin outlook?

Barry?

Well, Steve, again, the size and timing of investments is never a straight line, right?

Yes.

Investments are made for future benefit. Maybe the people we hire today won't have a benefit for two years.

In the long-term, that's what we should do. That's what a company should do to continue a long-term track record that we've established.

Now parsing that and splicing that in quarter-by-quarter increments is your job. I realize at the same time it's – there's a reality of when the spending comes in, both the size and scope of it.

So having said that, culturally, we expect our leaders in the field to generate higher profitability than sales growth rate, no question about it. And the 15% benchmark that you're asking about is the same benchmark we expect from our leadership.

How that plays out, and if it plays out, we're very conservative in our outlook sitting here in February. But that's certainly the intent, is to have better operating leverage over the next couple of years.

Yeah, and I'm not talking about quarters. I'm just thinking about over the long-term.

So definitely not thinking just about quarters, but four quarters doesn't make up a year. So it's just interesting to follow the progression.

And we have zero issues with you guys investing as long as you know it can be kind of broken out and we can incorporate that into our models, so we appreciate that. Are there any kind of reloading on the acquisition front?

Is there any loosening up of any of the distribution that you guys are looking at from the OEMs or is this still mostly the independence that you're looking at?

Well we certainly wish the OEMs would joint venture with us. I guess we were accused of being too persistent because we're constantly asking for joint ventures since we've had such a great success with the Carrier joint venture both at the manufacturing level as well as the distribution level.

But generally speaking, and the acquisitions I feel (27:02), I believe that because we've got such a lead and such a big emphasis on digitizing our company and improving our service to the contractor which in turn makes him better and more efficient and attracts more and more to Watsco, I think that other distributors who face what's going to occur, we believe digitize in our industry is the future, the digital economy. They will see that it's perhaps a good idea to talk to us about how we might share some of that technology, how we might share some of our capital.

We do, as you know, buy and build. If we buy a business, what we're interested in it – and it's not cutting cost, we're interested in growth, so we find growth.

We take – if it's a private company, we take the liability of the owner who has to sign and guarantee loans to grow. We take that away, we just fund.

Anybody who wants to – more branches, more people, more products, that's what's worked for us. That's why we became the largest.

So I think that the evolution to a digital economy will bring more opportunity, and that's why we keep our balance sheet strong because these things can be of any size. Of course, we always prefer those that are doing well so that we can help them do even better.

And whether they're smaller or bigger, we just think it's going to happen. I just wish I could tell you more about the timing.

I don't know, but we're active.

Yes, I'll accept the call, I'll accept the call. Okay.

Thanks.

Okay.

Hey, guys. Good morning.

Good morning, Robert.

Did you say how 1Q was tracking or could you?

I'm sorry?

How 1Q was tracking? Good top line...

Every time we try that then – I mean, one month can be good and then it softens. I mean, this is a climate-based business, right?

And without getting into trouble, I'm going to say we started off very well. But what will happen in the rest of the quarter, I just can't tell you.

Anybody that says they can is fooling himself. You don't know.

Fair enough. I also...

Although I would say that in terms of share of market, I think that we eventually would significantly increase our share of the market because of our ability to invest in branching, our ability to invest in increasing product offering, our ability to invest in more people to service the customer, our ability to invest in technology. So that's our view and we keep saying it's all long-term oriented.

Yeah. Listen, actually picking up on that comment, Al, and this is also a question about the Analyst Day.

I'm curious if you think at the Analyst Day you'll be in a position to make a more explicit link between your IT investments that have been going on for a few years now and what they can actually mean for the top line and for the operating margin.

Why don't we ask A.J.

Yeah. I think as far as where we are with that today, a lot of the data that we shared in the press release, it points to a lot of the technologies being adopted and getting into our organization and starting to scale in the organization, and there is some inherent value in that.

As far as maximizing the potential value and capturing the value that these technologies create, we're still very much in the first inning. And on Investor Day, that's probably a good idea.

We should try to connect that, those links a bit more concretely for you.

Right. Yeah...

And we promise to have good weather for you.

Yeah. I mean, the weather was not very good last year, so that would be good.

But, yeah, perhaps even maybe in parts of the business where the adoption of the IT is more advanced, you can say listen, it may not read out everywhere but at least in these branches we've seen this much impact on growth or op margin. I think that would be helpful.

You got to remember, we – our products end up in the hands of about 250,000 persons that are technicians, engineering people, people that our there installing and repairing. That's a huge audience to take on new stuff, that's why we don't like to pin ourselves down to when they will because we know it's going to take a while.

But we know that we're the best ones doing it and we know that eventually it's a damn good investment for the shareholders. I hate to think what would happen if we weren't doing this, who might come along and disrupt this.

Well we're very concerned about – and we'd correctly, I think, fear the Amazons and people like that. What that causes us to do is to think even harder, to think how to help our contract – it's all about the contractor.

We're not interested in products as much as we are and services to the contractor. Our technology is focused exclusively on the customer, to help him do better.

And of course, that also helps us operate better. Some of the technology helps us operate better.

Yeah, no, fair enough. Logically, it does seem like it would be.

Just one other quick one, following up on the earlier comment about the other HVAC products growth. To what extent was there some benefit from the hurricane rebuild in that number do you think?

Who would know that? Barry?

Hello, Robert. At first there was a retrieval of business that were lost from some of the closed stores in September.

So that's just business that flowed into this quarter and, as Paul mentioned, gave us some measure of bump (33:19). In terms of a sustained benefit of some kind, it's not something we can certainly go out and give you a number or even know the number.

But safe to say there is a measure of benefit that will creep in, but it's not material in my mind and it will probably take all through this year to play out. But it's not a reason to be overly optimistic about it because it's, again, only happened in certain regions of the country and will play out I think over a long period of time.

Got it, all right. Thanks, guys.

Hi, Josh.

Hi. Good morning, guys.

Just a question, zooming out a little bit over the last few years on margins Al, Barry, whoever wants to take it. It's kind of been pinned at this low 8% level since 2015 and...

8.2%

8.2%. Okay.

I mean, I'll give you credit.

When we started the industry was at 3% or 4%, so we pretty much doubled it from the industry.

Sure. No, I mean, not taking anything away from the progress, it's more on kind of – it seems like it syncs up with when some of the investments really started to ramp up.

Yes.

And I think Barry's comment earlier about 2018 being a return to something more of a normal incremental, well at least that's the ambition, should we think about it then as being – these investments being kind of a three-year payback? Is that...

No, it's hard.

when you see either a turn?

It's a great question but, again, we don't want to mislead anybody. It's not going to produce margin increase; we don't know what it's going to produce.

We just know it's essential. It's essential that we help our contractor, it's essential that we focus on the digital age, it's essential that we block any serious competition from us.

Do we think it'll help margin? Eventually we think it's going to be terrific, we hope we'll get into double digits eventually in margins.

We actually feel that way but we can't call when. I know that that's what you're supposed to ask, but we'll try to answer as best we can.

We don't know. All I know is our record, long-term, has been very good and I don't expect it to slack off.

I've said it openly. I think our future is bigger than our past especially because we're getting this technology in place that's going to make, hopefully, help these contractors with what they do.

That's our focus, the contractor.

I guess maybe this is a better question for the Analyst Day. But I guess if that's the mentality, how do you know when the investments are working?

Well, read the press release.

There's no, like, margin aspirations tied to it. It's a little harder for us to see it actually.

Yeah, but read the press release. It may give – it doesn't give you a numerical but it should give you a sense that it's being adopted.

But it's a big field to adopt it, 250,000 more or less people out there. Yes, does it show – can we point to a margin change because of that?

We did not do that in the press release because it's very difficult to measure at the moment. But I wanted to give you guys a sense of what is actually occurring, that the technology is being adopted.

If something is not good, it would not be adopted, and it's being adopted. And so hold on is all I can say and respect this for our track record, our 25-year track record.

Right, right.

We think we know what we're doing. I mean, I'm going to have a little fun with this now, but you know that our 25-year track record is better than Warren Buffett's.

How about that? We're ranked higher than he is.

He has a lot of capital to put to work, but I definitely appreciate that.

25 years, yeah, total shareholder return. Do you guys care whether it's a lot of cap or a little cap?

Well, I mean, that's our record and we have been ranked higher than that.

Now just switching gears...

I know you're trying to get some specifics for your models, but we're doing the best we can. It's very difficult to predict some of the things you want us to.

But we'll do our best. How's that?

Barry could do that offline.

So just switching over to some of the comments about the at-the-market offering. I mean, I tend to think of that as more associated with industries that have pretty big difference in timing between cash flow and project costs.

You guys are great cash generators; that's always been the case. I guess I'm kind of surprised to hear that this is something you could look at more often.

I mean...

Yeah.

I think A.J. made...

Well, because...

...comments about not a lot of big bids. So where...

No, we didn't say we're not going to have a lot of big bids. We just said the opposite.

We're hoping to have a lot of big bids. We're hoping that we don't – that we won't run – we don't like a lot of leverage.

That's our culture. It will be now.

It will be in the future. But we know that there are opportunities, and we think some big ones might come along, and I want to be ready for it.

Even when we do the big ones I don't want to have a lot of leverage. We're just not like others in this industry.

We don't believe in buying back shares to improve earnings per share. We believe that we should have a balance sheet to do whatever comes along, not only in the acquisitions field but also in technology.

We want to be ready if something breaks through that nobody's ever heard of to fund on the R&D side of our business. And certainly on the acquisition side, we want to be ready, and we have a very big appetite for large deals.

Got it, understood. Thanks.

I think my questions have been answered. Thanks, guys.

Hi, Robert. Okay.

Thanks, Rob.

Morning, Chris.

Yeah. Morning, Al.

Thanks for taking my questions. Just kind of want to put a finer point on something here.

I know you guys are proponents of long-term investment and the comments that you're seeing a lot of opportunity. I guess what does that mean or is there any plan to add additional heads in 2018 or do you kind of like what your employee count looks like right now?

Paul, you're the operating person.

Yeah. We add people at the individual branch and operating level, and we have that decision-making process.

If our people in the field see that they need people to satisfy customer needs or to move into an opportunity which has presented itself to them, they will add those people, very, very hard to predict. At our level, we're not micromanaging the people that are going out there and talking to customers.

That's something that we push out to our field operating people who actually know what they're doing.

Got it, got it. And it's at a high level here, really zooming out, I guess the historical replacement demand growth number we've seen in the past is somewhere in the neighborhood of 4%, give or take, I guess.

Based on data you guys have, is there any reason to suspect a change in that number, any other dynamics that we should be aware of on our side of the phone?

Barry?

So Chris, good morning. Obviously there's only three variables in our sales.

It's the number of units we sell, the price we sell that, and then the mix that allows for selling it higher or selling it at better prices. And the consumer is behind much of that dynamic, how many units, at what price, and at what mix.

So again, we're sitting here in February and can say those were all positive signals in the fourth quarter. And I think so far in 2018, how that plays out in the summertime is a bigger variable.

But I would expect there to be some continuance of what we've been seeing given how the consumer is going.

Got it. Well good luck guys and see you in March.

Great. Look forward to seeing you.

Good morning, Walter.

Hi. Thank you.

Good morning. Hey, I wanted to ask a follow-on on the branch adds.

I guess the e-commerce number look good at 25%. Is there a point at which you get enough e-commerce where you can get more productivity out of the branch people and maybe start allocating resources?

Well in our minds we haven't executed and we're just beginning the thought process. We think we may accelerate branches, have more.

We think there's territory that can use it. And we like having high densities, that's a wonderful thing to help the contractor with.

The closer the supplies and the technical support and everything else that he needs, we think we might be spreading that out. But as I said, that's just a thought now.

We're not ready yet for that. We have been closing branches from time to time that didn't work out, but I think we may start accelerating our footprint, spreading it out more.

That sounds great. What timing do you think you would see, I mean, something like that?

What geographic region would look good?

That's a little early. It's a good question, but it's a little early.

All right, fair enough. And I wanted to ask a question about working capital.

And the receivable cash inflow looked better than I thought. But the inventory, usually it draws down a little bit.

It looks like you may have invested in inventory with your...?

Yeah, that's a good question. There is a specific on that.

Barry?

No, well good morning again. We do and price it and – let's put it this way.

We do want to take advantage of our balance sheet and times with buying inventory that will allow us to use price and basically take advantage of opportunity. We've done that.

We did that in the fourth quarter. The inventory that's reflected is higher than what it otherwise would've been.

But that's, again, using some of our balance sheet to hit the 2018 season with. We won't tell you how much or who, but that's part of the part of the strategy of using our balance sheet.

Okay. Fair enough.

Thanks.

Thanks for listening and hope most of you can make it down to Miami in March, and we'll try to bring you more into the loop regarding technology. Bye now.