Q4 2022 Watsco Inc Earnings Call
That's good it gets put there [laughter].
Good morning, and welcome to the Watsco fourth quarter 2022 earnings conference call.
Participants will be English only mode.
You need assistance, please signal conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions.
A question that is starting on your telephone keypad.
To withdraw your question. Please press star two.
Please note this event is being recorded.
I'll now turn the conference or Albert <unk> CEO . Please go ahead.
Everyone I do hope everyone is healthy.
Not struck by the virus.
Welcome to our fourth quarter earnings call and this is al <unk> Chairman and CEO .
With me is a J.
President of Watsco.
And Paul Johnston, Barry Logan and Rick Gomez.
Before we start our here's our cautionary statement.
This conference call has forward looking statements.
As defined by SEC's 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 statement.
Okay.
Now watsco delivered an exceptional quarter to close out a fantastic year.
We are especially please.
In the fourth quarter of last year.
I should say the prior year.
Sales were up 21% and earnings per share were up 77%. So the results.
We're reporting today, where against that performance in the fourth quarter of the prior year.
Yeah.
So how did we do on the fourth quarter of this of this prior year.
2022.
Well the sales grew 5%.
To a record $1.6 billion.
Adjusted operating income increased 14% to $141 million.
EBIT margins expanded.
50 basis points, a correction 80 basis points.
To a record eight 9%.
And adjusted earnings per share increased 16% to a record $2 <unk>.
And 35 cents to dollars and yeah 35, right now.
Now we're going to explain what the adjustment is.
As we go through here.
So remember this fourth quarter results were running against the prior year, where sales were up 21% and earnings per share was up 787%.
So we think we did well.
Now for the full year.
Sales grew 16% to a record $7.3 billion.
Adjusted operating income increased 30.
<unk> 33 per cent to $835 million.
Yeah.
EBIT margins expanded 100 and.
50 basis points to a record 11 and a half per se.
And adjusted earnings per share increased 32% to a record $14.20.
Yeah.
Now, let me clarify what the adjustment made.
These figures the adjusted figures include a 49 million dollar I should say.
Let's get the adjusted figures exclude exclude a $49 million net tax benefit.
From vesting of restricted shares.
Yeah.
Which added the dollar 20 in earnings per share for the quarter and $1 21 earnings per share for the year those were excluded in the numbers that I just gave you.
And very important we generated a record cash flow.
$572 million due in 2023 and ended the year with a strong balance sheet and virtually no debt I like having very little if any at all.
Yeah.
Our financial strength gives us the ability to invest in most any opportunity as we continue to build scale in a very fragmented $50 billion North American distributor market.
And we continue to look for acquisitions. It's watsco is a great home for family businesses and why is that well because we sustained cultures, we invest in people and we provide technology to secure.
And build on their great legacies.
Our focus is always always on long term.
Which makes us different than other acquirers in the industry.
Yeah.
We have challenged our leadership teams to develop aggressive growth plans utilizing our scale.
Product diversity, and technology leadership and build upon our growing market share position.
To that end, we are working collaboratively.
With our OEM partners to develop forward looking growth initiatives, particularly in light of the various regulatory and positive industry catalysts.
That lie ahead and there are some good ones.
This quarter results also reflect continued progress on two key areas of focus.
And those are sustaining gross margins.
And improving operating efficiencies.
There's more to do on both.
But we are encouraged by our progress and our intent and achieving.
More operating efficiencies across our network.
Okay.
This morning's press release provides important concepts and details that support.
What's goes long term growth trajectory.
Okay.
Some of them are we haven't.
And the immense technology advantage and we are investing to grow that advantage.
These technologies are increasing customer engagement.
Do you think attrition and creating sustainable market share gains.
In addition watch goes broad array of products and brands.
As a competitive advantage that allows us to serve contractors.
In any environment.
Well you also have a leading market share position.
And some belt markets proving stability and higher growth overtime regarding those sunbelt markets a lot of people seem to be immigrating.
Sunbelt markets and in recent times and that works in our favor and it says we're the leader in those markets.
In addition, there are several important to regulate our regulatory and industry catalysts for growth that will play out in the next few years.
2023 saw the introduction of high efficiency standards.
For HVAC equipment.
Which will provide a pricing opportunity for us as well and this is very important as well as energy saving opportunities for our water.
And businesses.
In 'twenty three and beyond.
And then in 10 2025 will also market introduction of new refrigerant standards.
Which historically.
Made it harder to repair existing assistant and drive customers to new equipment.
Yeah.
We also see continued to move movement towards electrification and greater adoption of heat pumps, which generally come at a higher price and higher margin.
Sales of heat pumps grew 25% and 2022.
I'd, just say our sales of heat pumps grew 25% in 2020 two.
And 21% during the fourth quarter.
Outpacing overall growth rate.
Finally, the new inflation reduction act provides enhanced tax credits and incentives.
For efficiency upgrades.
In electrification.
All of these catalog catalyst will benefit the industry in the years ahead, and we certainly believe that our scale.
Technology.
And financial strength position us to capture these new market opportunities.
Finally.
Well you always have a concern about our balance sheet.
So that we are in a position for now.
So strength.
Today's balance sheet remains pristine condition to invest in any size growth opportunity.
In the coming years.
Lastly, before turning to Q&A I would like to thank them.
More than 7000 employees of watsco across our market for their service and commitment to customers. They have done an extraordinary.
Job to serve our customers in general and generate historic for farmers.
As you see today.
I believe that that's good.
So on Q&A.
Yeah.
We will now begin the question and answer session.
A question Michael Star then one on your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
It was part of your question. Please press Star then two.
At this time.
Longer term with some of our Austin.
Our first question will come from Tommy Moll with Stephens, Inc. You May now go ahead Ernie.
Tom.
Good morning Al.
So I think it's two quarters in a row, you've you've made a point to mention operational efficiencies on this call.
And I was hoping you could give us a little more insight into what initiatives you have underway, there and as the bottom line that.
SG&A will grow no.
Faster than revenue and likely slower than revenue, even if volumes in the industry are pressured this year.
Well, we certainly.
So that's our goal.
Is to constantly improve.
Improve our profitability and our revenues without significantly increasing our increasing SG&A, but let's get a little bit more color for you.
Yeah.
Yeah, Tom I would say good mornings timing I would say that first yeah. There's obviously in any distribution model a variable component to what we're spending on SG&A.
And the variable components were probably the most volatile during the last couple of years, when freight and overtime and.
Even even.
Just the daily life of our branch manager and 10 to 15 people on a branch was tested through all the disruption and everything that went on in the last two years. So those variable costs we.
We definitely saw an improvement and reductions in the fourth quarter.
And again that would be I would say a foreshadowing for what we're looking for going forward as some of the variable cost and inefficiency.
Coming opportunities to create efficiency this year in 2023.
Obviously, we also have fixed costs.
Which is probably a half or so of our SG&A spend.
And there there's inflation yeah theres been any.
Over the last 12 months like every other fixed cost of every other business.
So it's not it's not that simple to simply reduce cost across the entire portfolio, but the variable costs, we're seeing already in our fixed cost with more moderate with more moderate inflation I would expect to see some improvement so not net I'll.
I'll set out the goal is to have.
Much more of a moderate SG&A.
Statin versus revenue growth.
And Theres not a leader a branch manager a regional person in watsco that isn't focused on it.
And this this is Paul I I'd also add you know we talk about technology for our customers.
How it enhances their experience and provides them with a more efficient.
Model to do business with Watsco, but also those same technologies work within watsco to improve our efficiencies.
We've got I think a world class inventory management systems, you know World class data management systems to be able to track and know what where were not efficient and where we're not where we're at where we are efficient.
I think our people have spent the last four or five years learning how to use these tools and I think theyre going to come into play now as we are as we reach a more normal if you will business environment out there.
I appreciate the insight and wanted to follow up on a different topic on inventories.
Even it's always a good topic by the way [laughter] with inflation in the last couple of years. Yeah go ahead.
Where I was going out if even if your revenue is up this year is it more likely than not that inventory dollars on your balance sheet will be lower by year end.
And how much the supply chain have to improve to make that happen or is this more within your own control at this point well as tenured overdoor our financial people.
Yeah, well again, theres, two pieces or probably twenty-five pieces to the answer by the way, but I gave you the two big ones.
First as lead times lead times I've been tested the last two years lead times is what determines what we order and what we carry.
And just what our inventory levels are and to the extent, they're either disrupted or uncertain and we need to hedge in terms of what we keep in branches. That's what we've done the last the last couple of years.
So to the extent that over the next 12 months lead times become more dependable and less than there is the opportunity and would be the consequence of lowering inventory.
Whether it's lower than it is today in absolute dollars.
Factors involved but.
We would expect lead times to to shorten and confidence to strengthen and lead to lower inventory levels over time the second today.
Your you know where where it's hard to see it on a piece of paper, but our branches in the last 90 days have gone through the biggest inventory conversion.
From old product to new products that they've experienced in their careers it still going in and trickling into the first quarter as well.
So in many respects inventory is not business as usual, but also because of the product transition.
And over the next 12 months is that works itself through.
Would expect that to help inventory levels, meaning reduce inventory levels.
And or kind of looking forward to that to greater simplicity than we've been experiencing the last couple of years.
My.
Parents that we have.
Little bit what Barry, saying, there you know we you consider what we did with the going from what we call the <unk>.
M inventory, which is what we sold last year to the new M. One inventory basically we have to do a transition where we're replacing all of that inventory because in most of our sun belt markets.
The old inventory is not would not be available to sell.
So for US it was a complete refresh of all of that inventory.
And also adding to Barry's point as we move into the new inventory, we're gonna have a reduction in the number of Skus that we have to handle on the equipment side.
Which are we think will result in a better efficiencies and higher turnover.
Okay.
I appreciate the insight and I'll turn it back, but all of that that work on the inventory obviously as.
It leads to better cash flow as well, we're very aware of that.
The better we manage the inventory.
Just start all the forces that are are being where prison they dealing with the better the cash flow. So we expect to pay off in cash flow as well.
Thank you.
Yeah.
Our next question will come from Dave Manthey with Baird.
Uh huh.
Hey, al good morning, everyone.
I was wondering if you could talk about gross margin based on the mix of business in your current outlook is the annual gross margin floor start looking like it's approximately 27%.
Mr. Logan.
Yeah, well they again, Dave good morning, well firstly, the most simple component of gross margin percent is the markup, we sustain on selling products.
And what is our markup and we call that selling margin. It's the simplest most important you know analysis and.
That's what increased this quarter.
And and it's it's satisfying because again, there's a lot going on in the market a lot of product changes a lot of conversions a lot of a lot of noise and and our teams did a great job of sustaining margin.
So I don't think there's anything that's changed in our either our thought process or analysis or what our business leaders are telling us in margin looking forward in 2023 and <unk>.
You've heard a 27% as a target.
Our entrepreneurial Sierra would tell you, it's an interim target because we have greater expectations than that.
Yeah.
[laughter] and but I don't think anything's changed either in the mix of the thought process Dave of what the target is.
Yeah, that's good to hear.
And then second is in somewhat of a random question, but for future reference.
Lately what are you getting these days for a pound of our works in a refrigerant and what what percentage of your sales is replacement refrigerant right now.
It's.
What do we get it's around 25 $26 for a pound for tenet.
And that varies by region for a jug.
No that's possible.
That's pound okay.
And that varies by region and it's a very small percentage of our total sales.
Yep Yep.
Alright I appreciate it. Thank you very much you bet.
Our next question will come from Jeff Sprague with vertical research.
Yes.
Hey, good morning, everyone.
Hope you're doing well thanks for taking the question.
Yeah, I just wanted to come back to inventory also just for maybe a little bit more granularity if we if we could.
It is the I'll call. It disruption, maybe you guys called it the internal fire drill but from the [laughter] transition from old to new.
As product geographically, where it needs to be is there stuff stranded now in the south that you can't sell it needs to move on you know is there any any of the calculus.
Noise that we should think about particularly in the first quarter here.
Well, that's a very good question and we're very aware of what would happen by year end.
And so the answer is we took care of that very very well there.
There's no exposure to that or no significant exposure and whatever there was we just shipped our northern branches, but it was very small.
That kind of makes watsco unique because we're we're a national North South East West Company you know.
Nothing is ever as.
As ever stranded because as al indicated we've got a large business that we do in the northern tier of the U S plus a plus Canada, where we were able to move very little inventory actually but we did move the inventory to make sure. It's available to so yeah. We are very aware of this so we weren't the inventory down in the southern states.
Okay. Thank you for that and can you just help us frame up kind of the the volume mix dynamics in the in the quarter volume price mix. I mean, obviously you were selling old units, but youre also selling new stuff, we've got multiple OEM prices price increases out there plus your mark.
But just.
A little bit of help on how the quarter really play so that's why they pay us the big Bucks I figure I'll, let out.
[laughter] they pay us the smaller bucs to figure out what it was [laughter] right by the way I would say that just to give some some editorial on it I think the idea of selling out of the end product in the Sun belt markets.
And the regaining of the other replacement inventory of Am one there was probably actually a gap there as you know as opposed to move.
Meaning that there you know, there's there's almost probably some some.
Branches and so on it did not have the new stock to sell as they sold out of the old stock. So that transition was probably slightly negative to a unit in the fourth quarter just to give you. Some color. So don't Oh I think the Oems are still playing catch up on getting the Hamlin product everywhere it needs to be.
As opposed to being ahead of what we're if it would've been so some of the Oems are doing better than others. So it's pretty on a target or a supply chain from that respect.
But they're giving it to give you. The answer you know you can see the we said U S U S. A prada.
Products are up 4% in the quarter.
So I'll give you the the units our units were down.
8%, which would be which would mean prices up 12.
And that 12% prices you know again six line items that would add up to 12%.
Not so much inflation some inflation.
But the heat pump growth, obviously is a big component.
All of that of that growth rate because they were selling at a higher unit prices there.
And some inflation, but that would give you the mixture.
Terrific. Thanks for the color.
I appreciate it.
And don't don't ever done ever forget that in the fourth quarter and even in the first quarter draw.
Drawing inferences in what's a much smaller quarter than the others as you know give it give it the way that it deserves given the size of the quarter.
Got it thank you.
Yeah.
Yeah.
Our next question will come from Ryan Merkel with William Blair You May now go ahead Ryan.
Hey morning, everyone. Thanks for taking the question I wanted to start off with a question on price mix and the impact in 2023, I think there's a little debate about what price makes could be given that you know that this year change so any any helps get us there.
It would be appreciated.
Yeah, I would say by the way I'll turn it over to somebody knows more about this and I do but also the.
That mix change their product.
It's affecting our margins.
That's a very significant part of what.
What's going on and people start buying.
Or have been buying more.
Heat pumps and improves our margins just by that fact.
Though some of these products are at a higher margin.
And then other products. So it's also a mix of products, but Paul go ahead, or Barry where ever wants to take that.
That's a very complex question and you know obviously.
We've indicated twice that our you know the eight by himself.
You know they they give us a better mix of heat pumps, obviously give us a better price dynamic and more profit dollars.
And when you get into some of the other products that we sell like you know are we haven't mentioned it yet, but you know the duct free splits market. You know has continued to grow at double digits for us not only in the quarter, but also on a year to date basis are even more.
So those those also come with a higher margin to them and that market has continued to escalate them with new products and as well as we're starting to see hybrid units that are getting into the ductile side.
And without getting too far into the weeds on that you know.
Where we're starting to see a lot of crossover between the duct free products become inducted.
And becoming more functional and that obviously adds to higher gross margins and better better profits.
Okay.
Have a wonderful benefit for the end user.
Explain that Paul.
Yeah that the products that we sell or are well above the the minimums.
Yeah under old here terminology. They were in the 18 to 24 year range, you know versus we consider you know 16 17 here on the <unk> product to be.
Very high efficiency. So the consumer is saving money getting them, a great product and we're seeing more and more on entrees into that marketplace from from all of our Oems.
Got it.
Yeah.
Net.
Go ahead Barry.
Just to add I, just a reminder, on the M. One product obviously, the alien you didn't capture a higher selling price in the market and I don't think anything has changed from what we're seeing.
In terms of price capture in 2023 on the new products.
And it depends on which OEM in and which conversation, but there are some march one.
Or some March price increases also flowing.
From the Oems and in March and how much of that sticks into the market time will tell but.
There is a you know obviously.
You know some inflation to be captured this year, which as you know.
Part of what the items are feeling in terms of their pressure.
Got it so I was sort of thinking price mix next year to be mid single digit to high single digits, given all the moving pieces I mean is that at least in the range.
Yeah, I hate to comment so specifically Ryan on on a range I would say what you've seen in the last six months from watsco in terms of price.
You know don't include a lot of inflation.
It includes a lot of price capture and mix and.
So you know I think.
There's still a big dependency on.
On the contract to go into someone's home and selling these products and capturing their price.
And so time will tell but I think obviously, we expect.
A pretty strong pricing environment this year.
Well I have to hasten to add that these are not just price increases for the hell of it the innovation of cooling and heating that's going on now is.
It's magnificent for the people that use.
H B E C.
I mean, theyre getting the savings are going to have heat pump because the heat cool and heat. So you don't need a cooler and the fairness. That's a wonderful use of it the federal government's discovered that so they're they're they're providing already and we'll provide more incentives for businesses and homes to use the heat pump everybody.
Wednesday on that then.
Consumer saves more and the.
And there are less emissions from it.
So.
Yeah.
I always like to think.
A little further out I don't see anything that isn't positive given that heating and cooling is 50% of the homeowners cost of electricity and all of these innovations are.
Focused on helping that consumer.
Save money as well as benefits from my more efficiency in the.
And in.
In the the the unit itself, which is how he saves money.
So I I just state the industries on a roll here now.
Because of the.
Concern about emissions.
They're concerned about.
Refrigerants damaging.
The environment.
And there's a movement by the guys, who make the stuff to innovate and more of the innovate the more we enjoy providing great products to the.
To the contractor who in turn provides it to the homeowner or the business owner is just a lot of good stuff going on.
Alright, I agree thanks.
Beth.
Our next question will come from Nigel Coe with Wolfe Research you May now go ahead.
Thanks, Good morning, everyone.
Pardon me Nigel So morning. So you mentioned the you know the ductless.
Ductless splits systems, that's growing double digits. It just strikes me that this is the byproduct, but this time given the efficiency the price points and it feels like the I R. A it's almost being written for the system. So do you think the 'twenty three 'twenty four there's going to be a real breakout for these units and it sounds like it's a lower price.
Point in our revenue mix, but better margins is that the way to think about it.
You know actually it's it's a you know for the last 20 years, it's been growing and growing and I think the I don't think it's going to be a breakout period for it.
Have to remember that there's approximately 70 or 80 million homes out there that have duckworth that runs through them. So.
Their ability to adapt to the ducting system had a career for really two but to be an important element.
But the.
The ducting systems that we have the the new M. One products, our our Oems have done marvelous things with the technology.
Engineering of them to come up with more efficiency to come up with a way to maintain cost.
And provide better comfort for the consumer so I think it's gonna be a nice balance now that we've broken out between ductless and the duct free.
I almost call it almost a conversions where I'm going to wear a homeowner would perhaps use both products in their home.
Yeah.
Right, Yeah, so more hybrid system something that makes sense.
The down 8% units in the quarter, you mentioned that some some of your warehouses.
You're stuck with the transition because it sounds like that was a bit of an impact I mean can you just give us a flavor on how that's been tracking through the through January perhaps.
And when do you think we'll be in a situation where the Oems.
The speed on this <unk> product.
Yeah.
Well in the most most of the Oems are improving there is there is a yeah. There is some dysfunction in the in the channel right now obviously with the higher demand for.
For heat pumps, that's created some some longer lead times are long lead times compared to the straight cooling units and the gas furnaces. So we're hoping that they get those ironed out.
When you know that you'd have to ask the Oems when theyre going to be able to do that but it's our hope that you know that'll start stabilizing in the AR in the second quarter.
We're also seeing some some high.
Demand on the commercial products that we offer and lead times there are stretching out into the months not yeah. That's that's most difficult.
Uh huh.
Inventory excise ability that we have now the commercial.
With a high with a very high demand for them and so that's that's kind of pushing sales along out into the year.
Frankly with that that particular product if demand continues where it's at it's gonna be a it's going to be probably throughout the entire 2023, we're going to see.
A disconnect there between availability and demand.
But any improvements in that minus eights into into <unk> with the perhaps the better supplier in E systems.
With it with the residential systems, we are seeing definitely an improvement.
But as I indicated earlier again, it's mostly with the street cool products that we're seeing the improvement we're not.
Today, we're seeing small improvements on the heat pumps, but not not where we want them to get our inventories suggested.
Great. That's very helpful. Thanks, a lot.
Okay.
Yeah.
Our next question will come from Jeff Hammond with Keybanc capital markets.
You May now go ahead Hello.
Yeah, Hey, good morning, everyone.
Ally it came down to Miami and it rained for two days you said, it's always sunny down that you didn't call me otherwise that have made it.
The Sun if you come down here and don't tell anybody that's got to be what it's going to be [laughter] well, even if we take you to a big room Briggs said when we were here.
Oh, I don't know a couple of weeks ago.
What did you enjoy the weather at least.
It rained [laughter], it was nicer than Cleveland, but [laughter] well right.
Yeah, Yeah, Yeah, I'm, just just back on the inventory question I guess, you know Barry you mentioned lead times and the conversion.
Yes, if you <unk>.
Say lead times get back to normal and we obviously, we don't know when and you get through this conversion.
You know how much inventory ultimately do you think you can take out of the system, assuming those two things happen at some point.
Within 2023, and you know if we get some of this destock, which everyone's talking about you know kind of is it.
You know ended the season, you know what what's kind of your best guess on timing. Thanks, well I'll give you a number that's a goal.
Not where they were able to achieve it or not but what I want us to achieve is to remove $200 million.
Inventory.
Who knows.
Jeff when you look at it you've got to look at it on two sides you've got to look at it in dollars you got to look at it and it's also you.
Our unit inventory is not up that dramatically, it's up mid single digits.
So when you look at it that way at a lot of the dollars you now have to do with the inflation effect and if that continues to go along you know we're gonna have to work even harder to reach to reach our goal, which I think we all want them all want a machine and all want to meet.
Okay.
Okay. That's that's really helpful.
So just on 2023 I know you guys don't give guidance, but you know most of the Oems are kind of calling for.
You know kind of a sell through unit decline of mid single digits in.
One just wanted to get your your take on that and that's market I understand you guys want to want to outgrow but.
Yeah, just just your view of kind of market volume for.
For 2023 and then.
Now assuming that you know can you still grow sales and earnings this year. Thanks.
Oh, that's an easy one this year yes.
I'll, let somebody else answer quarter.
Yeah.
Yeah, I mean in terms of the year, Jeff are our team our leaders are.
Our business.
One of the people in the field all its all expect to grow sales and earnings this year. So.
That's you know the targets they've set for us and they're the ones you know.
Managing all of the local businesses that watsco operate so.
I wouldn't say, it's just not just optimism it's their plans to see growth. So.
Short term the first quarter is the funkiest quarter in and maybe my career my 30 year career.
And that you have.
30% revenue comps and 100% EPS comps of a year ago.
And I'm glad it's the smallest quarter of the year to have that type of a comparison to be up against.
So I think you have to look beyond that.
The first quarter.
And into the year and again, our teams are planning for growth in 2023.
And I'm always you know when.
When you when you talk about the industry of course, we always get focused on are inducted.
Residential split systems, you know and I always remind people that are over a third of watch those businesses in the parts and supplies.
Each of our business and.
And we expect that to continue to grow we also have a large commercial presence.
Which we have a lot of tools and a lot of different markets and a lot of different products that we can focus on for growth.
Yes, it's something that hasn't been something that hasn't been asked so I'll offer it on the commercial side of the business. It was up over 20% this quarter.
Which is probably the seventh or eighth straight quarter of being up 20% or more.
And I mentioned about the supply chain for commercial simply being.
You know truly challenged still.
It's still it's not restraining growth a growth rate of over 20%.
I think you've heard all the Oems talk about that dynamic over the next you know year or two.
And we're certainly seeing the same thing.
And add to Barry's comment you know aren't.
Our non equipment sales were up.
Mid teens.
In Indiana, we need equipment to move the needle, yes, and and the nice thing about who we are and our density locations is it.
Wherever that the weather goes we'd probably have facilities that serve what their their needs are in that area.
Hey, just quick last one international I think it was looked like it was a little softer than U S. Any any nuances.
No, it's a pretty steady business and I expect growth there for sure spoilt very well managed and.
Even though some of these economies there are not doing well.
I'm positive on it.
Okay. Thanks.
Yeah.
Yeah.
Our next question will come from Josh Poker's, your worst ski with Morgan Stanley Hi, Josh How're you doing.
Hey, how are you doing well how about yourself.
Oh, My Gosh I got to say, that's a new pronunciation of your last name.
One I haven't heard it get more creative every time [laughter].
[laughter] Oh my God.
Well I appreciate the I appreciate the question guys.
You touched on heat pumps at all times downward.
Just wanted to check.
Your thoughts on how you're thinking about any.
The IRI side, there's anything to point to on rulemaking became so far that are paying more attention to.
Yeah right now the IRI in the first quarter, obviously had I would say zero impact.
On what we've seen to date are I think the 25 C portion of it where you can get a tax credit I think we'll start seeing some some positive feelings from it in the second quarter and third quarter.
We still don't have a clear definition of what units qualify for the tax credit.
And that's been delayed and we continue to follow up to make sure that we understand you know which units are available from each one of our Oems. So we can we're ready we've launched programs with our dealers and we got the information and the dealers and it's a matter now of just matching it up with what units are available.
On the other side of the I R. A the tax rebates.
I really don't think we're going to see a great impact at all on the rebates side for 2023, I think most of the impact there will start kicking in in 2024.
However on the non Airasia side, we're starting to see a lot more municipalities and other regions of the country that are pushing harder and harder on.
Basically going with the heat pump.
In Northern California, you can't replace a gas furnace, New York City, it's fossil fuel eat forget it.
In Canada, we're seeing the same thing so as we move through this transition. The IRA has an impact plus a lot of local municipalities and states are also getting behind the movement out of it.
To electrify our heating needs.
Got it Super comprehensive really appreciate that.
Something else you'd like to follow on maybe away from what's been touched on so far.
Saw that in the fourth quarter.
Carrier distributor would get picked up by I think the first one non watsco entities. The JV started if memory serves just how do you think about the kind of ability to maybe look at future regions or or the balance of ownership there longer term.
Well, let me just kind of made that there have been other carrier distributors sold to other people and during her time with carrier, it's not a new thing.
But I have to remind you that we we have a 23 brands that we deal with and our appetite is for distributors.
That are good well run and it doesn't matter what the brand is.
Alright very helpful.
I think we're very we're carrier's largest customer we'd never going to let them down.
But.
We also want to grow our share of the $50 billion business.
That we see in the United States for distributors.
So we will go where we can.
And finally, great companies that want to be part of us and I think we offer more than anybody else.
In terms of joining our family.
Yeah.
Alright, Thanks, a lot.
Our next question will come from Steve Tusa with Jpmorgan you may.
Hello, Steve Hey, guys good morning.
Good morning.
Carrier sales to their JV eases up like low twenty's in the quarter I know they have some other JV isn't there you guys are obviously an important one and I think you said commercial was up for you guys pretty nicely. So when that equipment number that equipment volume is down eight what was the actual like razee.
Number.
The unit number for equipment and for Q, what was the actual <unk> number.
No.
It was pretty flat Steve Yeah.
But in and around that.
Let's see.
Cause if if if commercial was up that strong.
Obviously commercial not as big but I'm just curious.
I'm kind of I'm, commenting on all of watsco, not certainly not just carrier, but totally totally all of what's getting the units were down eight on equipment, you're it sounds like you're like commercial was up you know comfortably.
So what does that mean for resi like down in low double.
Overall, it was down 8% for the quarter residential domestic that's it.
Okay. So thats the resi number.
Yes.
Okay that makes sense.
And then I I am not sure. If you answered. This I mean, you said youre going to grow sales, but what what do you think that the unit number is for what was that are in reference to a unit number or.
I thought that was a sales number do you have kind of what your.
Construct is for the industry for.
23, I'm not sure if you guys had answered that before units.
For a rabbit data mature right not in the cards steep.
Okay.
[laughter].
[laughter] well, you said youre going to grow sales that includes obviously price of mix. So yeah. Our volumes actually I think it was your question before I'm not sure I totally got that.
Units and prices to increase to contribute to sales growth both.
Sure.
For the year.
Oh, yeah for the year.
We expect another price increase coming from the OEM now.
That's already starting to occur.
Because of the new mix, the new products that you're introducing.
Got it and then.
And Steve I, just wanted I just want to handle this because it's important and in sport and for other people to listen to it too we don't sit here and like wonder what the market's going to do and just say Oh my goodness, they listen to what everybody is saying.
No and wringing, our hands, you know in and hoping hoping its not right you know.
The last two years, its almost been impossible to go to.
OEM community and ask for incremental opportunities.
To go to go to Oems and say, we want more territory, we want more brands, we want more products, we want to expand what we're doing let's do that that's not been possible in the last two years cause that Williams could not make the product or couldn't offer the opportunity.
And those types of initiatives are going on right now I'm not going to list them for you.
There's a lot of you know underground effort here or two to do what I, just said, which is to grow to grow our business with our manufacturers some of the new manufacturers in order to expand what we're doing in and grow the market. This year.
Got it got it for you and for your share from a share perspective.
Correct.
One one last one for you Paul May be you know the answer to this question, but I was talking a lot about the savings for the consumer what what is the like what is what do you think is the payback.
FERC for the consumer obviously very good question.
What is the actual payback because I mean, youre going to be spending a couple of grand more on some of these systems. What is the actual payback is measured in years on some of these new engineers, Yeah. You know it obviously it depends on the geography of Florida, you get a faster payback and Oh.
In Connecticut to your payback would be a lot slower so and each one of the regions to payback is also a factor of the utility rebates that state rebates the eye or a.
Tax credits.
Energy consumption.
Drop in energy consumption is is the key thing.
All of those other things added a gravy to the to the male but.
What what is the reduction.
And energy use when we install a high efficiency.
Precisely.
Percentage wise it could be 25% to 30% I think that we're even more on an older system, but I mean to be able to come up with a year's analysis you'd have to take all those factors into consideration so.
Really really a tough a tough payback analysis to do Steve.
I'm not sure.
Yeah, but if you start with the premise that they're going to use 25% less energy and probably more.
Percentage wise and energy is half to that.
The cost I'm, sorry, cooling and heating is half the cost of electrical to use at home.
That's the way to look at it we got a lot of homes, where they're already paying X dollars and if they go to the two for their energy and if they go to a higher efficiency.
Didn't cooling system, they're gonna save half of the half.
The overall cost is half is dedicated to heating cooling and stuff. We're selling is going to save them have them that half of that and can cost with electrical company plus as Barry or Paul sorry to say that all kinds of tax benefits that are going to run to the whole water.
Yeah, one more question for you sorry. This this hybrid ductless.
It's my understanding that.
That they have that some of the guys like <unk> have gotten their products do.
Down to be essentially in line with the replacement for unitary system and I would assume that with the increase in Sierra for unitary that.
That that kind of difference is going to get smaller.
Is that about right or is the hybrid ductless still.
First cost is still more expensive than what will be the baseline unitary product like how the hotbed of added a bar that theyre very cost competitive they're right in line.
With the ducting product.
Yeah, you know beyond beyond I know you made a comment about you know the the.
The dike and product.
From the ash ratio, but every manufacturer either has one or will have one.
Right.
We've been marketing it for what the last two and a half years.
Yeah.
<unk> seen substantial growth in revenue.
Yes makes sense alright, thanks for all the color as usual guys really helpful.
Yeah.
Again, if you have a question. Please press Star then one.
Our next question will come from Chris Dankert with Luke capital you'd be now go ahead Chris.
Chris.
Good morning Al [laughter]. It is it is.
I guess to stick with the heat pumps theme here really impressive growth on the quarter and the year.
[noise] than two extra market, if I'm not mistaken I guess, maybe could you tell us or remind us kind of what percentage of your mix is heat pumps today and.
Are we starting from a smaller base there and any comments would be it would be really helpful.
Yeah Yeah.
Yeah, Yeah. It depends on the states. Once again do you go to Texas, It's a very low percentage of the total market in the low twenties. So we have a huge opportunity to grow the the heat pump share there if I go up into the Carolinas were already in the 65% to 70% range.
So that's just a continuation of what we've what we've done over the last 10 years or so.
Regionally it varies and obviously now the big push is to get into heat pumps, which are able to do what we call Super Super heat.
And operate at 15 2025 degrees below zero, so that we can move the market up into my home state of North Dakota.
People warm in the winter.
Uh huh.
Got it got it Okay and then.
So.
I was going to say you have to want to own watsco for another 20 years, which we want you to but remember that.
[laughter].
Further the furnace might last a lifetime and in fact, many of them have lifetime warranties.
And our heat pump useful life is.
10 years at best in some markets so.
There is a longer term churn of the replacement market for heat pumps also that works itself out.
Okay, Okay that makes that makes sense.
And then there's a lot of understandable concern kind of on the strength of the consumer balance sheet and spending right now part of life credit for comfort makes so much sense here, but are you seeing any change in.
The rate of repair versus replacement or hearing about any kind of homeowner belt tightening from from your contractor customers here.
Good question.
Oh yeah.
Yeah.
<unk>.
No we didnt throughout the entire.
Danny period, we were just talking this morning about the amount of home equity.
It's available to consumers with the appreciation in their in their primary residence.
So.
We haven't seen a repair versus replace discussion, which generally the industry gets into.
As we move into a transition to new products.
So I think it's a little early to to to declare which way the market's going to go right now.
But for right now, we're seeing a nice balance between our equipment.
And our parts business.
Yeah, I will say this is David I will say that if and when a repair.
They make plays out we're well positioned.
We've done a lot of work around product assortment and making sure that each of our stores have the right products to meet that demand as well.
And of course, those product often come with a higher margin.
That's a very unique advantage I don't think anybody has.
If they do that.
Hum.
Got it thanks, so much for the color guys.
It appears no further questions. This concludes our question and answer session I'd like to turn the conference back over to Albert <unk> for any closing remarks.
Well, thanks again for your interest in our company.
We're very optimistic.
And we hope you stay interested and please don't hesitate to come down and visit and hear from the players.
<unk> directly.
Not only that the Sun always shines here so.
Thanks again for your interest and we'll see you next quarter Bye bye.
Okay.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.