Q1 2023 Watsco Inc Earnings Call
Speaker 1: I.
Speaker 2: to the WATSCO first quarter 2023 earnings conference call. All participants will be in a listen-only mode for the duration of the call. If you need any assistance during that time, please signal a conference specialist by pressing the star key followed by zero.
Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: If you would like to ask a question, you may press star then 1 on your telephone keypad. And to withdraw your question, please press star then 2.
Speaker 2: Please also note that today this event is being recorded.
Speaker 2: I would now like to turn the conference over to the Chief Executive Officer, Albert Nomad. Please go ahead, sir.
Speaker 3: Good morning everyone.
Speaker 3: I hope you all got to see the Spaceship Starlink launch a few minutes ago. Biggest spaceship in the history of our country, or probably in the history of the world. The climate, or our orbit. In any event, welcome to our first quarter earnings call. This is Al Nomet, Chairman and CEO .
Speaker 3: And with me is AJ Naumet, President, Paul Johnson, Barry Logan, and Rick Gomez. Now before we start, a cautionary statement. This conference call is for looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions.
Speaker 3: of these various laws. Ultimate results may differ materially than the forward-looking statements.
Speaker 3: Now, Watsco delivered an exceptional first quarter, especially in light of last year's impressive first quarter.
Speaker 3: Last year, St. Louis sales were up 25% and EPS was up 109%. Let me say that again. This quarter compares to last year. Last year, sales were up 25% and earnings per share was up 109%.
Speaker 3: This quarter, sales grew 2% to a record $1.55 billion.
Speaker 3: Gross margins of 28.9 reflect our mindset around price and continued progress in our investments in pricing technology to help our leaders in the field optimize margins.
Speaker 3: You will recall that last year's first quarter gross margins also benefited from OEM pricing actions in response to unprecedented inflation.
Speaker 3: We are happy with the quarter's result given the reduced level of OEM pricing access during this first quarter of this year compared to last year.
Speaker 3: SG&A increased 1% reflecting early progress with cost containment and gains in operating efficiency that builds on what we achieved, started to achieve last quarter. Operating income was $165 million.
Speaker 3: Pretty margins remain in double digits at 10.6%. Annual needs for sale were $2.83 for the quarter.
Speaker 3: As for cash flow, this is the time of the year when we build inventory for the upcoming selling season. And we are seeing supply chains ease in certain product segments versus last year. I must say not all OEMs are over the supply chain problem yet, but they're improving.
Speaker 3: Cast shoes during the quarter improved $54 million year over year despite an unprecedented shift in inventory to new higher cost systems as a result of its change in efficiency standards that took place January 1st.
Speaker 3: We expect further progress in terms of improved inventory terms in cash flow as the year goes on.
Speaker 3: All in all, our balance sheet remains strong with almost no debt.
Speaker 3: This provides us the flexibility to invest in virtually any opportunity as we continue to build scale in a very fragmented $50 billion plus North American market.
Speaker 3: We continue to look for acquisitions as WattsCo is a great home for family businesses.
Speaker 3: We sustain cultures, invest in people, and provide technology to secure and build on their great legacies.
Speaker 3: That's something we love doing, building great legacies and companies that we acquire.
Speaker 3: Looking beyond the short term, our press release today provides critical details that support Watsco's long-term growth trajectory.
Speaker 3: We have an immense technology advantage and we are investing to grow that advantage.
Speaker 3: These technologies are increasing customer engagement, reducing attrition,
Speaker 3: creating market share gains and supporting margin.
Speaker 3: Lots goes by the way of products and brand is a competing, is a competitive I should say a competitive advantage that allows us to share contractors.
Speaker 3: in most environments.
Speaker 3: We also have a leading market share position in some belt markets to provide stability and higher growth rates. In addition, there are several important regulatory and industry catalysts for growth that will play out in the next few years.
Speaker 3: 2023 saw the introduction of federally mandated high efficiency standards for HVAC equipment, which will deliver price benefits in 2023 and beyond.
Speaker 3: 2025 will also mark the introduction of new refrigerant standards.
Speaker 3: which historically has made it harder to repair existing systems and favors more than that for replacements.
Speaker 3: We also see continued movement towards electrification and greater adoption of heat pumps.
Speaker 3: which generally come at higher prices and higher margins.
Speaker 3: Sales of heat pumps grew 7% in our cafe during the first quarter, outpacing overall growth rates.
Speaker 3: Sales of heat pumps grew 7% in our company during the first quarter, outpacing overall growth rate. Finally!
Speaker 3: We also expect new inflation reduction act to provide enhanced tax credits and incentives for efficiency upgrades and electrification in the years ahead. All of these catalysts would benefit the industry in the coming years.
Speaker 3: And we certainly believe our scale.
Speaker 3: technology and financial strength position us to capture the new market share opportunity.
Speaker 3: With that, let's go on to questions and answers.
Speaker 2: We will now begin the question and answer session.
Speaker 2: If you would like to ask a question, you may press star then 1 on your telephone keypad.
Speaker 2: If you're using a speakerphone, please pick up your handset before pressing the keys. And if you would like to withdraw your question, again please press star then 2.
Speaker 2: At this time, we will pause just momentarily to assemble our roster.
Speaker 2: And our first question here will come from Ryan Merkel with William Blair. Please go ahead with your question. Hi, Ryan.
Speaker 4: Hey guys, good morning. Thanks for taking the question.
Speaker 4: I guess first off, can you comment on trends so far in April , just trying to figure out if things are continuing at this pretty healthy pace?
Speaker 3: Well, you know, that's just a few days to start, but I'll let Barry provide some more information. I think that, you know, really the first four months of the year are all pretty consistent in a very short period of time. There's not volatility, there's not a lot of change. It's been pretty consistent.
Speaker 5: of the big seasonal increases. For the quarter, for example, May and June would probably be 80% of the earnings of the quarter. So.
Speaker 5: An early read in April , I'll give you some inference, but it's not...
Speaker 5: Not representative of what the rest of the season looks like yet, but so far so good. If I say it more simply.
Speaker 4: Okay, well, I'll take that and appreciate that, yeah, we're not in the season yet.
Speaker 4: And then turning to gross margin Was was the quarter hurt by inventory profits rolling off year-over-year? And I guess really my question is our inventory profits out of your gross margin at this point
Speaker 3: That's a great accounting question, Mr. Logan.
Speaker 5: Yeah, I mean, it's funny for my 30-year career, it's always been a first quarter question and never a question beyond the first quarter because that's generally the timing of pricing.
Speaker 5: I'll take a shot at it Ryan because it's been anything but normal the last couple of years. So a year ago OEMs had near double-digit price actions effective January 1st.
Speaker 5: This year they did not.
Speaker 5: This year the pricing action is on March 1st.
Speaker 5: and it's less than double digits. So there's clearly a cost, to use your term, which is really, I wouldn't call it a cost.
Speaker 5: I would say there's clearly an impact in the short-term margin this quarter.
Speaker 5: could be 150, 200 basis points in the quarter.
Speaker 5: because of that algebra and equation.
Speaker 5: And obviously our margins didn't go down by that amount because there are, you know,
Speaker 5: everything we've been saying now for a year about the entrepreneurial culture, the team, the technology, the culture, working with working with our OEMs, you know, all the heavy lifting going into the margin and pricing development the last two years.
Speaker 5: you can see offset.
Speaker 5: some of that short-term cost and margin. So that's the difference between short-term and long-term in this. Short-term, yes, there's a...
Speaker 5: algebraic impact in the corridor long term, the benefits you can see and you've been seeing it now for the last two or three quarters in a pretty significant way.
Speaker 4: Thanks for that. I'll pass it on. Nice quarter.
Speaker 2: Thank you. And our next question here will come from Dave Manthi with Baird. Please go ahead. Good morning, Dave.
Speaker 3: Hey, good morning Al. I was wondering if you could talk about the OPEX a little bit here. Is it true to say that your increased investment in driving sales for key OEMs via selling and marketing expenses is being offset by tight cost control at the business operating unit level?
Speaker 5: short term. So the last two years.
Speaker 5: It's pretty remarkable, I think, that headcount is up about 15%. That's 800 people.
Speaker 5: say $60, $70 million in costs.
Speaker 5: added to our network to serve customers, to deal with the environment we're in.
Speaker 5: To sell more products to bring more technology, whatever it might be and it's a remarkable number
Speaker 5: And that's part of the investment that we talk about in...
Speaker 5: in growing the market, growing the business, the two-way street of economics that we've been looking for to grow the business long-term.
Speaker 5: the two-way street of economics that we've been looking for to grow the business long-term. And that's in the numbers.
Speaker 5: And if I dial into the quarter and again...
Speaker 5: If I dial into the quarter and be again more surgical about it.
Speaker 5: For example, we saw fixed costs increase this quarter, high single digits.
Speaker 5: and that goes with the people and the investments that are made. Where variable costs, some of the variable selling costs went down double digits in a quarter. So that's a little bit of what we expected. We're not going to shut off investments. We're going to keep investing.
Speaker 5: some of the variable or transitory costs of what's been going on the last two years, if that eases. As that eases, we would expect cost reduction.
Speaker 5: Everything I've just said is playing out in 673 locations in very different ways.
Speaker 5: But culturally, you can see over the last six months, there's a big impact going on in S
Speaker 5: Not just the quarter.
Speaker 3: Yeah, okay. And second, at a recent investor conference Carrier said that they believe they're underrepresented in their aftermarket. Do you have any idea what they mean by that?
Speaker 4: Well, excuse the video, I've never heard that. I think this OEM is now, has been looking for an increase in their aftermarket share. It's something that all OEMs are after.
Speaker 4: And so, as time goes on, we'll find out how we can motivate the contractor to do more repair parts than they've done in the past.
Speaker 4: But there's a trade-off to that obviously You want replacement units and parts. I don't think that you necessarily go hand in hand
Speaker 5: And Dave, I think, I don't know the answer, but I'll add my editorial to it. There's a commercial element to that discussion probably that's pretty significant. I don't know market share in the commercial applied aftermarket parts business. I don't know the answer, but I'll add my editorial to it.
Speaker 5: But I have a feeling it's a pretty complex machine and my guess is that some of this long-term development can come there.
Speaker 5: As Paul said, it's been elusive, I think, for all the OEMs in that sector.
Speaker 3: All right, thank you very much and good luck in the season.
Speaker 2: Thank you. Our next question here will come from Jeffrey Sprague with Vertical Research Partners. Please go ahead. This has been a question for Jeffrey.
Speaker 3: Thank you. Good morning everyone. You sound a little under the weather Al. Hope you're feeling okay. It's my spring cold, you know, every spring I have to weather this cold.
Speaker 6: All right. It's just it's just a simple call, but thank you for asking.
Speaker 6: It's just a simple call, but thank you for asking. Yeah.
Speaker 3: Obviously, a lot of cross-currents going on on the revenue line. I just wondered if you could unpack that a little bit for us. We got carryover price, we got new price, we got this year change. It's clear volumes are down, but can you give us a little bit of granular detail on the interplay of volume price.
Speaker 6: mix. Well I would say that all the things that you mentioned are positive for us.
Speaker 6: I don't see anything in front of us other than good things. And we have the scale to take advantage of that. But let's get a little more granular with you and Barry and Paul and anybody else. Rick, if you wanna jump in as well.
Speaker 5: Sure. Good morning, Jeff. First, units are down in a quarter. We expected that. The industry expected that. It's single, you know, mid-single digits in terms of decline.
Speaker 5: Pricing was up, you know, very high single digits.
Speaker 5: which is just more of a mix benefit this quarter. Again, the OEM pricing came later and will actually have some carryover benefit into the second quarter. But this quarter, pricing is largely mixed.
Speaker 5: and near double digits.
Speaker 5: And as far as commercial and that type of thing, commercial is up well into double digit territory, which is probably two and a half years now of trend. And to give you some sense of that, I think...
Speaker 5: you know, if we look out into the season, you still have a lag in the full market converting to the new higher tier, higher tier systems.
Speaker 5: You have the northern part of the market catching up to the Sun Belt.
Speaker 5: with new systems at higher prices. The manufacturers will all be asked for further pricing actions this year, but as a group, most were effective March 1, which carries into the second third quarter.
Speaker 5: systems at higher prices. The manufacturers will all be asked for further pricing actions this year, but as a group, most were effective March 1st, which carries into the second third quarter.
Speaker 5: And what I was referencing is...
Speaker 5: 2023 has really three things going on that are remarkable too, which is the refrigerant change, the heat pump, the refrigerant change, the refrigerant change, the heat pump, the
Speaker 5: 2023 has really three things going on that are remarkable too, which is the refrigerant change, the heat pump, growth.
Speaker 5: and tax credits and so on that could play a role and influence this.
Speaker 5: If I add a fourth one that I think is somewhat unique to Watsco, our ductless business, which is a big business for us, it's not centric, so to speak, to the US OEMs, but it's a growing part of the market. If I add a fourth one that I think is somewhat unique to Watsco, our ductless business, it's
Speaker 5: There's a lot of growth, a lot of investment, a lot of new territories for us in that market.
Speaker 5: So I think all in all it's once we get past some of this early.
Speaker 5: comparable difficulty that we have.
Speaker 4: That's Al's frame of mind as we're pretty optimistic about the rest of the year. I can add on to that a little bit. The impact of 25C with the tax credits coming in for the high efficiency product really wasn't in him.
Speaker 4: really wasn't in our mix in the first quarter. We really didn't see a lot of evidence of a lot of tailwind coming from the tax credit. So we're looking forward to that second and third quarter as we start seeing more of that.
Speaker 4: And then exactly what Barry is saying, you know, the
Speaker 4: the sell-through of the existing
Speaker 4: heat pumps is still going through and we really haven't seen the benefit of the high efficiency heat pumps have not yet
Speaker 4: flowed through into the marketplace.
Speaker 4: So we've got some good upsides, you know that we're looking at for Q2 and Q3.
Speaker 3: And maybe just a clarification on refrigeration. Are you saying you think the refrigeration change that happens in 2025 will already have some kind of positive impact on 23 in terms of pre-buy or things like that, or were you kind of referring to something else? No. We were referring to what? I'm sorry say I'm sorry about that. I'm, I'm sorry you address the question of what is possible in shrimp in some5 when N is00.Music
Speaker 4: when the road cut is in. That's not going to impact us until late 24. Yeah, okay, that's what I thought. I just want to clarify that. Thank you.
Speaker 2: And our next question will come from Nigel Coe with Wolf Research. Please go ahead with your question.
Speaker 2: And our next question will come from Nigel Cote with Wolf Research. Please go ahead with your question. Good morning, Nigel. Good morning, Nigel.
Speaker 4: I think the answer is yes.
Speaker 7: Good morning Al, sorry I was on mute there. I hope you feel better soon.
Speaker 7: Quick question on inventory. So, a much bigger build in inventory than what we'd expect. I'm just wondering, was that magnitude of inventory build intentional? Are there any other factors we need to bear in mind?
Speaker 6: Well, part of it, as I suggested in previous calls, is the supply chain issues that we would get in the system, just part of one system, and we'd have to inventory that until we get the rest of the system. And that still lingers. We still have inventory of that sort.
Speaker 6: It's good inventory eventually would get into the pipeline and into the market And I do believe we have more inventory at the moment than that Then I'd like to see but we're going into the season. So it's not a bad problem to have As I said earlier some OANs are still having
Speaker 6: issues with supply, the product that we need.
Speaker 6: But it's good inventory and eventually I think we'll get it right size and we'll increase turns.
Speaker 6: And that improves cash flow even beyond where we are today.
Speaker 6: As you know, our castle is performing well today. Any commentary from the team?
Speaker 8: Well, this is AJ. I'll just add that while year over year inventory looks up in dollars, there is inflation in those numbers and if you look at units, they're actually down.
Speaker 8: So, there are supply chain issues that keep us in, if you will, at a higher inventory position than ideal. There are certainly ways on those numbers. But I agree with what was just said is that here comes the season and we should be in pretty good shape to – Jennifer Bong Commissioners
Speaker 7: So through what we've got Yeah, okay. That's helpful, and then maybe barry connect to go back to your comments on the gross Margin Obviously there's a price increase came through So late in the course of normal, so I think then trip into QQ
Speaker 5: Again, we're speaking in basis points here, not percentages, so don't get carried away with it. Yes, there is a benefit that will flow into the second quarter that can benefit gross profit because of the timing of the price increases. But it's in basis points. It's not a... I wouldn't get carried away with the analysis. Sorry, I was just going to add that yes, it's true that the price increase came later than usual. It's also more moderate than usual, or at least in last year. And it's only on our equipment business, right? The price increases on all the other...
Speaker 8: thousands of SKUs that we sell have tampered relative to the last two years.
Speaker 7: Sorry, just one more clarification. Do you think 20% plus is a good number to use for a second quarter and beyond?
Speaker 6: Whitman gross margin? raised
Speaker 6: Yeah, oh my goodness
Speaker 6: Oh my goodness.
Speaker 6: Go ahead very I Didn't hear I think you said you think we'll do 20% or better in the credit board But I think he said 28% Yeah, 28% Oh, I'm sorry You're right well, I want to speculate on that boy
Speaker 5: I'm going to stick to what we've said now. A year ago we were asked, what are you looking at for gross margin? We said 27% as a baseline. Obviously we've been exceeding that the last six months especially.
Speaker 5: But Nigel, I'm going to stick to that just until we can see the real impact of everything. We're a 30-40% larger business.
Speaker 5: 90 days from now, just out of pure seasonality. So let's be conservative and thoughtful and.
Speaker 5: We'll change our mind when we have more data. Thanks Barry. You set us up for 27 last time Barry and we did pretty well against that goal. Maybe you should raise the bar. Thanks guys. Thank you. Thank you for joining us today and see you all next time.
Speaker 2: Sure. I'd love to know. Our next question will come from Josh Pokrowinski with Morgan Stanley . Please go ahead.
Speaker 3: Good morning, Al. Good morning, Al. Just want to follow up on the gross margin comment. Obviously, when you see numbers that big, everyone's trying to figure out what that looks like going forward. But, Barry, you mentioned that the 150, 200 basis points, I think, any other factors that
Speaker 3: We should keep in mind in there you mentioned selling price, but anything on the freight side And then I guess maybe just specifically on selling price
Speaker 3: Do you think of that as more doing better on the buying side or doing better on kind of the customer? You know selling side obviously both have the impact Well you brought a good point on three. Barry you go ahead and answer that.
Speaker 5: Yeah, well first, the parts of cost of sales that don't relate to the cost of the product
Speaker 5: like freight in, shrinkage, inter-branch freight, things that are within cost of sales. Over the last six months, again, no great variation as a basis point impact.
Speaker 5: We would hope at some point actually freight would be a contributor to gross profit as it's been a higher cost over the last couple of years, but as a trend
Speaker 5: Those line items have had no impact on what you've seen and the results of the last
Speaker 5: The result comes from, again, taking 100,000, 200,000 skews.
Speaker 5: and going through a pricing margin optimization program. It also goes to the branch level leadership, incentivizing them or culturally giving them tools they didn't have two years ago.
Speaker 5: And it is also, as I said, more generically working with OEMs over the last two or three years.
Speaker 5: It is also, as I said, more generically working with OEMs over the last two or three years. So I think...
Speaker 5: Josh that there's not much to report or volatility or when I want one you know
Speaker 5: big impact items, it's all been pretty consistent, I think, for the last several quarters now. The only variable that changes has been the level of pricing actions, like we're articulating carefully today, and yes, it had a cost, but the other thing is how to benefit and...
Speaker 5: To the extent that levels out, the OEM pricing actions levels out, the benefits will be there, and that's how we look at it.
Speaker 3: Hope that makes sense. Certainly does. And then, you know, I know 2025 is kind of a long way off, especially with a little more macro uncertainty, but, you know, just trying to put in context that higher cost of repair that I think you guys mentioned earlier, I mean, did we see, you know, sort of a step function change, I guess, entering COVID? I know, you know, with the higher replacement rates.
Speaker 3: Is repair just getting a lot more expensive even today before we get to 2025 that, you know, this is just kind of the new normal on that front?
Speaker 4: You know, if I can take a cut at that, and it's not scientific and we don't have any data yet on...
Speaker 4: Being able to answer that quantifiably, but yes repair probably is going up the cost of labor has gone up and As you know labor is not included in a warranty calculation So consumers are being hit with a higher price to do warranty than they were in the past.
Speaker 4: And then the other side of it is obviously things like refrigerant and some of the commodities that aren't covered by a warranty Also are adding to the cost of being able to do a warranty. Warranty is not free in our world Warranty has a definite cost to it and it also has a timing to it that it takes longer to do a rep...
Speaker 4: concepts that now I think we need to dig deeper and find out more detail as far as what really does drive that.
Speaker 4: that now I think we need to dig deeper and find out more detail as far as what really does drive that. Great. Appreciate the detail. Best of luck guys.
Speaker 5: And our next question will come from Tommy Moulton with Stevens. Please go ahead with your question. All right, Tommy. Morning. Appreciate you taking the questions. Thank you. All right. We'll go ahead and take questions. We just opened it up.
Speaker 9: Al, you mentioned that the OEMs moved a little bit later this year on their pricing initiatives, but vis-a-vis your distributor competitors, are you seeing any emerging signs of price-based competition? And, if not, we'll be Mother's Day tokens across Virus Rhino since a recording of this
Speaker 4: On a like for like basis. Do you think pricing could actually be up again this year across the industry? Very good question I'm gonna go to my two guys Paul and Barry. Yeah You know Regionally and with certain customers. Yes. There is still is price competition going on there all
Speaker 4: as perhaps it's been in the past.
But still it's there. It's always going to be there. It's a very competitive industry. Yeah, Paul, I mean one thing that sticks out and I agree, it's regionally and it's kind of noise, not the signal, but we heard from one of our northern businesses yesterday that guys are one of the Wait Carbon
they're later in the transition to the M1 product, the new products, that some of the old products are being moved in their region at lower prices. So that'd be an example of kind of a regional...
if you will, but a temporary and not material, I think, in the end of the day. Right, and hopefully transitory. Right, that's right. The whole offering of them on is more expensive than what they're likely.
Right. And that's just new in the market now, beginning this first quarter. Yeah. So we should see the impact there. Yeah. Right. That's just not new to the data.
That's the big story. The other stories are just noise is my point. I'm going to put a fire point on it.
That's the big story. The other stories are just noise is my point. Right. So maybe to put a finer point on it.
Do any of these dynamics feel like they've accelerated or moderated this year in particular, just given that industry-wide volumes may be pressured?
Or do you still think that net-net across the industry pricing does in fact move higher through this year? Well, I hope it's hard to predict that we've had a pricing action that takes place now just starting and it's more moderate than it has been. But it's hard for us to advise you on it.
We expect no changes in pricing. I just don't think that's something that we have a good, we would know that comes from the OEM. Paul, I'm listening to that. Yeah, I think I agree with Al completely. I mean, until we start seeing normal supply chain, until we start seeing where the weather goes.
and what the consumer dynamic is, making a prediction like that in April would be a wild guess on our part. I think what's, just to add a layer to that, I think this is just important educationally.
You know, we have a store in Miami here that sells more than $50 million of equipment. That's more than a Home Depot sells, right? We're selling to a couple thousand customers at different prices. You know, our pricing to the market.
to our customers has variability, it has customization, it has competitive you know thinking to it, it has technology around it now, and what's really not well known is we're buying from our manufacturers at different prices.
It's a mammoth math and science equation.
where pricing is that granular across that many markets and customers. So, two points to that is there's a lot of fluidity in how we can manage margin no matter what a local market is doing or how another OEM might be behaving. It's an immense equation that is very fluid.
And the good news is, and I'll say it again, third time in the call, there's now technology in place to look at all of that, to manage that, to prosecute that strategy in a way we didn't have it two or three years ago. Appreciate the context. If I could ask one on market share.
Again, just starting from the construct of industry volumes down, let's just say somewhere at the mid-single digits this year.
In recent years you've taken significant share. I presume you'll plan to repeat that again this year, but could that net to to Watts go volumes flat or even up on the year do you think? You mean in units or in dollars? In units.
I certainly hope so. Give it a shot. We've never set a goal to not increase market share in a year. That just isn't something that's in the watch code DNA. I think it's referring to the environment. And we're going to have the environment to grow share.
And right the variables to that is you know if you get hot weather It doesn't matter
What we want to do that the bad's going to be there because heat creates the bed Well also, I think this year what we're looking at is is Spicing the market into into different segments, so not just looking at market share split systems, but looking at market share in
heat pumps versus straight cool versus versus the mini splits for the ductless type product. So I think I think it's going to become a more complicated equation than we looked at in the past. And it's also going to be probably more important that that we're looking at markets here in the markets that we think have got the longest legs and the longest future. That obviously is
The ductless product and the heat pump product. I appreciate the insight. I'll turn it back to you. The nation right now in terms of share. I think that's correct statement. Of those products. And our next question here will come from Jeff Hammond with KeyBank Capital Markets. Please go ahead with your question.
Hey guys, good morning. This is Mitch Moore on for Jeff. It seems like the supply chain for residential equipment's pretty close to normal here, but I was just wondering if there's any areas where within RESI where lead times are still an issue.
Yes, we're not going to identify it, but we have an issue with the equipment still.
We're not going to identify it, but we have an issue with the equipment still.
and the issues are more serious in different places and different brands. Yes, we still are overcoming shortages of equipment itself.
more seriously in different places and different brands. Yes, we still are overcoming shortages of the equipment itself, no question about it.
Okay, that's helpful. And then just on inventory, I was wondering maybe what's a realistic source of cash from inventory kind of this year? What would I like or what do you think is going to happen? I mentioned before, I'd like to get another $200 million out of our inventory and cash
we'll see what happens but we're better prepared for that because of the versus supply chain as it improves we improve our turn because if that's it equipment that isn't matched right now will be matched and it will be clear to show it
And just our technology has got a lot better so that we can.
Obviously, it's very mature. That's what our goal is. So I gave you a number. It's a goal. It's not a projection.
obviously, that's what our goal is. But so I gave you a number. It's a goal, it's not a projection. Okay, thanks guys.
And again, if you have a question, you may press star then one to join the queue. Our next question here will come from Patrick Baumann with JP Morgan. Please go ahead with your question. All right, Patrick.
Good morning Al, how's it going? I hope you feel better. This is the call, it's just a call, thank you. Good, good. I had a quick one, a few actually, but in the pressure release you mentioned that unit volumes are adjusting to more conventional run rates, but what?
What was meant by that comment? Maybe that's a Barry question. Barry and Paul. And Patrick, may I suggest that you come visit us? We always want to have you guys come visit. We hope you'll be able to do that soon. Yeah, we are. We'll be coming down there soon, we will.
Thank you for that. OK guys, I'm gonna answer that.
Yeah, Patrick, I mean if you look at you know 20 30 years of data the growth rate of the industry is right around 3% You know unit growth. It's been closer to eight seventy percent the last two or three years and So my you know the comment really is that no PPP or possible delivery notices So there's some of that
some adjustment is going on, obviously the last few quarters. And I think the realignment towards that longer term growth rate is probably what we'll see at some point. And so it's just a reset. It's not meant to tell you what we think unit growth will be short term.
But it's part of the reset that's obviously been in the cards now for probably the last year kind of taking place. Makes sense. And then switching gears on HVAC products sales, can you talk through what you're seeing there?
The decline in the first quarter was modest, but just kind of curious if you could parse that out a little bit, whether it's volume or price or however you want to talk about it. I know there's a lot of stuff within that subset of sales. Just kind of curious if you could talk about that subset.
I didn't hear your question. Just want to talk a little bit about HVAC product sales, not the equipment side, the product subset of sales. So it was down 2% in the quarter. You could talk about whether it's volume or price or specific product categories.
No great inference on any one thing. It's a basket. We're a year ago, again, 25...
percent plus I think same store sales a year ago. I think that's just a reality a year later of a very tough comparable.
Also, Patrick, remember what we do, we participate in a very stable market.
We're not involved that much with new constructions. It's about, I don't know, about 10%, maybe as much as 15% sometimes. We're in the business of helping air conditioning and even continue operating.
12 months a year. That's what we support.
It's just nice to be in that sort of business where it's pretty stable. Sometimes it goes even faster than others. It's stable. And with the millions and millions of homes and businesses that are using HPC products.
It's just something that, shall we say, essential. You've got to cool homes or you've got to heat homes.
be that effective with economic.
trends to a large extent. Now, where we think we can also help is financing if things get too expensive in terms of interest rates and inflation on the product. And so we are focused on helping the consumer with financing.
that we have designed, probably industry-leading technology, to help the contractor help the consumer with financing these products.
Understood. Thanks for that, collar. And then the last one is just on the M&A pipeline. Maybe if you could talk about how you guys are feeling about the M&A space these days, what are your thoughts on the M&A space?
Maybe hold that, but maybe Market Uncertainty holds that back a bit. I don't know, any color you can give on that. Well, I want to say that I think our reputation for our culture is our best selling place.
private equity entered the industry. I don't know the impact of higher rates is gonna have on private equity as compared to worst of men's acquisitions.
But we're a different kind of a buyer for private equity. We're in for the long term. We like building the legacies of people that created a business. We're very unique in that position. And yes, we're always, always active in M&A. We think of that as a strategic way for us to expand our footprint.
North America, and I don't think that that's ever going to change. Now will private equity come and go? We'll see. But remember there are over a thousand distributors out there.
It doesn't mean that we're not going to be active in it. We always will be active in it. OK. Thanks so much. Best of luck this season. We'll see you guys soon.
we're not going to be active in it. You always will be active in it. Okay. Thanks so much. Best of luck this season. We'll see you guys soon. Bye Bye
And that concludes our question and answer session. I would like to turn the conference back over to Albert Namlin for any closing remarks.
That's your good job. And that's you all listening to our interesting company. And we look forward to having another one of these calls at the end of this quarter. Bye bye now.
The conference has now concluded. Thank you very much for attending today's presentation, and you may now disconnect your slides.