Q2 2023 Watsco Inc Earnings Call
Good morning, and welcome to the Watsco second quarter 2023 earnings call.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press <unk>.
Star then two please note. This event is being recorded I would now like to turn the conference over to Albert <unk>, Chairman and CEO . Please go ahead.
Good morning, everyone welcome to our second quarter earnings call.
This is Amit chairman and CEO and.
With me is a J not been the president and Paul Johnston, Barry Logan and Rick Gomez.
Now before we start our 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.
Forward looking statements.
Okay.
Watsco delivered a solid quarter against a challenging backdrop.
It was the second.
Strongest quarterly performance in our history.
Which is about 50 years.
Only surpassed by last year's record breaking second quarter.
When sales were up 15% and earnings per share was up 33% last year.
Our teams executed very well to generate this quarter's results, which came with considerable challenges including product availability as mentioned in our press release.
The product shortages are a consequence of an immense product transition that is playing out this year. Following the step up of minimum efficiency standards mandated across the United States.
Approximate.
60% of the equipment and we are selling today.
Represents new or revamped product.
Pricing capturing margins consistency have done well as evidenced by our gross margin performance for the quarter and the year to date.
We are converting inventory and balancing our product offerings across.
Our footprint.
We have trained thousands of customers on the new products.
We have updated our digital library to include all of the new products, adding over 400000, new sku's since the start of the year.
Uh huh.
The transition however has been uneven.
One of our primary OEM partners was disproportionately impacted.
Affecting product availability of higher efficiency systems.
Therefore affecting our sales.
We estimated a second sales impact of $75 million.
The 80 million as much as $125 million for the six months period ended June 30th.
The reality is all of our OEM partners they've been affected to some measure and all are working to improve supply chain and help us meet the needs of our customers.
As he mentioned beyond the tough comps and supply chain issues. The arrival of a hot summer weather was delayed this year as evidenced by the decline in cooling degree days cooling degree days as measured by the U S. Government. So we have a lot of information as to.
The band for cooling systems during the year.
Summer has now arrived in current business conditions are encouraging.
From a product transition, which largely affected our residential business.
Other facets of the business are performing very well.
Our commercial business continues to grow strong double digits.
This quarter and our backlog of projects extends into next year.
Sales of Ductless systems, and increasingly important component of our business also grew double digits during the quarter.
We saw the continued trend of gas furnaces converting towards heat pumps, which we sell at higher average selling prices.
Gross margins held firm this quarter at 28.1, reflecting our disciplined mindset around price and continued progress on our investment in our.
Pricing technology.
We also exhibited good SG&A discipline this quarter and we are optimistic about driving more operating efficiencies across our network as they move through the years.
Through the year I should say.
And of course, our balance sheet remains strong with little net debt at the peak of our seasonality.
As always the financial position provides us flexibility to invest in virtually any opportunity as we continue to grow and scale in a very fragmented 50 billion dollar plus north American market.
Yeah.
We continue to look for acquisitions.
Watsco is a great home for entrepreneurs in our space.
We sustain cultures invest in people and provide technology.
To secure and build on their great legacies.
Looking beyond the short term our press release provides critical details that support watsco as long term growth trajectory.
We have a managed technology advantage and we are investing to grow with that advantage.
Our mobile platforms and e-commerce channels have increased customer engagement reduced attrition created market share gains and supported our margin expansion in recent years.
Watsco has broad array of products and brands is a competitive advantage that allows us to serve contractors in any environment.
We have a leading market share position in Sun belt markets that provide stability and high growth rates over time.
In addition, there are several important regulatory and in an industry catalysts that are developing.
For example, the introduction of higher efficiency standards for H B.
For H B a C equipment has taken a full effect this year, providing pricing sales mix benefit.
No refrigerant standards historically has made it harder Twitter pair existing systems and benefits our sales of replacement system.
In other words wherever they changed the refrigeration mandate it.
It makes it very difficult to repair what you've got so they have they generally go and buy a replacement system.
The phase out of current refrigeration began last year and the launch of new equipment like that for them. So the new refrigerant standards, it's scheduling.
2025.
We also see continued progress toward electrification and greater adoption of heat pumps, which higher average selling prices.
Finally, we expect the inflation reduction acts enhance tax credit.
And consumer incentives to help upgrade HDA systems in the years ahead.
Yeah.
All of these catalysts will benefit the industry in the coming years, and we certainly believe our scale technology and financial strength positions us to capture these market opportunities.
With that let's go on to questions and answers.
We'll now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press star.
And then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Ryan Merkel with William Blair. Please go ahead, Barney Ryan Hey, good morning, everyone.
I had a question on sales and then a question on gross margin.
First on sales you mentioned the weather out any any chance you can share that July growth rate or just give us a sense of the magnitude change in sales from May June to July .
Well I would say that let me answer the first question in July we're seeing growth.
Low single digits, and it's expanding and I think it will end up.
Yeah with growth rates in the in the third quarter.
And what was the second part of your question.
Yeah, and just in terms of the magnitude of the improvement in July relative to what you saw in May and June .
Over may and June or at the same period last year I gave you the same period last year, we're up.
Low single digits.
Paul have you got it yeah that bother you got that answer.
Yeah, I mean, we're seeing we're seeing definite growth rates, you know pretty much across the board.
<unk> seen.
An uptick which yeah, because the weather was so weak in the first half of Europe , we're seeing an uptick in and repair parts, which is always good for us on a gross profit basis, but.
[noise] really not a big trend towards.
Towards replace versus repair or repair versus replace whichever way you are going out.
Both of them were starting to see some upticks on.
Okay got it yeah, Brett and Brian It's Barry If your question was how is June versus July getting getting granular about way.
Obviously June is a huge month within the quarter. So June looked a lot like our second quarter performance.
So July is obviously better than and that's a good thing.
Yeah, No that was what I was getting at so thanks for that Perry.
Onto gross margins everyone's favorite topic I'm a long term goal is 27% you just did $28. One so Justin tack for US why you know your 100 basis points above your target and then should we think about long term target of 27% 28 or you're willing to make that.
Change here today.
Well I'm gonna raise your expectations are we're shooting for 30%.
Now I'm not going to give you a timetable on it but we believe we can get there and then eventually beyond that.
Who wants to take a shot at his question.
Yeah.
I'd be happy to Alright, again are we there are five or six important variables and the current performance that has improved versus three years ago whenever are.
Without question was asked I was asked two or three years ago I feel like.
And I think all five or six variables have been influenced by technology number one.
We've talked about our pricing platform and how everything we sell to every one we sell it too is being touched in some way through through our pricing platform.
And so on.
The other other August reality, we've talked about is we're selling a lot of new products. We had the opportunity this year or two to go out and get price margin and support you know our OEM community with with all of their new products.
And sustained profitability.
And so far so good.
Obviously to you have a growth in the replacement market relative to new construction, which helps margin some.
And and I think the overall mix of everything we're selling.
In terms of efficiencies and higher growth rates of heat pumps for example helps margin as well.
I still have an answer to your question, though which is you know where are we on the spectrum of our target and so on in the short term I don't think there's anything.
There's two remarkable to either pressurize.
Or to add to gross profit, where we are today.
What I was suggesting longer term is.
We we feel far from satisfied that we're doing all the things we can do to grow to grow margin.
And to get the full benefit of the technology that we've put in place only a couple of years ago.
And the pulp pricing discussion, we're talking about with technology is only a couple of years old.
And therefore very far from being mature and it's in terms of benefits.
Well that was a long winded answer, but there's a lot of good weather.
I liked it.
Thanks for that very very helpful very clear at that time.
Thank you.
The next question comes from Tommy Moll with Stephens, Inc.
Tommy.
Good morning, Al how are you Sir.
Thanks for taking my questions sure.
So I wanted to start with.
With the continuation of the pricing theme.
We are.
Potentially late in this pricing cycle and I just wonder if you could give any qualitative commentary on where it feels like we sit today and then to the extent you can give anything quantitative on what the contribution was in the second quarter.
That'd be helpful as well thank you.
Alright.
Who's best to handle that.
Barry do you want to take a run at that sure sure I, Yes, I mean again it it's the same variables that that.
You know, we have to go out and prosecute and execute.
And price and layer in costs during the market given all the changes.
So I think for the quarter, it's about a 9% 10% benefit to overall average selling price for for our residential business our residential equipment.
The 9% to 10%.
<unk> has very little OEM.
They've been placing capture.
There was some of that but very very moderate this quarter.
Most of it comes from mix.
Or from all the new products that are being layered in.
And also heat pumps, which obviously have higher average selling price.
So in the quarter and it's pretty much the same number for year to date I think 9% is the overall.
We call it average higher average AR.
Any price increase for the year for the quarter on a year.
Thank you Barry that's helpful.
I also wanted to ask about the disruption.
Called out with one of your key OEM partners.
Any other context, you can share there would would be good to know and in particular can you give us the status today and is this something that we should expect to continue to pressure revenue in the third quarter now for the summer.
That's a very good question.
They're a great company and they're working very hard at it.
And there are improving.
And my guess is that either through the end of this quarter or certainly by the end of the fourth quarter there'll be.
All caught up.
Thank you I'll turn it back.
The next question comes from Dave Manthey from Baird. Please go ahead.
Yeah, Hi, good morning, everyone.
Oh My day Al since you since you've put it out there I'll ask a question on your 30% gross margin target just didn't give us broad strokes I won't ask you timelines, but what mechanisms would you see that would move you in that direction.
Well there is lots of opportunity in the non equipment side.
You know, we we sell a considerable amount of our revenues come from non equipment.
That people seem to forget.
And.
Secondly, the movement towards heat pumps, but the nature of that creates a higher margin and that's where the demand is going to expand significantly.
Motivated by federal government mandates and things like that plus the value of having a pet.
And we have other things that.
Our technology is providing ability to compete more effectively.
So it's internal and external forces it.
I'm, hoping to move us to the 30 and eventually beyond.
When you have this kind of scale that we do you should be able to accomplish those kinds of things.
Anthony This is Paul Johnson, you know you also see an awful lot of change happening with regulation over the next.
Really over the next five to six years, you know we've got the refrigeration change that's going on.
That al mentioned in his opening remarks, which will be in effect next year, which is going to reduce the availability of the gas is.
By another 30%, we just saw a 10% two years ago now we see another 30, and we see another 30 happening in 2028.
So we were gonna have a definite squeeze on that as a as a commodity and also there's an ability for us to be able to sell more replacement products. Even some of the products that we sell in 'twenty 'twenty four and 2025.
We've got the complete change a product line that we're gonna be hitting in 2025, which.
Yeah, it's kind of a little bit of a flexibility.
Timeline as far as when that's released but we're gonna be we're gonna be seen that occur.
We've also got two other things that are hitting us and that is going to be in.
An increase in the minimum of Oh efficiency for gas furnace to a minimum of 95% we feel pretty confident that that's going to occur and there is the potential of an additional refrigerant change where the government could reduce.
The.
The global warming potential down from $7 50 down to 500, so anytime there's a change in market I think there's an opportunity for an upside in gross profits were watching it.
Yeah don't take me literally that we would expect we have a timetable for 30% that's an aspiration, but we feel very confident we'll get there.
No that's great color actually expected to be shut down in that question, but I appreciate all of the.
[laughter] well I went to the the resource that I knew would talk the most zone.
Yeah. He is good is good it's absolutely well so second liens on tech spending if you're on a run rate of 55 million right now that's about to ask when you started standing up all these tools and populating your databases and everything else and.
Just wondering if you could help us understand what are the the key tech spending priorities in buckets that you're dealing with today Oh, you mean, you want to know who the big Spender is.
Yeah, Hi.
Mr President.
Yeah Yeah.
No I think I think we've consistently said with our tech spending that we are doing that.
They are unlimited the universe of opportunities to apply technology, and innovation and process improvement and smart thinking.
Smart people to everything we do.
And we've been at it now for 10 12 years and I think it's had a major impact on our business and now with the advent of generative AI. There's a whole another world of opportunity next chapter is just starting to be written and we're knee deep in that that opportunity as well now which is obviously changing very very fast so.
Maybe an ambiguous out there, but we're going to continue and that's because we know what's right for the long term health of the business.
And we might invest more I think we will we win.
Investing more every year.
As you know this company is very focused on long term.
I know in the analysts ask us.
Last year sometime when are you going to stop investing and I said, well, we're never going to do that.
This is our advantage and we're going to continue to increase our advantage.
I think thank you very much.
Yeah.
Yeah.
Yeah, I was just kind of add a layer of thinking to it for Youre, saying Dave is.
I mean, it's roughly let's say 300 people technology people and that number in that $55 million number what's.
Well, it's not well understood is that probably two thirds of that head count is actually sitting in the field with customers.
Sitting in a corporate Ivory tower.
Kicking out new technology, we have that.
But you know a lot of momentum a lot of the new investing it.
It is helping customers and then growing our customers and then growing new customers at the field level. It really is spreading.
Our local religion, so to speak.
And very local markets. So so just get the sense that it's not just invention and development.
That's going on for sure.
But it's also this ground game.
That is that there are truly at the ground level in our markets.
And it's worth saying again that our customers that use our technology, our better customers.
Is there a growth rate would that growth rates are higher their attrition rates lower our cost to serve than lower.
The more customers, we gotta using the technology more often.
Earnings for the company as well as work with customers by the way that they are more efficient and profitable as a result of using the technology.
Yeah.
Thanks again, everyone.
Right.
Our next question comes from Josh <unk> with Morgan Stanley . Please go ahead.
Hey, John what are you liking is better recently.
You guys have done all right I'll give you that.
Thank you. Thank you.
Couple of questions here, maybe one just kind of sticking to the quarter itself. Barry I know you gave some good color last quarter about maybe some of the moving items and and gross margin basically selling initiatives, maybe versus kind of that that inventory or inflation margin phenomenon.
I know that there was an extra wrinkle in <unk> with the timing of price increases anything that you can give us as bridge item to unpack that a little.
In general the selling margin, which is the purest form of price.
Price versus cost.
Net increase in the quarter. So that's a that's a high quality important you know an important component of gross profit because it is the largest component.
Sure the performance, so and that's without considering any benefit from.
Some of the pricing actions that came in in the quarter. So.
Just pure quarter over quarter year over year quality of margin improved.
Some of the below the line items I would say were fairly flat.
And.
And something like freight are afraid in where we pay our vendors to deliver certain things to us.
That still doesn't have some of the savings that we would like to have.
And because we're going through is pretty enormous transition of inventory.
Nothing too remarkable Josh one way or the other I think what is remarkable is that the selling margin.
Which is simple again simply price and cost being prosecuted in the market.
Was positive and up without any.
Sintering and benefit of pricing actions.
Got it that's helpful. And then maybe just shifting over more philosophically on on heat pumps.
I think with all the stimulus out there I guess airasia specifically.
I know that these things carry a higher price point anyway, but do you guys get the sense that the Oems or maybe the industry at large sort of disproportionately raises the price of pumps out there to start to capture some of that versus letting it all flow to the consumer I'm just trying to think through you know sort of what are the pricing strategy.
Think of all those zairy becomes more meaningful.
Yeah I agree yeah, we've finally got some clarity around that.
Tax credits.
The IRS should finally published a list of what pieces of equipment by modeling skewed.
Our available that will get the tax credits so that that just occurred this week and of course because of our technology, we were able to get that out.
And our dealer apps to a couple of hundred thousand people quickly.
So we really haven't felt the benefit of that.
There's historically been a spread between the heat pump and its great cool there are different components different electronics and Paul.
And so.
I don't think theres any any real uptick that's going to occur where you're gonna see heat pump margins.
Going up because of the the I R. A proposition that we've got on the table right now.
So I don't think the two are related right now because there really hasnt been any impact at all on sales from higher rate.
And whereas we finally got the the word out that the states now have the recommendation that from the D. O E on how to manage their rebate programs for mid and low income people and so we're not going to see any of that probably until end of first quarter beginning of second quarter next year.
<unk>.
Got it appreciate it Paul.
Alright.
Yeah.
Take the next question comes from Jeff Hammond with Keybanc capital markets. Please go ahead morning, Jeff.
Hey, guys. Good morning. This is much more on for Jeff.
I just had a quick question how much inventory do you guys want or need to take out in the second half I think you said you'd address inventory levels. Once you get a better handle on the selling season.
Yeah.
Well, that's a take a shot at I'll say that.
My sense of it is we can we're capable of taking out another 200 million.
Uh huh.
When things settle down.
And.
That'll be helpful.
In terms of inventory turns and in terms of cash flow.
Yeah.
No I would agree that that's a fair assessment.
Okay, Great and then just one more on the SG&A line, what can you guys do to temporary decrementals. If we if we continue to see volume declines in the second half.
Yeah.
I can I mean, I can answer it if you like I'm sure.
Yeah, I mean first what what helps in that equation to be concern if you're asking let's be conservative on the top line what happens below the top line.
That's your question.
SG&A becomes a focus item obviously.
SG&A went down this quarter and second quarter.
Good good.
Look inside that number variable costs are down in the teens.
Somewhere between 15 and 20%.
Our variable costs that we've been expecting that to reflect.
Kind of the change in the topline is occurring.
And fixed costs were up 4%, Florida for example.
It's still a measure of inflation.
And also does not fully yet benefit from some of the productivity things that we have.
Our team's focused on.
So I don't I'm, not going to predict precisely where SG&A heads.
But it's obvious that it was better in the second quarter than the first in terms of trend.
And we will see how the rest of the year plays out, but there is an immense amount of effort.
And challenge.
In data and technology looking at SG&A for the rest of the year and in terms of how we can reduce it further.
So that would help the decremental equation.
And if theres any level of growth.
It certainly helps the earnings growth rate.
Hi, guys. Thanks for taking my questions.
The next question comes from Brett Linzey with Mizuho. Please go ahead morning, Brad and Bob Hey, Good morning.
Hey, Jim.
Wanted to come back to the refrigerant changeover beginning in 'twenty five clearly the the regional seer transition created some impediments for watsco with the OE issue, how does that change or maybe inform the way you think about pre buy next year ahead of the twenty-five changeover as you looked at maybe secure more more inventory.
That's that's a good question from Paul He follows Yeah, I don't I don't.
We've been out we discussed this with all of our Oems, where we're not looking at a free buy I don't think anybody's right now looking at pre buying.
On 410, eight is as I indicated earlier theres already been a 30% reduction in the G. WP allocations for next year, which means we're gonna be at 60% what was allocated in 2011.
And there's going to be a further one and two in 2028, so we're gonna be down too.
Basically 30%.
So.
Offering a unit.
And doing a pre buy on a unit where the refrigerant is gonna be in short supply or very very extensive I don't think it would be a prudent business opportunity for anybody.
Okay got it.
Then just shifting to the consumer backdrop clearly you know the mix I was just wondering if theres anything you can glean from credit metrics across the organization or anything specific to the complexion of you know parts growth versus equipment that might suggest you're seeing some repair versus replacement trade down.
Yeah, we are.
There's two primary components when we look at them when we look at what the repair versus replace is doing.
It's motors and compressors.
What's happening with motors and compressors as we've seen.
We are we finally are seen in the month of July we've finally seen an uptick which we didn't see in the first half of the year.
So as we see a growth in that that would indicate that there would be more.
More repair happened, we also monitor any sort of warranty claims back to the Oems that we make to make sure that Oh, yeah. One they are in line with the marketplace, but also as an indicator of whether or not the units.
Or requiring repair while they're under warranty.
To date as I indicated earlier, yes, we are seeing.
An increase in the repair business and the.
In July but its not a major.
Not a major trend I don't think yet it's only been a well I've got is three weeks of information, but at this point I wouldn't say, it's a major trend, but certainly is there and it's positive and I'm happy about it.
Okay, Great I appreciate the color.
The next question comes from Steve Tusa with Jpmorgan. Please go ahead.
Yeah.
My first question is who had the who had to suite pipes at the beginning of the call. There that was that was a that was a nice thing [laughter]. That's good yeah, I know I know Barry Barry doesn't saying, maybe it was Paul I I don't know I don't know.
Well, there obviously reasons the thing with those gross margin. So congrats on continued execution there.
I just wanted to you know level set kind of the the the July commentary. So you said you're up low single digits.
Maybe a little bit more from a like components and repair related product perspective, what was what's kind of like the equipment unit would that be down high singles equipment unit volume in July .
Paul.
Barry It is yeah Barrett if not two to take that.
Yeah, Okay. Thank you.
First I think when we talked about growth, we're talking about the whole business, Steve and.
Our parts sales are not consequential enough to matter in that in that equation.
Alright, Yeah, Hi, Consequentially overall growth.
Will is.
The continuance of price that we see on average higher selling prices, probably a single digit decline in units. If I you know use common sense.
And that's about it I think and.
And we're up against again, 15% comps of a year ago.
So if.
We're still not you know.
We're still up.
We've said many times now we're still up against blockbuster stuff a year ago.
For July to have growth.
Good.
Yeah, Okay, and then I just wanted I'm, having trouble reconciling something I mean, you guys had a tough time with supply, but your inventories are up significantly can you help kind of reconcile.
Those two dynamics.
An accounting question for you Mr. Logan.
[laughter] I think that's a little more basic kind of accounting I don't know you tell me [laughter] trying to I'm trying to prove all that this is an account anymore. After 30 years.
[laughter], you're all everything Barry.
So Steve.
The irony of the question is if you look at it if you took our data look through it and said no.
I'm going to pick the whole universe of equipment, which is indoor units outdoor units Duckworth DUC did coil furnaces.
It might be called a unit.
The irony is the units are down this June versus a year ago single digits.
So your question is why is inventory higher right.
First the cost is higher.
Mixes higher mixes richer.
And so you know part of the.
The reality is we own inventory this year that is new.
We can't say that enough or obviously clearly enough.
Imagine in retail or any business and emptied out 60% of its products over the last six months.
And our carrier new products that are roughly 10, 12% more than cost.
And every customer every price was every bit of technology everything had to be updated in the last six months to accommodate that.
Analytically reality time to ever measure anything in this industry I think.
And if I cut through the crap and kind of just give you a simple answer.
Units are down and our inventory and it's cost us up.
Got it and then one last one for you just on this you know kind of product transition dynamic E. As they come back and supply you do you you know you'll will you shift back to them as as kind of a as they can ship in and I. My guess is you took on.
More of somebody else's to make up for that this past quarter.
Yeah, I would say we use.
We use the term balance and its not that what that is what that means is every store having matching systems.
That fit the need of any customer who calls or emails or E. Commerce is in order.
The balances is having the right mix of everything the right matching systems and everything.
And that's been one that's been the trickiest part.
As the Oems needing to to manufacture matching systems and.
And a very rich mix of new products that meet local needs of every customer in a local store.
And so that's the challenge and.
And that's the that's that balance is not is what is not is not fully balanced at this point in all the stores because of all the transactions that have gone on.
That's my abstract.
Random thought answer right, you're very close to this too.
Yeah Yeah.
I want to make sure I totally understand your question and your question are we going to move back to that OEM, Yes of course, where we're going to support them in every way, we can and where it went to a clawback and eat any sales. Our sales will also we had in any share loss that we had and the collaboration that we have with that OEM and such.
It's gonna be a joint effort to be able to get that back so.
Yeah things happen yeah.
And when they happen you know good partners stand together and work together.
And sorry, one last quick one for you you you mentioned that inventories are down but obviously your you know yourself through unit Wise is also down you know probably a bit more meaningfully than I think we would've expected if somebody were to come out and say like you know in industry residential HVAC unit.
Inventories are in balance or that we've already seen a destocking NASA over it doesn't sound like that's the case with you guys, saying you want to you know reduce your inventory by another 200 million I mean, it seems like they're just there as a way to go here from that perspective.
Yeah. There there still is some destock left to be to be performed as Barry indicated we have some you have some mismatch where youre going to have the outdoor units not the indoor units to put the system together coil will be there, but not the.
Not the air handler. So there is some destock as far as getting getting the proper match of inventory on hand and sold through.
And you know we're still seeing that.
We're still seeing a lot of great backlog on the commercial side, which we indicated in the in the opening comments were.
The units are still.
As hard as can be and we have a nice backlog of those that are that we have in inventory some of those but they are awaiting jobs to be completed to be moved into so.
I think I think there's some destocking to be happening and just some some management that we're gonna have to take on ourselves in order to reduce inventory by 200 million.
Great Alright, thanks, guys. Thanks for all the time.
Hi by Steve.
The next question comes from Joe <unk> with Deutsche Bank. Please go ahead morning Joel.
Hey, good morning, everybody just wanted to follow up on that prior comment in the comments in the prepared remarks about commercial you mentioned the double digit growth in backlogs into next year is there could you give us a sense of whether those backlogs are coming down at this point are you or your current sales sort of greater than what you're adding to those backlogs.
Good question, Paul you've got the data I think it varies based upon like commercial is a very broad subject.
I can buy a commercial applied where it's made to order for the for the job I think we'd still see knows backlogs continue to increase when you get into commercial rooftop units I think we've got a stabilization there.
Why is equaling demand right now so I don't see that growing much further than where we are today.
So you know it was kind of a mixed bag. When you look at all the components that go into commercial.
Okay understood and another another couple just fact based questions here what percentage of the commercial business would you say is driven by repair and upgrades versus new construction I think in the past you said, you're a bit less interested in the new construction because of the pricing and margin dynamics and then on the resi.
Side, just any number you might have in mind around how big heat pumps could be as a percentage of your overall equipment business.
And I would say I mean once again, he's got a mixed bag. When you talk about commercial when you were talking about the applied business. It generally is new construction that we're into because those are made to order for a specific building.
When you were talking rough jobs are our game has historically and continues to be on the replacement side.
Yeah.
And then he pumps.
And heat pumps continue to grow at one.
The percentage of our total business I think.
Sure you know you can get that information on the H M Rye website Hill.
You'll see that.
Heat pumps now has exceeded in 2022 exceeded the gas furnace sales.
And now they've moved up to you know roughly what 40% of the total market.
Watsco would be heavier on the heat pumps and most people because of our Sun belt.
Geography that were heavy in.
And so you're going to find more heat pump activity.
Obviously south of the Mason Dixon line, many well north.
However that will change as the technology of the heat pump changes and as government program to utility programs push heat pumps into the northern climes.
Yeah.
Alright, Thanks, a lot for all the detail good luck everybody.
Thank you.
The next question comes from Damian Karas from UBS.
Go ahead Hello.
Hi, good morning, everyone.
Morning.
So I appreciate the details that you gave around price and mix benefit just curious if you happen to be seeing any sign that your competitors might be getting more competitive on price inventories are being worked down or would you say that you know that pricing uplift that you're seeing pretty consistent out there in the market.
I would say it's been fairly consistent we haven't really seen any breaks you know obviously, if you listen to the salesmen you know all the prices are going down.
Uh Huh, if you really look at the reality of it.
You know that the marketplace is.
It was fairly disciplined.
And we have not really seen a decline in equipment pricing.
Understood I appreciate that.
And a follow up question on you know the.
Fragrance change I mean, you're effectively going to have.
Multiple refrigerant competing I think that's a little bit different than past cycles and I believe you do work with Oems that are on both sides of that so I'm. Just curious how you see that dual refrigerant dynamic playing out and what it means for watsco.
Well.
One of our companies that sells.
There are OEM is going to go with a 32, a and then we have the rest of our companies where they're going with the 454 P. So it's a it's very discreet and divided amongst our companies. So.
We have one company that will be carrying two flavors for 10 and.
32, a portend for repair and 32 eight for the new equipment.
And the rest of our companies will be carrying a $4 54 and form 10.
So I don't see a big.
I don't see a big deal there.
Understood appreciate your thoughts thanks, a lot.
I would like to turn the conference back over to Albert <unk> for any closing remarks.
Thanks again for your interest in our company.
We appreciate it very much and we look forward to speaking to you.
On the next quarter. However, if any of you want to come visit and learn more about.
Our technology and the innovations that we're doing feel free we will I'm happy to.
To present, you the information that would be helpful to you.
So thanks for.
Listening in to see the next time.
Yeah.
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