Watsco [WSO] Conference call transcript for 2022 q4
2023-02-16 16:24:06
Fiscal: 2022 q4
Operator: Good morning, and welcome to the Watsco Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After todayâs presentation, thereâll be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Albert Nahmad, CEO and Chairman. Please go ahead.
Albert Nahmad: Good morning, everyone. I do hope everyone is healthy and not struck by the virus. Welcome to our fourth quarter earnings call. And this is Al Nahmad, Chairman and CEO; and with me is A.J. Nahmad, President of Watsco; and Paul Johnston, Barry Logan and Rick Gomez. Before we start, here is 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 from the forward-looking statement. Now, Watsco delivered an exceptional quarter to close out a fantastic year. We are especially pleased, because 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 are reporting today were against that performance in the fourth quarter of the prior year. So how did we do on the fourth quarter of this prior year of 2022? Well, sales grew 5% to a record $1.6 billion. Adjusted operating income increased 14% to $141 million. EBIT margins expanded 80 basis points to a record 8.9%, and adjusted earnings per share increased 16% to a record $2.35. Now, weâre going to explain what the adjustment 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 77%. So we think we did well. Now for the full year, sales grew 16% to a record $7.3 billion. Adjusted operating income increased 33% to $835 million. EBIT margins expanded 150 basis points to a record 11.5%, and adjusted earnings per share increased 32% to a record $14.20. Now, let me clarify what the adjustment means. These figures â the adjusted figures including $49 million, I should say, once again, the adjusted figures exclude a $49 million net tax benefit from vesting of restricted shares, which added $1.20 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 of $572 million doing 2023 and ended the year with a strong balance sheet and virtually no debt, I like having a very little debt, if any at all. 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 as Watsco is a great home for family businesses, and why is that? Well, because we sustain cultures, we invest in people and we provide technology to secure and build on their great legacies. Our focus is always on long-term, which makes us different than other acquires in the industry. We have challenged our leadership team 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 thereâs 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. Thereâs more to do on both, but we are encouraged by our progress and our intent and achieving more operating efficiencies across our network. This morningâs press release provides important concepts and details that support Watscoâs long-term growth trajectory. Some of them are, we have an immense technology advantage, and we are investing to grow that advantage. These technologies are increasing customerâs engagement, reducing attrition and creating sustainable market share gains. In addition, Watscoâs broad array of products and brands is a competitive advantage and allows us to serve contractors in any environment. We also have a leading market share position in Sunbelt markets, proving stability and higher growth over time. Regarding those Sunbelt markets, a lot of people seem to be immigrating to the Sunbelt markets in recent times, and that works in our favor since weâre the leader in those markets. In addition, there are several important regulatory and industry catalysts for growth that will play out in the next few years. 2023 saw the introduction of high efficiency standard 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 homeowners and businesses in 2023 and beyond. And then in 2025, weâll also market introduction of new refrigerant standards, which historically made it harder to repair existing systems and drive customers to new equipment. We also see continued movement towards electrification and greater adoption of heat pumps, which generally come at a higher price and higher margins. Sales of heat pumps grew 25% in 2022, I should say, our sales of heat pumps grew 25% in 2022 and 21% during the fourth quarter, outpacing overall growth rates. Finally, the new Inflation Reduction Act provides enhanced tax credits and incentives for efficiency upgrades and electrification. All of these catalysts 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, we always concern about our balance sheet, so that we are in a position of financial strength. Todayâs balance sheet remains in pristine condition to invest in any size growth opportunity in the coming years. Lastly, before turning to Q&A, I would like to thank more than 7,000 employees of Watsco across our market for their service and commitment to customers. They have done an extraordinary job to serve our customers and generate historic performance as youâll see today. With that, letâs go on to Q&A.
Operator: We will now begin the question-and-answer session. Our first question will come from Tommy Moll with Stephens Inc. You may now go ahead.
Albert Nahmad: Good morning, Tommy.
Tommy Moll: Good morning, Al. So, I think, itâs 2 quarters in a row youâve 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 is the bottom line that SG&A will grow no faster than revenue and unlikely slower than revenue, even if volumes in the industry are pressured this year?
Albert Nahmad: Well, we certainly â thatâs our goal is to constantly improve our profitability, and our revenues without significantly increasing SG&A. But letâs get a little bit more color for you. Barry?
Barry Logan: Yeah, Tommy, I would say â good morning, Tommy. I would say that first, thereâs obviously in any distribution model, a variable component to what weâre 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 just the daily life of a branch manager and 10, 15 people on a branch was tested through all the disruption, everything that went on the last 2 years. So those variable costs, we definitely saw an improvement and reductions in the fourth quarter. And again, that would be, I would say, a foreshadowing for what weâre looking for going forward is some of the variable costs and inefficiency, becoming opportunities to create efficiency this year and 2023. Obviously, we also have fixed costs, which is probably a half or so of our SG&A spend. And there it is inflation, thereâs been inflation over the last 12 months like every other fixed cost of every other business. So itâs not that simple to simply reduced cost across the entire portfolio. For the variable costs weâre seeing already and the fixed costs with more moderate inflation, I would expect to see some improvement. So net-net, Iâll set at the goal is to have much more moderate SG&A spend versus revenue growth, and thereâs not a leader, a branch manager, a reasonable person in Watsco, that isnât focused on it.
Paul Johnston: This is Paul. I can also add, we talked about technology for our customers and 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. Weâve got, I think, world class inventory management systems, world class data management systems to be able to track and know what, where weâre not efficient and where weâre not â and where we are efficient. And I think our people have spent the last 4 or 5 years learning how to use these tools. And I think theyâre going to come into play now as we reach a more normal, if you will, business environment out there.
Tommy Moll: Appreciate the insight, and wanted to follow-up on a different topic on inventories. Evenâ¦
Albert Nahmad: Itâs always a good topic by the way with inflation in the last couple of years. Yeah, go ahead.
Tommy Moll: Well, thatâs where I was going, Al. Even if your revenue was 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 does supply chain have to improve to make that happen? Or is this more within your own control at this point?
Albert Nahmad: Iâll hand it over to our financial people.
Barry Logan: Yeah. Again, thereâs two pieces or probably 25 pieces to the answer, by the way, but Iâll give you the two big ones. First is, lead times. Lead times have been tested with the last 2 years. Lead times is what determines what we order and what we carry and just what our inventory levels are. And to the extent theyâre either disrupted or uncertain, and we need to hedge in terms of what we keep in branches. Thatâs what weâve done in 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 itâs lower than it is today in absolute dollars, thereâs other factors involved. But we would expect lead times to shorten, and confidence to strengthen and lead to lower inventory levels over time. The second, today, itâs 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 product that theyâve experienced in their careers, itâs still going and trickling into the first quarter as well. So in many respects, inventory is not business as usual also because of the product transition. And over the next 12 months, as that works itself through, I would expect that to help inventory levels, meaning reduce inventory levels. And weâre kind of looking forward to the greater simplicity than weâve been experiencing the last couple of years.
Paul Johnston: Correct. A little bit what Barryâs saying there, you consider what we did with going from what we call the M inventory, which is what we sold last year to the new M1 inventory. Basically, we have to do a transition where weâre replacing all of that inventory, because in most of our Sunbelt markets, the old M inventory would not be available to sell. So for us, it was a complete refresh of all of that inventory. And also adding to Barryâs point, as we move into the new inventory, weâre going to have a reduction in the number of SKUs that we have to handle on the equipment side, which we think will result in better efficiencies and higher turnovers in the inventory.
Tommy Moll: Appreciate the insight, and Iâll turn it back.
Albert Nahmad: So all of that work on the inventory, obviously, it leads to better cash flow as well. Weâre very aware of that. The better we manage the inventory. And youâve just started all the forces that are being weâre presently dealing with better the cash flow, so we expect to pay off in cash flow as well.
Tommy Moll: Thank you.
Operator: Our next question comes from Dave Manthey with Baird. Please go ahead.
Albert Nahmad: Hi, Dave.
David Manthey: Hey, Al. Good morning, everyone. I was wondering if you could talk about gross margin based on the mix of business and your current outlook is the annual gross margin floor still looking like itâs approximately 27%.
Albert Nahmad: Mr. Logon?
Barry Logan: The â again, Dave, good morning. Well, first, 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. Itâs the simplest, most important analysis and thatâs what increased this quarter. And itâs satisfying, because again thereâs a lot going on in the market, a lot of product changes, a lot of conversions, a lot of noise. And our teams did a great job of sustaining margin. So I donât think thereâs anything thatâs changed in our â either our thought process or analysis or what our business leaders are telling us in margin looking forward in 2023. And youâve heard 27% as a target. Our entrepreneurial CEO would tell you itâs an interim target, because we have greater expectations than that. And, but I donât think anythingâs changed either in the mix of your thought process, Dave, of what the target is.
David Manthey: Yeah. Good to hear. And then seconds is somewhat of a random question. But for future reference approximately what are you getting these days for a pound of R-410A refrigerant and what percentage of your sales is replacement refrigerant right now?
Barry Logan: What do we get, itâs around $25, $26 per pound of 410A, and that varies by region.
Albert Nahmad: .
Barry Logan: No, thatâs pound.
Albert Nahmad: Thatâs pound. Okay.
Barry Logan: And that varies by region, and itâs a very small percentage of our total sales.
Albert Nahmad: Yeah. Yeah.
David Manthey: All right. Appreciate it. Thank you very much.
Albert Nahmad: You bet.
Operator: Our next question will come from Jeffrey Sprague with Vertical Research. Please go ahead.
Albert Nahmad: Good morning, Jeff.
Jeffrey Sprague: Hey, good morning, everyone. Hope youâre doing well. Thanks for taking the question. I just want to come back to inventory also just for maybe a little bit more granularity if we get. Is the, Iâll call it, disruption maybe you guys call it the internal fire drill. But from the transition from old to new, is product geographically where it needs to be? Is there stuff stranded now in the South that you canât sell that needs to move? Is there any particular noise that we should think about particularly in the first quarter here?
Aaron Nahmad: Well, thatâs a very good question. And we were very aware of what happened by year end. And so the answer is, we took care of that very, very well. Thereâs no exposure to that, or no significant exposure. And whatever there was, we just dipped our northern branches, but it was very small.
Barry Logan: That kind of makes Watsco unique, because weâre a national North, South, East, West company, nothing is ever stranded. Because, as Al indicated, weâve got a large business that we do in the northern tier of the U.S. plus Canada, where we were able to move, very little inventory actually, but we didnât move the inventory to make sure itâs available to sell.
Albert Nahmad: Yeah, we are very aware of this. So we were the inventory down in Southern states.
Jeffrey Sprague: Thank you for that. And can you just help us frame up kind of the volume next dynamics in the quarter volume price mix, I mean, obviously, you were selling old units, but youâre also selling new stuff, we got multiple OEM price increases out there, plus your markup, just a little bit of help on how the quarter really played out.
Albert Nahmad: Thatâs why they pay us the big bucks to figure all that out.
Jeffrey Sprague: But they pay us the smaller bucks to figure out what it was?
Barry Logan: By the way, I would say that just to give some editorial on it, I think, the idea of selling out of the M product in the Sunbelt markets, and the gaining of the replacement inventory of M1, there was probably actually a gap there, as opposed to meaning that thereâs almost probably some branches and so on did not have the new stock to sell as they sold out of the old stock. So that transition was probably slightly negative to unit in the fourth quarter just to give you some color. So donât â I think the OEMs are still playing catch up on getting the M1 product everywhere it needs to be as opposed to being ahead of where it would have been. Soâ¦
Albert Nahmad: Yeah, some of the OEMs are doing better than others. So itâs pretty good. Our supply chain in that respect.
Barry Logan: To give you the answer, you can see the â we said U.S. products are up 4% in the quarter, if I gave you the units, units were down 8%, which would mean prices up 12%. In that 12% price is, again, fixed line items that would add up to 12%, not so much inflation, some inflation. But the heat pump growth obviously is a big component of that growth rate, because weâre selling at higher unit prices there. And some inflation, that would give you the mix stuff.
Jeffrey Sprague: Terrific. I appreciate it.
Albert Nahmad: And donât ever forget that in the fourth quarter, and even the first quarter drawing inferences and whatâs a much smaller quarter than the others is, give it the weight that deserves given the size of the quarter.
Jeffrey Sprague: Got it. Thank you.
Operator: Our next question will come from Ryan Merkel was William Blair. You may now go ahead.
Albert Nahmad: Good morning, Ryan.
Ryan Merkel: Hey, good morning, everyone. Thanks for taking the question. I wanted to start off with the question on price mix and the impact in 2023. I think, thereâs a little debate about what price mix could be given the sheer change. So any help give us there would be appreciated.
Albert Nahmad: Yeah, I would say by the way, Iâm turning it over to somebody knows more about this than I do. But also the mix change or product is affecting our margins. Itâs very significant part of whatâs going on, people start buying or have been buying more heat pumps that improves our margins just by that fact, because some of these products are at a higher margin than other products. So itâs also a mix of products. But, Paul, go ahead, or Barry, whoever wants to take that.
Paul Johnston: Thatâs a very complex question, Ryan. Obviously, weâve indicated twice that the heat pumps help, 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, we havenât mentioned it yet, but the duct free split market, has continued to grow at double-digits for us meddling in the quarter, but also on a year-to-date basis even more. So those also come with a higher margin to them, and that market has continued to escalate with new products. And as well as weâre starting to see hybrid units that are getting into the ducted side. And without getting too far into the wheeze on that, weâre starting to see a lot of crossover between the duct free products becoming ducted and becoming more functional, and that obviously has higher gross margins and better profits.
Albert Nahmad: The products also have a wonderful benefit for the end user. Explain that, Paul?
Paul Johnston: Yeah, the products that we sell are well above the minimums under old SEER terminology, they were in the 18 to 24 SEER range, versus we consider 16, 17 SEER on the ducted product to be very high efficiency. So the consumer is saving money getting a great product. And weâre seeing more and more on entrees into that marketplace from all of our OEMs.
Ryan Merkel: Got it. Yeah, I appreciate that. Go ahead, Barry.
Barry Logan: Yeah, just to add a â just a reminder on the M1 product, obviously, the OEMs needed to capture a higher selling price in the market. And I donât think anything has changed from what weâre seeing in terms of price capture in 2023 on the new products and depends on which OEM and which conversation, but there are some March 1 or some March price increases also flowing from the OEMs in March. How much of that sticks into the market, time will tell, but there is a â obviously, some inflation to be captured this year, which is part of what the OEMs are feeling in terms of their pressure.
Ryan Merkel: 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, itâs at least in the range?
Barry Logan: I hate the comments specifically, Ryan, on a range, I would say what youâve seen the last 6 months from Watsco in terms of price does not include a lot of inflation, and includes a lot of price capture and mix. And so, I think thereâs still a big dependency on the contractor going into someoneâs home and selling these products and capturing their price. And so time will tell, but I think, obviously, we expect pretty strong pricing environment this year.
Albert Nahmad: Well, I hasten to add that these are not just price increases for the hell of it. The innovation of cooling and heating thatâs going on now is magnificent for the people that use HVAC. I mean, theyâre getting the savings of going to a heat pump, because the heat pump cools and heat, they donât need a cooler add the furnace. Thatâs a wonderful use of it. The federal governmentâs discovered that. So theyâre providing already and weâll provide more incentives for businesses and homes to use the heat pump, everybody wins on that. The consumer saves more and there are less emissions from it. So, I always like to think a little further out, I donât see anything that isnât positive, given that heating and cooling is 50% of homeowners cost of electricity. And all these innovations are focused on helping that consumer save money as well as benefits from more efficiency in the unit itself, which is how he saves money. So, I just think the industry is on a roll here now, because of the concern about emissions and the concern about the refrigerants damaging the environment. And thereâs a movement by the guys that make the stuff to innovate. And more they innovate, the more we enjoy providing great products to the contractor, who in turn provides it to the homeowner or the business owner. Itâs just a lot of good stuff going on.
Ryan Merkel: All right. I agree. Thanks, Al.
Albert Nahmad: You bet.
Operator: Our next question will come from Nigel Coe with Wolfe Research. You may now go ahead.
Nigel Coe: Thanks. Good morning, everyone.
Albert Nahmad: Good morning, Nigel.
Nigel Coe: So â good morning. So you mentioned the ductless split systems as growing double digits, it just strikes me that this is the byproduct for this time, given the efficiency, the price points, and it feels like the IRA is almost being written for the system. So do you think that 2023-2024 is going to be a real breakout for these units? And it sounds like itâs a lower price point, lower revenue mix, but better margin? Is that the way to think about it?
Barry Logan: Actually, itâs â for the last 20 years, itâs been growing and growing. And, I think, the â I donât think itâs going to be a breakout period for it. You have to remember that thereâs approximately 70 or 80 million homes out there that have ductwork that runs through them. So their ability to adapt to a ducted system had to occur for really to be an important element. But the ducted systems that we have the new M1 products are our OEMs have done marvelous things with the technology and the 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, itâs going to be a nice balance now that weâre going to have between the ductless and the duct free. I call it almost a conversions where Iâm going to where a homeowner would perhaps use both products in their home.
Nigel Coe: Right. Yeah, so more HVAC systems that makes sense. And then the down 8% units in the quarter, you mentioned that some of your warehouses were out of stock with the transition to sounds like that was bit of an impact. I mean, can you just give us a flavor on how thatâs been tracking through January perhaps? And when do you think weâll be in a situation where the OEMs are up to speed on this M1 product?
Barry Logan: Well, most of the OEMs are improving, there is some dysfunction in the in the channel right now, obviously, with the higher demand for heat pumps as created some longer lead times or long lead times compared to the straight-cooler units and the gas furnaces. So weâre hoping that they get those ironed out. When â that youâd have to ask the OEMs when theyâre going to be able to do that, but itâs our hope that will start stabilizing in the second quarter. Weâre also seeing some high demand on the commercial products that we offer, and lead times there are stretching out into the months, not year.
Albert Nahmad: Yeah, thatâs most difficult inventory accessibility that we have now in the commercial.
Barry Logan: With the highest of the very high demand for them, and so thatâs kind of pushing sales along out into the year. And, frankly, with that that particular product, if demand continues where itâs at, itâs going to be probably throughout the entire 2023. Weâre going to see disconnect there between availability and demand.
Nigel Coe: But any improvements in that manifests into 1Q with the â perhaps the better player for new systems?
Barry Logan: Yeah, with the residential systems, we are seeing definite improvement. But as I indicated earlier, again, itâs mostly with the straight-cool products, and weâre seeing the improvement weâre not today, weâre seeing small improvements on the heat pumps, but not where we want them to get our inventories adjusted.
Nigel Coe: Great. Thatâs very helpful. Thank a lot.
Operator: Our next question will come from Jeff Hammond with KeyBanc Capital Markets. You may now go ahead.
Albert Nahmad: Hello, Jeff.
Jeffrey Hammond: Hey, good morning, everyone. I like came down to Miami and it rained for 2 days. You said itâs always sunny down there.
Albert Nahmad: Well, you didnât call me. And donât tell anybody itâs going to be, what itâs going to be, even if we take you to a big room, when were you here?
Jeffrey Hammond: A couple of weeks ago.
Albert Nahmad: Did you enjoy the weather at least?
Jeffrey Hammond: Well, it rained. It was nicer than Cleveland. Butâ¦
Albert Nahmad: Well, rain . Yeah.
Jeffrey Hammond: Yeah. Just back in the inventory question, I guess, Barry, you mentioned lead times in the conversion, I guess, if you say lead times get back to normal. And, obviously, we donât know, when you get through this conversion. 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 if we get some of this destock, which everyoneâs talking about kind of is it end of the season? Whatâs kind of your best guess on timing? Thanks.
Albert Nahmad: Well, Iâll give you a number thatâs a goal that whether weâll achieve it or not, but what I want us to achieve is to remove $200 million of our inventory.
Barry Logan: Jeff, when you got to look at it on two sides, you got to look at it in dollars, you got to look at it units also. Our unit inventory is not up that dramatically itâs up mid-single-digits. So when you look at it that way a lot of the dollars have to do with the inflation effect, and if that continues to go along weâre going to have to work even harder to reach our goal, which I think we all want to receive and all want to meet.
Jeffrey Hammond: Okay. Thatâs really helpful. So just on 2023, I know, you guys donât give guidance, but most of the OEMs are kind of calling for kind of a sell through unit decline of mid-single-digits, and one, just wanted to get your take on that and thatâs market I understand you guys want to outgrow. But just your view of kind of market volume for 2023, and then presuming that can you still grow sales and earnings this year? Thanks.
Albert Nahmad: Oh, thatâs an easy one this year? Yes. Iâll let somebody else answer the quarter.
Paul Johnston: In terms of the year, Jeff, our team, our leaders, our business development people in the field, all expected growth sales earnings this year. So thatâs the target they set for us and other ones, managing all the local businesses that lots go operate. So I wouldnât say itâs just â not just optimism, itâs their plans to see growth. So, I think, short term, the first quarter is the funkiest quarter, and maybe my career, my 30-year career in that you have 30% revenue comps and 100% EPS comps of a year ago. And Iâm glad itâs 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 the first quarter and into the year. And, again, our teams are planning for growth in 2023.
Barry Logan: And Iâm always â yeah, when you talk about the industry, of course, we always get focused on ducted residential split systems, and always remind people that over one-third of Watscoâs businesses in the parts and supply business is a big piece of our business. 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. And something that hasnât been asked, so Iâll offer it on the commercial side of the business, it was up over 20% this quarter, which is probably the 7th or 8th straight quarter of being up 20% or more. And Iâll mentioned about the supply chain for commercial simply being truly challenged still. Itâs still itâs not restraining growth, the growth rate of over 20%. And, I think, youâve heard all the OEMs talk about that dynamic over the next year or two. And weâre certainly seeing the same thing.
Albert Nahmad: And to add Barryâs comment, our non-equipment sales were up mid-teens.
Barry Logan: But in the end, we need equipment to move the needle. And they think about who we are and our density of locations is that wherever the weather goes, we probably have facilities that serve what their needs are in that area.
Jeffrey Hammond: Just quick last one, international, I think was looked like it was a little softer than U.S., any nuances?
Albert Nahmad: Itâs a pretty steady business, and I expect growth there. For sure, itâs very well managed, and even though some of these economies there are not doing well, Iâm positive on it.
Jeffrey Hammond: Okay, thanks.
Operator: Our next question will come from Josh Pokrzywinski with Morgan Stanley. You may now go ahead.
Albert Nahmad: Hi, Josh, how you doing?
Joshua Pokrzywinski: Hey, Al, doing well. How about yourself?
Albert Nahmad: Good. Good.
Barry Logan: Well, Josh, I got to say thatâs a new pronunciation of your last one. I havenât heard.
Joshua Pokrzywinski: I get more creative every time. Well, appreciate the question, guys. So weâve touched on heat pumps enough times now, weâre just want to check your thoughts, Paul, on how youâre thinking about anything. On the IRA side, thereâs anything to point to on rulemaking the single bar that they are paying more attention to.
Albert Nahmad: Yeah. Right now, the IRA in the first quarter obviously had, I would say, zero impact on what weâve seen to date. I think the 25-C portion of it where you can get a tax credit. I think weâll start seeing some positive feelings from it in the second quarter and third quarter. We still donât have a clear definition of what units qualify for the tax credit. And thatâs been delayed and we continue to follow-up to make sure that we understand which units are available for each one of our OEMs. So we can â weâre ready. Weâve launched programs with our dealers. We got the information in the dealers hands, itâs a matter now of just matching it up with what units are available. On the other side of the IRA, the tax rebates I really donât think weâre 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 2024. However, on the non-IRA side, weâre starting to see a lot more municipalities and regions of the country that are pushing harder and harder on basically going with the heat pump. Places in Northern California, you canât replace a gas furnace, New York City, itâs fossil fuel heat, forget it. In Canada, weâre seeing the same thing. So as we move through this transition, the IRA has an impact that plus a lot of local municipalities and states are also getting behind the movement now to electrify our heating needs.
Joshua Pokrzywinski: Got it. Super comprehensive. I really appreciate that. Something else would like to follow-on maybe away from whatâs been touched on so far. Just saw that in the fourth quarter, you had a carrier distributor get picked up by, I think, the first one non-Watsco entity since the JV started, if memory serves, just how do you think about the kind of ability to maybe look at future regions or the balance of ownership their longer term?
Albert Nahmad: Well, let me just kind of make that there have been other carrier distributors, so other people in during our time with carrier. Itâs not a new thing. But I have to remind you that we have 23 brands that we deal with. And our appetite is for distributors that are good, well run, and doesnât matter what the brand is.
Joshua Pokrzywinski: All right. Thatâs helpful.
Albert Nahmad: I think weâre very â weâre Carrierâs largest customer. Weâre never going to let him 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 find great companies that want to be part of us. And I think we offer more than anybody else in terms of joining a family.
Joshua Pokrzywinski: Right. Thanks, Al.
Operator: Our next question will come from Steve Tusa with JPMorgan.
Albert Nahmad: Hello, Steve.
Stephen Tusa: Hi, guys, good morning.
Albert Nahmad: Good morning.
Stephen Tusa: Carrier sales to their JVs was up like low-20s in the quarter. I know they have some other JVs in 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 8%, what was the actual like resi number? The unit number for equipment in 4Q. What was the actual resi number?
Barry Logan: I think it was pretty flat, Steve?
Stephen Tusa: Pretty â in and around that?
Barry Logan: Wait to see.
Stephen Tusa: Because if commercial was up that strong. I mean, obviously commercials not as big but just carrying them.
Albert Nahmad: Now, Iâm commenting on all of whatâs going not certainly, not just carrier, butâ¦
Stephen Tusa: Yeah, totally, totally, all of Watsco. So units were down 8% on equipment. It sounds like youâre like commercial was up comfortably. So what does that mean for resi like downloadable?
Albert Nahmad: We said overall it was down 8% for the quarter residential domestic. Thatâs it.
Stephen Tusa: Okay. So thatâs the resi number.
Albert Nahmad: Yes.
Stephen Tusa: Okay. That makes sense. And then I am not sure if you answer this. I mean, you said youâre going to grow sales. But what do you think the unit number is for? 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 2023? Iâm not sure if you guys answered that before units.
Albert Nahmad: on the call, Steve, just kidding.
Stephen Tusa: Well, you think youâre going to grow sales that includes, obviously, price and mix. So our volumes, actually â I think we had a question before, Iâm not sureâ¦
Albert Nahmad: We do expect units and prices to increase could contribute to sales growth both.
Stephen Tusa: For the year?
Albert Nahmad: Oh, yeah, for the year. We expect another price increase coming from the OEM now. Itâs already starting to occur because of the new mix, the new products that theyâre introducing.
Stephen Tusa: Got it. And thenâ¦
Barry Logan: And Steve, I just want to handle this, because itâs important and itâs important for other people to listen to it too. We donât sit here and like wonder what the markets going to do and just say, oh my goodness, they listen to what everybody is saying, when wringing our hands, and hoping itâs not right. The last 2 years, itâs almost been impossible to go to OEM community and ask for incremental opportunities to go OEMs, and say we want more territory, we want more brands, we want more products, we want to expand, what weâre doing. Letâs do that thatâs not been possible over the last 2 years, because OEMs could not make the product or couldnât offer the opportunity. And those types of initiatives are going on right now. Iâm not going to list them for you. But thereâs a lot of underground effort here to do what I just said, which is to grow our business with our manufacturers, some of them new manufacturers in order to expand what weâre doing and grow the market this year.
Stephen Tusa: Got it. Got it. For your share â from a share perspective.
Albert Nahmad: Thatâs correct.
Stephen Tusa: One last one for you, Paul, maybe you know the answer this question, but I was talking a lot about the savings for the consumer. What is the like â what do you think is the payback for the consumer? Obviouslyâ¦
Albert Nahmad: Very good question. Goodâ¦
Stephen Tusa: What is the actual payback? Because, I mean, youâre going to be spending a couple grand more on some of these systems. What is the actual payback is measured in years on some of these newâ¦
Paul Johnston: Yeah. Obviously, it depends on the geography. In Florida, you get a faster payback. In Connecticut, your payback would be a lot slower. So in each one of the regions to pay back is also a factor of utility rebates, the state rebates, the IRA tax credits.
Stephen Tusa: But energy consumption. The drop in energy consumption is the key thing. All those other things add gravy to the meal, but what is the reduction in energy use, when we install a high efficiency.
Barry Logan: Yeah, percentage wise, it could be 25% to 30%. Weâre even more on an older system. But I mean, to be able to come up with a yearâs analysis, youâd have to take all those factors into consideration. So really a tough payback analysis to do, Steve, for the whole U.S.
Albert Nahmad: Yeah, if you start with a premise that theyâre going to use 25% less energy and probably more percentage wise, and energy is half the cost â Iâm sorry, cooling and heating is half the cost of electrical use in home. Thatâs the way to look at it. We got a lot of homes where theyâre already paying X dollars. And if they go to â for their energy, and if they go to a higher efficiency heating and cooling system, theyâre going to save half of the half. The overall cost is half dedicated to heating and cooling, and the stuff weâre selling is going to save them, half of that in costs with the electrical company. Plus as Barry and Paul starts to say all kinds of tax benefits that are going to run to the homeowner.
Stephen Tusa: Yeah, one more question for you, sorry, this hybrid ductless, itâs my understanding that they have â that some of the guys like Daikin have gotten their products down to be essentially in line with the replacement for a unitary system. And I would assume that with the increase in fear for unitary, that kind of difference is going to get smaller. Is that about right or is the hybrid ductless still the first cost is still more expensive than what will be the baseline unitary product? Like how cost competitive are they?
Barry Logan: Theyâre very cost competitive. Theyâre right in line with the ducted product. And beyond â I know, you made a comment about the Daikin product from the ASHRAE show, but every manufacturer either has one or will have one, right. We have been marketing it for what the last 2.5 years. It seems substantial growth in revenue.
Stephen Tusa: Yeah. Makes sense. All right. Thanks for all the colors as usual, guys, really helpful.
Albert Nahmad: Okay.
Operator: Our next question will come from Chris Dankert with Loop Capital. You may now go ahead.
Albert Nahmad: Good morning, Chris.
Christopher Dankert: Yeah, good morning, Al. It is. It is. I guess to stick with the heat pump theme here, really impressive growth on the quarter and the year. More than 2x the market if Iâm not mistaken, I guess, maybe could you tell us or remind us kind of what percent here mix of heat pumps today? And are we starting from a smaller base there? And any comments would be really helpful?
Albert Nahmad: Yeah, it depends on the states. Once again, if you go to Texas, itâs a very low percentage of the total market. Itâs in the low-20s. So we have a huge opportunity to grow the heat pumps here, there. If I go up into the Carolinas, weâre already in the 65%, 70% range. So thatâs just a continuation of what weâve done over the last 10 years. 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 heat, and operate at 15, 20, 25 degrees, below zero. So that we can move the market up into my home state of North Dakota, and actually keep people warm in the winter.
Christopher Dankert: Got it. Okayâ¦
Barry Logan: I was going to say after one on Watsco for another 20 years, which we want you to. But remember the furnace might last a lifetime. In fact, many of them have lifetime warranties. And heat pump useful life is probably 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.
Christopher Dankert: Okay. That makes sense. And thereâs a lot of understandable concern kind of on the strength of a consumer balance sheet and spending right now, part of why 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 your contractor customers here?
Albert Nahmad: Good question. Paul?
Paul Johnston: Yeah, we didnât throughout the entire pandemic period, we were just talking this morning about in the amount of home equity thatâs available to consumers with the appreciation in their primary residence. So we havenât seen a repair versus replace discussion, which generally the industry gets into as we move into a transition to new products. So I think itâs a little early to declare with which way the market is going to go right now. But for right now, weâre seeing a nice balance between our equipment and our parts business.
Aaron Nahmad: Okay. I will say â this is A.J. I will say that if and when a repair dynamic plays out, weâre well positioned. Weâve 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 products often come with a higher margin.
Albert Nahmad: Thatâs a very unique advantage. I donât think anybody has the system to do that.
Christopher Dankert: Got it. Well, thanks so much for the color, guys.
Operator: It appears no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks.
Albert Nahmad: Well, thanks again for your interest in our company. Weâre very optimistic and we hope you stay interested. And please donât hesitate to come down and visit and hear from the players directly. Not only that, the sun always shines here. So thanks again for your interest, and weâll see you the next quarter. Bye-bye.
Operator: The conference is now concluded. Thank you for attending todayâs presentation. You may now disconnect.