Good morning, welcome to the Watsco fourth quarter 2022 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by 0. After today's presentation, there'll be an opportunity to ask questions. To ask a question, press star 1 on your telephone keypad. To withdraw your question, please press star then 2. 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. Morning, everyone. I do hope everyone is healthy and not struck by the virus. Welcome to our fourth quarter earnings call. This is Albert H. Nahmad, Chairman and CEO. With me is Aaron Nahmad, President of Watsco, Paul Johnston, Barry Logan, and Rick Gomez. Before we start, here's 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. 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%. The results we're reporting today were against that performance in the fourth quarter of the prior year. 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 a $141 million. EBIT margins expanded 50 basis points. Correction, 80 basis points to a record 8.9%. Adjusted earnings per share increased 16% to a record $2.35. We're gonna explain what the adjustment is as we go through here. Remember, this fourth quarter results were running against the prior year, where sales were up 21% and earnings per share was up 77%. We think we did well. 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%. Adjusted earnings per share increased 32% to a record $14.20. Now, let me clarify what the adjustment means. The adjusted figures, I should say, once again, exclude a $49 million net tax benefit from vesting of restricted shares, which added $1.20 in earnings per share for the quarter and $1.21 earnings per share for the year. Those were excluded in the numbers that I just gave you. Very important, we generated record cash flow of $572 million during 2023 and ended the year with a strong balance sheet and virtually no debt. I like having 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 the very fragmented $50 billion North American distributor market. We continue to look for acquisitions as Watsco is a great home for family businesses. 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 acquirers in the industry. We have challenged our leadership teams to develop aggressive growth plans utilizing our scale, product diversity and technology leadership and build upon our growing market share position. To that end, we are working collaboratively with our OEM partners to develop forward-looking growth initiatives, particularly in light of the various regulatory and positive industry catalysts that lie ahead. There are some good ones. This quarter results also reflect continued progress on 2 key areas of focus. Those are sustaining gross margins and improving operating efficiencies. There's more to do on both. We are encouraged by our progress and our intent on achieving more operating efficiencies across our network. This morning's press release provides important concepts and details that support Watsco's long-term growth trajectory. Some of them are: we have an immense technology advantage. We are investing to grow that advantage. These technologies are increasing customers' engagement, reducing attrition, and creating sustainable market share gains. Watsco's broad array of products and brands is a competitive advantage that allows us to serve contractors in any environment. We also have a leading market share position in Sun Belt markets, proving stability and higher growth over time. Regarding those Sun Belt markets, a lot of people seem to be immigrating to the Sun Belt markets in recent times. That works in our favor since we're the leader in those markets. 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. Then in 2025 will also mark an 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 margin. 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, we certainly believe that our scale, technology, and financial strength position us to capture these new market opportunities. We always are concerned about our balance sheet so that we are in a position of financial strength. Today's balance sheet remains in pristine condition to invest in any size growth opportunity in the coming years. Before turning to Q&A, I would like to thank the 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 you see today. With that, let's go on Q&A. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Tommy Moll with Stephens Inc. You may now go ahead. Morning, Tom. Morning, Al. I think it's 2 quarters in a row you've made a point to mention operational efficiencies on this call, and I was hoping you could give us a little more insight into what initiatives you have underway there. Is the bottom line that SG&A will grow no faster than revenue and likely slower than revenue, even if volumes in the industry are pressured this year? Well, we certainly... That's our goal is to constantly improve our profitability and our revenues without significantly increasing SG&A. Let's get a little bit more color for you. Barry? Yeah, Tommy. I would say, Good morning, Tommy. I would say that first, you know, there's obviously in any distribution model, a variable component to what we're spending on SG&A. 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 in the last 2 years. Those variable costs, we definitely saw an improvement and reductions in the fourth quarter. Again, that would be, I would say, a foreshadowing for what we're looking for going forward, is some of the variable costs and inefficiency becoming opportunities to create efficiency, this year in 2023. Obviously, we also have fixed costs, which is probably half or so of our SG&A spend. There's inflation. You know, there's been inflation over the last 12 months, like every other fixed cost of every other business That it's not that simple to simply reduce costs across the entire portfolio. The variable costs we're seeing already and the fixed costs with more moderate inflation, I would expect to see some improvement. Net, net, Al said it, the goal is to have much more moderate SG&A spend versus revenue growth. There's not a leader, a branch manager, a regional person in Watsco that isn't focused on it. This is Paul. I'd also add, you know, we talk about technology for our customers and how it enhances their experience and provides them with a more efficient model to do business with Watsco. Also those same technologies work within Watsco to improve our efficiencies. We've got, I think, world-class inventory management systems, you know, world-class data management systems to be able to track and know where we're not efficient and where we are efficient. And I think our people have spent the last four or five years learning how to use these tools, and I think they're gonna come into play now as we reach a more normal, if you will, business environment out there. Appreciate the insight and wanted to follow up on a different topic on inventories. That's always a good topic, by the way. With inflation the last couple of years. Yeah, go ahead. Well, that's where I was going, Al. If even if your revenue is up this year, is it more likely than not that inventory dollars on your balance sheet will be lower by year-end? How much does supply chain have to improve to make that happen, or is this more within your own control at this point? Well, let's hand it over to our financial people. Yeah. Well, again, there's 2 pieces or there's probably 25 pieces to the answer, by the way, but I'll give you the 2 big ones. First is lead times. Lead times have been tested the last 2 years. Lead times is what determines what we order and what we carry and just what our inventory levels are. To the extent they're either disrupted or uncertain, and we need to hedge, in terms of what we keep in branches, that's what we've done the last couple of years. To the extent that over the next 12 months, lead times become more dependable and less, then there is the opportunity and would be the consequence of lowering inventory. Whether it's lower than it is today in absolute dollars, you know, that there's other factors involved. We would expect lead times to shorten and confidence to strengthen and lead to, you know, lower inventory levels over time. The second, today, you know, it's hard to see it on a piece of paper, but our branches in the last 90 days have gone through the biggest inventory conversion from old product to new product that they've experienced in their careers. It's still going and trickling into the first quarter as well. In many respects, inventory is not business as usual, also because of the product transition. Over the next 12 months, as that works itself through, I would expect that to help inventory levels, meaning reduce inventory levels. We're kind of looking forward to that, to greater simplicity than we've been experiencing the last couple of years. I'd pair it, you know, a little bit what Barry's saying there. You know, if you consider what we did with going from what we call the Appendix M, which is what we sold last year, to the new M1 inventory. Basically, we have to do a transition where we're replacing all of that inventory because in most of our Sun Belt markets, the old Appendix M would not be available to sell. For us, it was a complete refresh of all of that inventory. Also adding to Barry's point, as we move into the new inventory, we're gonna have a reduction in the number of SKUs that we have to handle on the equipment side, which we think will result in better efficiencies and higher turnovers in the inventory. Appreciate the insight, and I'll turn it back. All of that work on the inventory obviously it leads to better cash flow as well. We're very aware of that. The better we manage the inventory, and you've just heard all the forces that we're presently dealing with, the better the cash flow. We expect a payoff in cash flow as well. Thank you all. Our next question will come from Dave Manthey with Baird. Hi, Dave. Yeah, go ahead. 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 it's approximately 27%? Mr. Logan? You know, Dave, good morning. Well, first, the most simple component of gross margin% is the markup we sustain on selling products. What is our markup? We call that selling margin. It's the simplest, most important, you know, analysis. That's what increased this quarter, and it's satisfying because again, there's a lot going on in the market, a lot of product changes, a lot of conversions, a lot of noise. Our teams did a great job of sustaining margin. I don't think there's anything that's changed in either our thought process or analysis or what our business leaders are telling us in margin looking forward in 2023. You've heard 27% as a target. Our entrepreneurial CEO would tell you it's an interim target because we have greater expectations than that. You bet. I don't think anything's changed either in the mix or the thought process, Dave, of what the target is. Yeah. good to hear. Second, this is somewhat of a random question, but for future reference, approximately what are you getting these days for a 1 pound of R-410A refrigerant and what% of your sales is replacement refrigerant right now? What do we get? It's around $25-$26 for a pound of R-410A. That varies by region. For a pound or for a jug? No, that's a pound. Oh. That's a pound. Okay. That varies by region, and it's a very small percentage of our total sales. Yep. Yep. All right. Appreciate it. Thank you very much. You bet. Our next question will come from Jeff Sprague with Vertical Research. You may go ahead. Hi, Jeff. Hey, good morning, everyone. Hope you're doing well. Thanks for taking the question. I just wanna come back to inventory also just for maybe a little bit more granularity if we, if we could. Is the, I'll call it disruption, maybe you guys called 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 can't sell, that needs to move? you know, is there any particular... Yeah. noise that we should think about, you know, particularly in the first quarter here? Well, that's a very good question. We were very aware of what would happen by year-end. The answer is we took care of that very, very well. There's no exposure to that or no significant exposure. Whatever there was, we just shipped to our northern branches. It was very small. That kind of makes Watsco unique, you know, because we're a national north, south, east, west company. You know, nothing is ever stranded because, you know, as Al indicated, we've 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. We did move the inventory to make sure it's available to sell. Yeah, we are very aware of this, so we worked the inventory down in the southern states. Thank you for that. Can you just help us frame up kind of the volume mix dynamics in the, in the quarter volume price mix? I mean, obviously you were selling old units, but you're 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. Well, that's why they pay us the big bucks to figure all that out. Yeah. Yeah. Go ahead. That's why they pay us the smaller bucks to figure out what it was. 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 Sun Belt markets and the gaining of the replacement inventory of M1, there was probably actually a gap there as opposed to meaning that there's almost probably some branches and so on that did not have the new stock to sell as they sold out of the old stock. That transition was probably slightly negative to unit in the fourth quarter, just to give you some color. 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. So just a- Some of the OEMs are doing better than others, so it's pretty jagged, our supply chain from that respect. To give you the answer, you know, you can see the we said U.S. products were up 4% in the quarter. If I give you the units were down 8%, which would mean price is up 12. Right. In that 12% price is, you know, again, 6 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 'cause we're selling at higher unit prices there, and some inflation. That would give you the mix, Jeff. Terrific. Thanks for the color. I appreciate it. Don't ever forget that in the fourth quarter and even the first quarter, drawing inferences in what's a much smaller quarter than the others is, you know, give it the weight that it deserves given the size of the quarter. Got it. Thank you. Our next question will come from Ryan Merkel with William Blair. You may now go ahead. Morning, Ryan. Hey, 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 there's a little debate about what price mix could be given the, you know, the SEER change. Any help you could give us there would be appreciated. Yeah. I would say, by the way, I'll turn it over to somebody who knows more about this than I do, but also the mix change of product is affecting our margins. That's a very significant part of what's going on. People start buying or have been buying more heat pumps. That improves our margin just by that fact, 'cause some of these products are at a higher margin than other products. It's also a mix of products. Paul, go ahead, or Barry, whoever wants to take that. It's a very complex question, Ryan. you know, obviously, if we've indicated twice that, you know, the heat pumps help. You know, they give us a better mix of heat pumps, obviously give us a better price dynamic and more profit dollars. When you get into some of the other products that we sell, like, you know, our... We haven't mentioned it yet, but, you know, the duct-free split market, you know, has continued to grow at double digits for us, not only in the quarter but also on a year-to-date basis, even more. Those, those also come with a higher margin to them, and that market has continued to escalate with new products and as well as we're starting to see hybrid units that are getting into the ducted side. Without getting too far into the weeds on that, you know, we're starting to see a lot of crossover between the duct-free products becoming ducted and becoming more functional, and that obviously adds to higher gross margins and better profits. Obviously, the products also have a wonderful benefit to the end user. Explain that, Paul. The products that we sell are well above the minimums, you know. Under old SEER terminology, they were in the 18 to 24 SEER range, you know, versus, we consider, you know, 16, 17 SEER on the ducted product to be very high efficiency. The consumer is saving money, getting a great product, and we're seeing more and more onto it into that marketplace from all of our OEMs. Got it. Yeah, I appreciate that. Go ahead, Barry. No, just to add, Just a reminder on the M1 product. Obviously, the OEMs needed to capture a higher selling price in the market. I don't think anything has changed from what we're seeing in terms of price capture in 2023 on the new products. Okay. depends on which OEM and which conversation, but there are some March one or some March price increases also flowing from the OEMs in March. How much of that, you know, sticks into the market, time will tell. There is a, you know, obviously, you know, some inflation to be captured this year, which is, you know, part of what the OEMs are feeling in terms of their pressure. Got it. I was sort of thinking price mix next year could be mid-single digit to high single digits, given all the moving pieces. I mean, is that at least in the range? Yeah, I hate to comment so specifically, Ryan, on a range. I would say what you've seen the last 6 months from Watsco in terms of price, you know, does not include a lot of inflation. It includes a lot of price capture and mix. So, you know, I think, there's still a big dependency on the contractor going to someone's home and selling these products and capturing their price. So time will tell. I think obviously we expect pretty strong pricing environment this year. Well, I have to hasten to add that these are not just price increases for the hell of it. The innovation of cooling and heating that's going on now is magnificent for the people that use HVAC. I mean, they're getting the savings of going to a heat pump because a heat pump cools and heats, so they don't need a cooler and a furnace. That's a wonderful use of it. The federal government's discovered that, so they're providing already and will 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. I always like to think a little further out. I don't see anything that isn't positive given that heating and cooling is 50% of a homeowner's cost of electricity, and all these innovations are focused on helping that consumer save money as well as benefit from a more efficiency in the unit itself, which is how he saves money. I just think the industry's on a roll here now because of the concern about emissions and the concern about the refrigerants damaging the environment. And there's a movement by the guys that make the stuff to innovate. The 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. It's just a lot of good stuff going on. All right. I agree. Thanks, Al. You bet. Our next question will come from Nigel Coe with Wolfe Research. You may now go ahead. Thanks. Good morning, everyone. Morning, Nigel. Morning. You mentioned the, you know, the ductless split systems as growing double digits. It just strikes me that this is the right product for this time, given the efficiency, the price point, and it feels like the IRA is almost being written for these systems. Do you think that 2023, 2024 is gonna be a real breakout for these units? It sounds like it's a lower price point, lower revenue mix, but better margin. Is that the way to think about it? You know, actually it's, you know, for the last 20 years it's been growing. I don't think it's gonna be a breakout period for it. You have to remember that there's approximately 70 or 80 million homes out there that have ductwork that runs through them. Their ability to adapt to a ducted system had to occur for it really to be an important element. 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. I think it's gonna be a nice balance now that we're gonna have between the ductless and the duct-free. I almost call it almost conversions, where a homeowner would perhaps use both products in their home. Right. Yeah. More hybrid systems. That makes sense. The down 8% units in the quarter, you mentioned that some of your warehouses were out of, you know, stock, with the transition. It sounds like that was a bit of an impact. I mean, can you just give us a flavor on how that's been tracking through January perhaps? When do you think we'll be in a situation where the OEMs are up to speed on this M-one product? You know, most of the OEMs are improving. There's, there is a, you know, there is some dysfunction in the channel right now. Obviously, with the higher demand for heat pumps, that's created some longer lead times or long lead times compared to the straight cooling units and the gas furnaces. We're hoping that they get those ironed out. When, you know, that you'd have to ask the OEMs when they're gonna be able to do that. It's our hope that it, you know, that'll start stabilizing in the second quarter. We're also seeing some high demand on the commercial products that we offer, and lead times there are stretching out into the months, not just. Yeah. That's our most difficult... Yeah ... inventory accessibility that we have now, the commercial. With a very high demand for them, and so that's kind of pushing sales along out into the year. Frankly, with that particular product, if demand continues where it's at, it's gonna be probably throughout the entire 2023, we're gonna see a disconnect there between availability and demand. Any improvements in that -8 into 1Q with perhaps the better supply of the new systems? Yeah. With the residential systems, we are seeing definite improvement. As I indicated earlier, again, it's mostly with the straight cool products that we're seeing the improvement. Okay. Today, we're seeing small improvements on the heat pumps, but not where we want them to get our inventories adjusted. Great. That's very helpful. Thanks a lot. Our next question will come from Jeff Hammond with KeyBanc Capital Markets. You may now go ahead. Hello, Jeff. Hey, good morning, everyone. Al, I came down to Miami, and it rained for 2 days. You said it's always sunny down there. You didn't call me, otherwise, I'd have made it. I would've brought up the sun. If you come down here and don't tell anybody, it's gonna be what it's gonna be. Well, hopefully. Even if we take you to a big room and bring some sun. When were you here? Oh, I don't know, couple weeks ago. Oh. Couple weeks ago. Did you enjoy the weather at least? Well, it rained. It was nicer than Cleveland, but... Well, Florida can rain, yeah. Yeah, yeah. Just back on the inventory question, I guess, you know, Barry, you mentioned lead times in the conversion. I guess if you say lead times get back to normal, and obviously, we don't know when, and you get through this conversion, you know, how much inventory ultimately do you think you can take out of the system, assuming those two things happen at some point, you know, within 2023? You know, if we get some of this destock, which everyone's talking about, you know, kinda, is it, you know, end of the season? You know, what's kinda your best guess on timing? Thanks. Well, I'll give you a number that's a goal, not whether we'll achieve it or not, but what I want us to achieve is to remove $200 million of our inventory. You know, Jeff, when you look at it, you gotta look at it on 2 sides. You gotta look at it in $, you gotta look at it in units also. You know, our unit inventory is not up that dramatically. It's up mid-single digits. When you look at it that way, a lot of the $, you know, have to do with the inflation effect. If that continues to go along, you know, we're gonna have to work even harder to reach Al's goal, which I think we all wanna receive and all wanna meet. Okay. That's really helpful. So just on 2023, I know you guys don't give guidance, but, you know, most of the OEMs are kinda calling for. You know, a kind of a sell-through unit decline of mid-single digits. You know, one, just wanted to get your take on that. That's market. I understand you guys wanna, you know, outgrow. Just your view of kind of, you know, market volume, you know, for 2023, and then, you know, assuming that, you know, can you still grow sales and earnings this year? Thanks. Oh, that's an easy one this year. Yes. I'll let somebody else answer the quarter. Yeah, I mean, in terms of the year, Jeff, our team, our leaders, you know, our business, you know, development people in the field all expect to grow sales earnings this year. That's, you know, the target they set for us and they're the ones, you know, managing all the local businesses that Watsco operates. I wouldn't say it's not just optimism, it's there are plans to see growth. I think short term, the first quarter is the funkiest quarter in maybe my career, my 30-year career, in that you have 30% revenue comps and 100% EPS comps of a year ago. I'm glad it's the smallest quarter of the year to have that type of a comparison to be up against. I think you have to look beyond, the first quarter, and into the year. Again, our teams are planning for growth in 2023. I'm always, you know. When you talk about the industry, of course, we always get focused on ducted residential split systems, you know. I always remind people that over a third of Watsco's business is in the parts and supply business, which 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. Yeah. Something that hasn't been, something that hasn't been asked, so I'll offer it. On the commercial side of the business, it was up over 20% this quarter, which is probably the seventh or eighth straight quarter of being up 20% or more. Al mentioned about the supply chain for commercial simply being, you know, truly challenged still. It's not restraining the growth, the growth rate of over 20%. I think you've heard all the OEMs talk about that dynamic over the next, you know, year or 2, and we're certainly seeing the same thing. To add to Barry's comment, you know, our non-equipment sales were up, mid-teens. In the end, we need equipment to move the needle. Yeah. Right. The nice thing 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. Hey, just quick last one. International, I think, looked like it was a little softer than U.S. Any nuances around Canada? No, it's a pretty steady business, I expect growth there for sure. It's very well managed. Even though some of these economies there are not doing well, I'm positive on it. Okay, thanks. Our next question will come from Joshua Pokrzywinski with Morgan Stanley. Hi, Josh. How you doing? Hey, Al. Doing well. How about yourself? Good. Good. Boy, Josh, I gotta say, that's a new pronunciation of your last name. One I haven't heard. They get more creative every time. I'm waiting for a number to show up in there somewhere. Oh, my goodness. Well, appreciate the, appreciate the question, guys. We've, we've touched on heat pumps enough times now to where, I just wanna check, you know, your thoughts, Paul, on how you're thinking about anything on the IRA side and if there's anything to point to on rulemaking we've seen so far that you're paying more attention to? Yeah. Right now the IRA in the first quarter obviously had, I would say, zero impact on what we've seen to date. I think the 25C portion of it, where you can get a tax credit, I think we'll start seeing some positive feelings from it in the second quarter and third quarter. We still don't have a clear definition of what units qualify for the tax credit. That's been delayed and we continue to follow up to make sure that we understand, you know, which units are available from each one of our OEMs so we can... We're ready. We've launched programs with our dealers. We've got the information in the dealers' hands. It's 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 don't think we're gonna see a great impact at all on the rebates side for 2023. I think most of the impact there will start kicking in in 2024. However, on the non-IRA side, we're 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. You know, places in Northern California, you can't replace a gas furnace. New York City, if it's fossil fuel heat, forget it. In Canada, we're seeing the same thing. As we move through this transition, the IRA has an impact, but plus a lot of local municipalities and states are also getting behind the movement now to electrify our heating needs. Got it. Super comprehensive. Really appreciate that. Just something else I'd like to follow on, maybe away from what's 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 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, you know, the balance of ownership there longer term? Let me just comment that there have been other Carrier distributors that sold to other people during our time with Carrier. It's not a new thing. I have to remind you that we have 22 brands that we deal with, and our appetite is for distributors that are good, well-run, and it doesn't matter what the brand is. All right. I mean. Very helpful. I mean, we're Carrier's largest customer, and we're never gonna let them down. We also wanna grow our share of the $50 billion business that we see in the United States for distributors. We will go where we can and find great companies that wanna be part of us, and I think we offer more than anybody else in terms of joining a family. All right. Thanks a lot. Our next question will come from Stephen Tusa with JP Morgan. You may now- Hello. Hello, Steve. Hey, guys. Morning. Good morning. Good to see you. 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. I think you said commercial was up for you guys pretty nicely. 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? I think it was pretty flat, Steve. Yeah. Pretty. In and around that? Let's see. 'Cause if commercial was up that strong, I mean, obviously commercial is not as big, but just curious. No, I'm commenting on all of Watsco, not, certainly not just Carrier, but all of Watsco. Yeah. Totally. All of Watsco. Units were down 8 on equipment. It sounds like your light commercial was up, you know, comfortably. What does that mean for resi? Like, down low doubles? Yeah, we said overall it was down 8% for the quarter. Yeah. Residential, domestic. That's it. Okay. That's the resi number? Yes. Okay. That makes sense. I'm not sure if you answered this. I mean, you said you're gonna grow sales, but what do you think the unit number is for... Was that in reference to a unit number or... I thought that was a sales number. Do you have kind of what your construct is for the industry for 23? I'm not sure if you guys had answered that before, units for- We did, but you weren't on the call, Steve. No, just kidding. You said you're gonna grow sales. That includes obviously price and mix. Are volumes actually? You know, I think it was a question before. I'm not sure I got the answer. We do expect units and prices to increase, to contribute to sales growth, both. For the year? Oh, yeah, for the year. We expect another price increase coming from the OEM now. It's already starting to occur because of the new mix, the new products that they're introducing. Got it. Steve, I just. Yeah. I just wanna handle this because it's important and it's important for other people to listen to it too. We don't sit here and, like, wonder what the market's gonna do and just say, "Oh my goodness, they're... Listen to what everybody's saying," you know, and wringing our hands, you know, and hoping it's not right, you know. The last two years, it's almost been impossible to go to OEM community and ask for incremental opportunities. To go to OEMs and say, "We want more territory, we want more brands, we want more products, we wanna expand what we're doing, let's do that." That's not been possible the last two years 'cause OEMs could not make the product or couldn't offer the opportunity. Those types of initiatives are going on right now. I'm not gonna list them for you, but there's a lot of, you know, 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 we're doing and grow the market this year. Got it. Got it. For your share, from a share perspective. That's correct. One last one for you, Paul. Maybe you know the answer to this question. Al was talking a lot about the savings for the consumer. What do you think is the payback for the consumer? Obviously. That's a very good question. Good question. You know, what is the actual payback? 'Cause, I mean, you're gonna be spending $2,000 more on some of these systems. What is the actual payback as measured in years on some of these new systems? In years? Yeah, you know, it obviously depends on the geography. You know, Florida, you get a faster payback. In Connecticut, your payback would be a lot slower. In each one of the regions, the payback is also a factor of the utility rebates, the state rebates, the IRA tax credits. No, energy consumption. The drop in energy consumption is the key thing. All those other things add gravy to the meal. What is the reduction in energy use when we install a high efficiency? Percentage wise? Percentage wise, it could be 25%-30%. I think. Even more on an older system. I mean, to be able to come up with a year's analysis, you'd have to take all those factors into consideration. Really, really a tough, a tough payback analysis to do, Steve, you know, for the whole U.S. If you start with the premise that they're gonna use 25% less energy and probably more, percentage wise, and energy is half the cost. I'm sorry. Cooling and heating is half the cost of electrical use in the home, that's the way to look at it. We got a lot of homes where they're already paying X dollars, and for their energy, and if they go to a higher efficiency heating and cooling system, they're gonna save half of the half. The overall cost is half dedicated to heating and cooling, and the stuff we're selling is gonna save them half of that, half of that in cost with the electrical company. As Barry and Paul starts to say, there are all kinds of tax benefits that are gonna run to the homeowner. Yep. One more question for you. Sorry. This hybrid ductless, it's my understanding that some of the guys like Daikin have gotten their products down to be essentially in line with, you know, the replacement for a unitary system. I would assume that with the increase in SEER for unitary, that kind of difference is gonna get smaller. Is that about right, or is the hybrid ductless still, you know, the first cost is still more expensive than what will be the baseline unitary product? Like, how cost competitive are they? They're very cost competitive. They're right in line with the ducted product. Yep. You know, beyond. I know you made a comment about, you know, the Daikin product, you know, from the ASHRAE show. You know, every manufacturer either has one or will have one. Right. We've been marketing it for, what, the last two and a half years. Yeah. Seeing substantial growth in revenue. Yep. Yep. Makes sense. All right. Thanks for all the color. As usual, guys, really helpful. Yep. Again, if you have a question, please press star then one. Our next question will come from Chris Dankert with Loop Capital Markets. You may now go ahead. Morning, Chris. It is morning. Good morning, all. It is. It is. I guess to stick with the heat pump theme here, you know, really impressive growth on the quarter and the year. You know, more than 2x the market, if I'm not mistaken. I guess maybe could you tell us or remind us kinda what percentage or mix is heat pumps today? You know, just are we starting from a smaller base there? Any comments would be really helpful. Yeah. It depends on the states, once again. If you go to Texas, it's a very low percentage of the total market. It's in the low 20s. We have a huge opportunity to grow the heat pump share there. If I go up into the Carolinas, we're already in the 65-70% range. That's just a continuation of what we've done over the last 10 years. Regionally, it varies. 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. Got it. Got it. Okay. I was gonna say, you have to wanna own Watsco for another 20 years, which we want you to. Remember, the furnace might last. The furnace might last a lifetime. In fact, many of them have lifetime warranties. A heat pump, you know, useful life is probably 10 years at best in some markets. There is a longer-term churn of the replacement market for heat pumps also that works itself out. Okay. Okay, that makes sense. There's a lot of understandable concern kind of on the strength of the consumer balance sheet and spending right now, part of why Credit for Comfort makes so much sense here. You know, are you seeing any change in, you know, the rate of repair versus replacement or hearing about any kind of, you know, homeowner belt-tightening from your contractor customers here? Good question. Paul? Yeah. You know, it's... You know, we didn't throughout the entire pandemic period. We were just talking this morning about in the amount of home equity that's available to consumers with the appreciation in their primary residence. We haven't seen a repair versus replace discussion, which generally the industry gets into, as we move into a transition to new products. I think it's a little early to declare which way the market's gonna go right now. For right now, we're seeing a nice balance between our equipment and our parts business. Yeah. I will say. This is AJ. I will say that if and when a repair dynamic plays out, we're well-positioned. We've done a lot of work around product assortment and making sure that each of our stores have the right products to meet that demand as well. Of course, those products often come with a higher margin. That's a very unique advantage. I don't think anybody has the systems to do that. Got it. Well, thanks so much for the color, guys. It appears there are no further questions. This concludes our question and answer session. I'd like to turn the call back over to Albert Nahmad for any closing remarks. Well, thanks again for your interest in our company. We're very optimistic, and we hope you stay interested. Please don't hesitate to come down and visit and hear from the players directly. Not only that, the sun always shines here. Thanks again for your interest, and we'll see you the next quarter. Bye-bye.