Good morning, and welcome to the Watsco Second Quarter 2023 Earnings Call. All 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 star then two. Please note, this event is being recorded. I would now like to turn the conference over to Albert Nahmad, Chairman and CEO. Please go ahead. Good morning, everyone. Welcome to our second quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, the President, 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 from the forward-looking statements. 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. Approximately 60% of the equipment we are selling today represents new or revamped products. Pricing, capture, and 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 400,000 new SKUs since the start of the year. The transition, however, has been uneven. One of our primary OEM partners was disproportionately impacted, affecting product availability of higher efficiency systems and therefore affecting our sales. We estimated a second sales impact of $75 million-$80 million, as much as $125 million for the six-month period ended June 30th. The reality is, all of our OEM partners have been affected to some measure, and all are working to improve supply chain and help us meet the needs of our customers. As we 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 is measured by the U.S. government, so we have a lot of information as to the demand for cooling systems during the year. Summer has now arrived and current business conditions are encouraging. Apart from the 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, an 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 we move through the years. Through the year, I should say. 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 plus North American market. 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's long-term growth trajectory. We have immense 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's broad array of products and brands is a competitive advantage that allows, 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 industry catalysts that are developing. For example, the introduction of higher efficiency standards for HVAC equipment has taken a full effect this year, providing price and sales mix benefits. New refrigerant standards historically, has made it harder to repair existing systems and benefits our sales of replacement systems. In other words, whenever they change the refrigeration mandates, it makes it very difficult to repair what you've got, so they generally go and buy a replacement system. The phaseout of current refrigeration began last year, and the launch of new equipment that conforms to the new refrigerant standards is scheduled in 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 Act's enhanced tax credit and consumer incentives to help upgrade HVAC systems in the years ahead. 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 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. If at any time your question has been addressed and you would like to withdraw your question, please press star, 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. Morning, 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, Al. Any, any chance you can share the 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, but it's expanding, and I think it'll end up with growth rates in the third quarter. What was the second part of your question? Yeah, 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 over the same period last year? I gave you the same period last year. We're up, low single digits. Paul, have you got that? Yeah. Paul, have you got that answer? Yeah, I mean, we're seeing definite growth rates, you know, pretty much across the board. Seeing a, an uptick, which, you know, because the weather was so weak in, in the first half of the year, we're seeing an uptick in, in repair parts, which is always good for us on a gross profit basis. Really not a big trend towards, towards replace versus repair or repair versus replace, whichever way you're going on this. Both of them, we're starting to see some upticks on. Okay, got it. Yeah, Ryan, and Ryan, it's Barry. If your question was, how was June versus July, getting, getting granular in that, in that way, obviously June is a huge month within the quarter. June looked a lot like our second quarter performance. July is obviously better, and, and that's a good thing. Yeah, that, that was what I was getting at, so thanks for that, Barry. Onto gross margins, everyone's favorite topic. The long-term goal is 27%. You just did 28.1%. Just unpack for us why, you know, you're 100 basis points above your target. Then should we think about long-term target of 27%-28%? Are you willing to make that change here today? Well, I'm gonna raise your expectations. We're shooting for 30%. Now, I'm not gonna 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? I'd be happy to. Yeah, Ryan, again, we, there are five or six important variables in the current performance that have improved versus, you know, three years ago, whenever that question was asked. It was asked two or three years ago, I feel like. I think all five or six variables have been influenced by technology, number one. We talked about our pricing platform and how everything we sell to everyone we sell it to, is being touched in some way through a pricing platform, and so on. The other, you know, obvious reality we've talked about is we're selling a lot of new products. We had the opportunity this year to, to go out and get price margin and support, you know, our OEM community with, with all of their new products and sustain profitability, and so far, so good. Obviously, too, you have a growth in the replacement market relative to new construction, which helps margin some. I think the overall mix of everything we're selling, in terms of efficiencies and, and higher growth rates of heat pumps, for example, helps margin as well. Now, I still haven't answered your question, though, which is, you know, where are we on the spectrum of, of, of our target and so on? In the short term, I don't think there's anything that is too remarkable to, to either pressurize or to, to add to gross profit where we are today. What Al's 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 put in place only a couple of years ago. I mean, the whole pricing discussion we're talking about with technology is only a couple of years old, and therefore, very far from being mature in its, in terms of benefits. Well, that was a long-winded answer, but was that a good one? Yeah, I liked that, Barry. Thanks for that, Barry. Very helpful, very clear. Have fun. Thank you. The next question comes from Tommy Moll with Stephens Inc. Hello, Tommy. Good morning, Al. How are you? Good, sir. Thanks for taking my questions. Sure. I wanted to start with a 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? 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. All right. Who's best to handle that? Barry, do you want to take a run at that? Sure, sure. I, you know, I mean, again, it, it, it's the same variables that, that, that, you know, we have to go out and prosecute and execute and, and, and price and, and layering costs through the market, given all the changes that have gone on. 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%-10% obviously has very little OEM kind of inflation 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 have, obviously, have higher average selling price. In, in the quarter, and it's pretty much the same number for year to date, I think 9% is the overall, call it average, higher average, selling price increase for the year- for the quarter and the year. Thank you, Barry. That's helpful. I also wanted to ask about the disruption you called out with one of your key OEM partners. Any other context you can share there 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 and into the summer? That's a very good question. They're a great company, and they're working very hard at it, and they're improving. My, my guess is that either through the end of this quarter or certainly by the end of the fourth quarter, they'll be all caught up. Thank you, Al. I'll turn it back. The next question comes from David Manthey from Baird. Please go ahead. Hey, good morning, everyone. Hi, Dave. Al, since you put it out there, I'll ask a question on your 30% gross margin target. Just could you 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 are lots of opportunity in the non-equipment side. You know, we, we sell a considerable amount of our revenues comes from non-equipment. That, that people seem to forget. Secondly, the movement towards heat pumps, by the nature of that, creates a higher margin, and that's where the demand is gonna expand significantly, motivated by federal government mandates and things like that, plus the value of having heat pumps. We have other things that our technology is providing, ability to compete more effectively. It's internal and it's external forces that, that 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 kind of things. Dave, this is Paul Johnston. 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 Al mentions in his opening remarks, which will be in effect next year, which is going to reduce the availability of gases, you know, by another 30%. We just saw 10%, two years ago. Now we see another 30%, and we see another 30% happening in 2028. we're gonna have a definite squeeze on that as a commodity, and also as an ability for us to be able to sell more replacement products, even from the products that we sell in 2024 and 2025. We've got the complete change of product line that we're gonna be hitting in, in 2025, which, you know, is kind of a little bit of a flexibility in, in the timeline as far as when that's released. We're gonna be, we're gonna be seeing that occur. We've also got two other things that are hitting us, and that is there's going to be an increase in the minimum of efficiency for gas furnace to a minimum of 95%. We feel pretty confident that that's going to occur. There's the potential of an additional refrigerant change, where the government could reduce the global warming potential down from 750 down to 500. Anytime there's, there's a changing market, I think there's an opportunity for an upside in gross profit for Watsco. Yeah, don't take me, literally, that we 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. I actually expected to be shut down on that question, but I, I appreciate all of the details. Well, I, I went to the, the resource that I knew would talk the most, so. Yeah. He's good. He's good. Absolutely. We'll, so second is on tech spending. If, if you're on a run rate of $55 million right now, that's about 2x when you started standing up all these tools and populating your databases and everything else. I'm just wondering if you could help us understand, what are the, the key tech spending priorities and, and buckets that you're dealing with today? Oh, you mean you wanna know who the big spender is? Yeah. Nice. Hey, Mr. President. Yeah. Yeah. No, I, I, I think, I think we've consistently said with our tech spending that we are going to invest and there's a unlimited universe of opportunities to apply technology and innovation and process improvement and smart thinking and smart people to everything we do. We've been at it now for 10, 12 years, and I think it's had a major impact on the business. Now with the advent of generative AI, there's a whole another world of opportunity, and the next chapter is just starting to be written. We are knee-deep in that, that opportunity as well now, which is obviously changing very, very fast. Maybe an ambiguous answer, but we're gonna continue to invest because we know it's right for the long-term health of the business. We might invest more. I think we will. We've been investing more every year. you know, this company is very focused on long term. I know an analyst asked us last year sometime, 'When are you gonna stop investing?' I said, 'Well, we're never gonna do that.' This is our advantage, and we're gonna continue to increase our advantage. I think just. Thanks, Dave. Yeah. Yeah, I was just gonna add, a layer of, of thinking to it for your, your sake, Dave, is, is... I mean, it's roughly, let's say, 300 people, technology people in that number, in that $55 million number. What's not well understood is, is that probably two-thirds of that headcount is actually sitting in the field with customers. It's not sitting in a corporate ivory tower, you know, geeking out new technology. We, we have that. You know, a lot of the momentum, a lot of the, the new investing is helping customers and then growing our customers, and then growing new customers at the field level. It really is spreading a local religion, so to speak, in very local markets. Just get the sense that it's not just invention and, and development. That's going on for sure, but it's also this ground game that is at the, truly at the ground level in our, our markets. It's worth saying again, that with our customers that use our technology, are better customers. Their growth rates with us, growth rates with us are higher, their attrition rates are lower, our cost of serving them is lower. The more customers we get using the technology more often, the better it is for the company as well. As well for the customers, by the way. They are more efficient and profitable as a result of using the technology. Yep. Well, thanks again, everyone. You bet. The next question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead. Hey, Josh. Are you liking us better recently? You guys have done all right, Al, I'll give you that. Thank you. Thank you. Couple questions here. Maybe, you know, one, just kind of sticking to the quarter itself. Barry, I know you gave some good color last quarter about maybe some of the, the moving items in gross margin. Basically, you know, the selling initiatives maybe versus the kind of that, that inventory or inflation margin phenomenon. I know that there was an extra wrinkle in 2Q at the timing of price increases. Anything that you could give us as bridge items to unpack that a little? Sure. Well, in general, the selling margin, which is the purest form of, you know, price versus cost, did increase in the quarter, so that's a, that's a high quality, important, you know, important component of gross profit because it is the largest component to, to, to the performance. And that's, that's without considering any benefit from, some of the pricing actions that, that came in in the quarter. Just pure quarter-over-quarter, year-over-year, quality of margin improved. Some of the below-the-line items, I would say, are were fairly flat. It, and something like freight, freight 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, again, 'cause we're going through this, this, this pretty enormous-... transition of inventory. Nothing too remarkable, Josh, one way or the other. I think what is remarkable is this, the selling margin, which is again, simply price and cost being prosecuted in the market, was positive, I know, without any considering a benefit of pricing actions. Got it. That's helpful. Then maybe just shifting over more philosophically on, on heat pumps. I think with all the stimulus out there, I guess IRA 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 heat 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 you guys think evolves as IRA becomes more meaningful. Yeah, IRA, you know, we, we finally got some clarity around IRA, that the tax credits, the IRS has finally published a list of what pieces of equipment by model and SKU, are available that will get the tax credit. That, that just occurred this week, and of course, because of our technology, we were able to get that out on our dealer apps to 200,000 people quickly. We really haven't felt the benefit of that. There's historically been a spread between a heat pump and a straight cool. There are different components, different electronics involved. I, I don't think there's any, any real uptick, you know, that's gonna occur, where you're gonna see heat pump margins going up because of the IRA proposition that we've got on the table right now. I, I, I don't think the two are related right now because there really hasn't been any, any impact at all, you know, on sales from IRA. We're-- we finally got the word out that the states now have the recommendation at, from the DOE on how to manage their rebate programs for mid and low-income people. We're not gonna see any of that probably until end of first quarter, beginning of second quarter next year, perhaps. Got it. Appreciate it, Paul. All right. Okay, the next question comes from Jeffrey Hammond with KeyBanc Capital Markets. Please go ahead. Morning, Jeff. Hey, guys. Good morning. This is Mitch Moore 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 had a better handle on the selling season. Who wants to take a shot? I'll say that my, my, my sense of it is, we could-- we're capable of taking out another $200 million, when things settle down, that'll be helpful in terms of inventory turns and in terms of cash flow. Okay. I would agree. That's, that's a fair assessment. Okay, great. Then, just one more. On the SG&A line, what can you guys do to temper decrementals if we, if we continue to see volume declines in the second half? You know, I can... I mean, I can answer it if you like, Al? Sure. Yeah, I mean, first, you know, what, what helps in that, in that equation, to be conservative, if you're, if you're asking, let's be conservative on, on the top line, what happens below the top line? If that's your question. So SG&A becomes, you know, a focus item, obviously. SG&A went down this, this quarter, in the second quarter, is good. If I look inside that number, variable costs are down, in the teens. You know, somewhere between 15% and 20% are variable costs that we've been expecting to, to, to reflect kind of the change in the top line is occurring. Fixed costs were up 4% quarter, for example, which is still a measure of inflation and also does not fully yet benefit from some of the productivity things that we have our teams focused on. You know, I'm not gonna 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'll see how the rest of the year plays out. There is an immense amount of effort and challenge and data and technology looking at SG&A for the rest of the year in, in terms of how we can reduce it further. That would help the decremental equation, and if there's any level of growth, it certainly helps the earnings growth rate. All right, guys. Thanks for taking my questions. The next question comes from Brett Linzey with Mizuho. Please go ahead. Morning, Brett, and welcome. Hey, good morning. Hey, I just wanted to come back to the refrigerant changeover beginning in 2025. Clearly, the, the regional SEER transition, you know, 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 2025 changeover, as you look to maybe secure more, more inventory? That's, that's a good question for Paul. He follows that. Yeah, I don't, I don't think. We've, we've been out, we discussed this with all of our OEMs. We're, we're not looking at a pre-buy. I don't think anybody is right now looking at pre-buy, on R-410A. As, as I indicated earlier, there's already been a 30% reduction in the GWP allocations for next year, which means we're gonna be at 60% what was allocated in 2011. There's gonna be a further one in, in 2028. We're gonna be down to, you know, basically 30%. Offering a, a unit, and doing a pre-buy on a unit where the refrigerant is gonna be in short supply or very, very expensive, I don't think would be a prudent business, opportunity for anybody. Okay, got it. Then just, you know, shifting to the, the consumer backdrop, clearly, you know, mix. I was just wondering if there's anything you can glean from, you know, 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, you know, repair versus replacement trade-down? Yeah, we, we, there's, there's two, two primary components that we look at when we look at what the repair versus replace is doing, and it's motors and compressors, you know. What's happening with motors and compressors is we are, we finally are seeing, in the month of July, we're finally seeing an uptick, which we didn't see in, in the first half of the year. As, as we see a growth in that, that would indicate that there would be more, more repair happening. We also monitor any sort of warranty claims back to the OEMs that we make to make sure that, you know, one, they're in line with the marketplace, but also as an indicator whether or not the units are requiring repair while they're under warranty. To date, as I indicated earlier, yes, we are seeing an increase in the repair business in July, but it's not a major, not a major trend, I don't think yet. It's only been all I've got is three weeks of information. At this point, I, I wouldn't say it's a major trend, but certainly it's there, and it's positive, and I'm happy about it. Okay, great. Appreciate the color. The next question comes from Steve Tusa with JP Morgan. Please go ahead. My first question is, who, who had the, who had the sweet pipes at the beginning of the call there? That was, that was, that was some nice singing. That's good, Steve. I know, I know Barry. Barry doesn't sing. Maybe it was Paul. I don't know. I don't know. Well, there are obviously reasons to sing with those gross margins, so congrats on continued execution there. I just wanted to, you know, level set kind of 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's kind of like the equipment unit? Would that be down high singles, equipment unit volume in July? Paul? Yeah, I would. Barry? it is. Yeah, Barry, I want you to take that. Yeah. Okay. I think, yeah, first, I think when we talk about growth, we're talking about the whole business, Steve, and our parts sales are not consequential enough to, to matter in that, in that equation. Right. They're up, yes, but not consequential in the overall growth. Consequential is, the continuance of price that we see, average higher selling prices, probably a single-digit decline in units if I, you know, use common sense, and that's about it. I, I think. We're up against, again, 15% comps of a year ago. If, and we're still not, you know, we're still up, you know, as I, as, as we've said many times now, we're still up against blockbuster stuff of a year ago. For July to have some growth, it's a good... it's good. Yeah, that, that, again, then I just wanna, 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. Good for you, Mr. Logan. Oh, wow! I think that's a little more basic than accounting. I, I don't know. You, you, you tell me. I'm trying to, I'm trying to prove I'm not just an accountant anymore after 30 years, you know? So... You're all, everything, Barry. Steve, the irony of the question is, if you look at if you took our data, looked through it and said, I'm gonna pick the whole universe of equipment, which is indoor units, outdoor units, ductless, ducted, coils, furnaces, everything that might be called a unit. The irony is the units are down this June versus a year ago, single digits. Your question is, why is inventory higher, right? Well, first, the cost is higher, the mix is higher, the mix is richer. You know, part of the reality is we own inventory this year that is new. We can't say that enough or obviously clearly enough. Imagine any retailer, any business that emptied out 60% of its products over the last six months and are carrying new products that are roughly 10%, 12% more in cost, and every customer, every price list, every bit of technology, everything had to be updated in the last six months to accommodate that. It's the noisiest, most difficult, analytically, reality time to ever measure anything in this industry, I think. If I cut through the crap and kind of just give you a simple answer, units are down in our inventory, and it's the cost that's up. Got it. Then one last one for you, just on this, you know, kind of product transition dynamic. As they come back and supply you, do you, you know, you'll, will you shift back to them as, as kind of, as, as they can ship? 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 the, we use the term balance, 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's us an order. The balance is, is having the right mix of everything, the right matching systems of everything. That's been the trickiest part, is the OEMs needing to, to manufacture matching systems in a very rich mix of new products that meets the local need of every customer in a local store. That's the challenge, and, and that's the, that's, that balance is not, is not fully balanced at this point in all the stores because of all the transitions that are, that have gone on. Paul, I, that's my abstract, random thought answer, right? You're very close to this, too. Maybe you have some thoughts. Yeah, I, I, you know, I wanna make sure I totally understand your question. Your question was, are we gonna move back to that OEM? Yes, of course, we are. We're gonna support them in every way we can, and we're going to claw back any, any sales, sales loss that we had and any share loss that we had. The collaboration that we have with that OEM is such that, it's gonna be a joint effort to be able to get that back. Yeah, things happen, you know, and when they happen, you know, good partners stand together and work together. Yep, sorry, one, one last quick one for you. You, you mentioned that inventories are down, but obviously, your, you know, your sell-through unit wise is also down, you know, probably a bit more meaningfully than I think we would have 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 destock and that's over, it, it doesn't sound like that's the case with you guys saying you wanna, you know, reduce your inventory by another $200 million. I mean, it seems like there's, there's a way to go here from that perspective. Yeah, there, there still is some destock left to be, you know, to be, to be performed. You know, as Barry indicated, you have some mismatch where you're gonna have the outdoor units and not the indoor units to put the system together. The coil will be there, but not the, not the air handler. There is some destock as far as getting, getting the proper match of inventory on hand and sold through. You know, we're still seeing, we're still seeing, you know, a lot of great backlog on the commercial side, which we indicated in the opening comments, where units are still as hot as can be, and we have a, a nice backlog of those that we have in inventory, some of those, but they're awaiting jobs to be completed, to be moved into. I think, I think, there's some destocking left to be happening and just some, some management that we're gonna have to take on ourselves in order to reduce the inventory by $200 million. Great. All right. Thanks, guys. Thanks for all the time. Bye-bye, Steve. The next question comes from Joe Ahlersmeyer with Deutsche Bank. Please go ahead. Morning, Joe. Hey, morning, everybody. Just wanna follow up on that prior comment and the comments in the, in the prepared remarks about commercial. You mentioned the double-digit growth and, and backlogs into next year. Could you give us a sense of whether those backlogs are coming down at this point? Are your current sales sort of greater than what you're adding to those backlogs? Good question. Paul, do you got the data? Yeah, I, I think it varies based upon, like, you know, commercial is a very broad subject. Talking about commercial applied, where it's made to order for the for the job, I think we've, we've still seen those backlogs continue to increase. When you get into commercial, rooftop units, I think we've got a stabilization there. You know, it's supply is equaling demand right now. I don't see that growing much further than where we are today. You know, it's kind of a mixed bag when you look at all the components that go into commercial. Okay, understood. Another, another couple just fact-based questions here. What percentage of the commercial business would you say is driven by repair and upgrade versus new construction? I think in the past you said you're a bit less interested in the new construction because of the price and, and margin dynamics. 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 today? I would say on the once again, you've got a mixed bag when you talk about commercial. When you're 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're talking rooftops, our, our game is historically and continues to be on the replacement side. Then heat pumps? Heat pumps continue to grow, you know, as a percent of our total business. I think the, you know, you, you can get that information on the HRI website. You'll see that heat pumps now have exceeded, you know, in 2022, they exceeded the gas furnace sales, and now they, they've moved up to, you know, roughly, what, 40% of the total market. Watsco would be heavier on the heat pumps than most people because of our sunbelt geography that we're heavy in. You're gonna find more heat pump activity, obviously, south of the Mason-Dixon Line than you will north. However, you know, that will change as the technology of the heat pump changes and as government programs and utility programs push heat pumps into the northern clime. All right. Thanks a lot for all the detail. Good luck, everybody. Thank you. The next question comes from Damian Karas from UBS. Please go ahead. Hello, Damian. Hi, good morning, everyone. Morning. I appreciate the details you, you gave around price and mix benefits. Just curious if you happen to be seeing any signs that your competitors might be getting more competitive on price as inventories are being worked down, or would you say that, you know, that pricing mix uplift that you're seeing is 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 salesman, you know, all the prices are going down. If, if you really look at the reality of it, you know, the, the marketplace is, is fairly disciplined, and we have not really seen a decline in the equipment pricing. Understood. Appreciate that. A follow-up question on, you know, the refrigerants change. I mean, you know, you're effectively gonna have multiple refrigerants competing. I think that's a little bit different than, than past cycles. I believe you do work with OEMs that are on both sides of that. I'm just curious how you see that dual refrigerant dynamic playing out and what it means for Watsco. Thanks. Well, we have, we have one of our companies that sells. Their OEM is gonna go with the 32A. Then we have the rest of our companies, where they're going with the 454B. It's, it's very discreet and, and divided amongst our companies. We have one company that will be carrying two flavors, you know, 410 and, 32A. 410 for repair and 32A for the new equipment. The rest of our companies will be carrying, 454 and, and 410. I, I don't see a big, I don't see a big deal there, you know? Understood. Appreciate your thoughts. Thanks a lot. I would like to turn the conference back over to Albert Nahmad 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 the next quarter. However, if any of you wanna come visit and learn more about technology, the innovations that we're doing, feel free. We will happy to present you the information that would be helpful to you. Thanks for listening, and see you the next time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.