Watsco, Inc. (WSO) Q4 2022 Earnings Call
Watsco, Inc. (NYSE:WSO) Q4 2022 Earnings Conference Call February 16, 2023 10:00 AM ET
Company Participants
Albert Nahmad - Chief Executive Officer
Barry Logan - Executive Vice President, Planning & Strategy and Secretary
Paul Johnston - Executive Vice President
Aaron Nahmad - President
Conference Call Participants
Tommy Moll - Stephens Inc.
David Manthey - Robert W. Baird & Co.
Jeffrey Sprague - Vertical Research Partners
Ryan Merkel - William Blair & Company
Nigel Coe - Wolfe Research, LLC
Jeffrey Hammond - KeyBanc Capital Markets Inc.
Joshua Pokrzywinski - Morgan Stanley
Stephen Tusa - JPMorgan Chase & Co.
Christopher Dankert - Loop Capital Markets LLC
Operator
Good morning, and welcome to the Watsco Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there’ll be an opportunity to ask questions. [Operator Instructions] 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, we’re 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 – 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 there’s 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. There’s more to do on both, but we are encouraged by our progress and our intent and 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, and we are investing to grow that advantage. These technologies are increasing customer’s engagement, reducing attrition and creating sustainable market share gains. In addition, Watsco’s 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 we’re 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, we’ll 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. Today’s 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 you’ll see today.
With that, let’s go on to Q&A.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] 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, 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 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 – that’s our goal is to constantly improve our profitability, and our revenues without significantly increasing SG&A. But let’s get a little bit more color for you. Barry?
Barry Logan
Yeah, Tommy, I would say – good morning, Tommy. I would say that first, there’s obviously in any distribution model, a variable component to what we’re 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 we’re 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, there’s been inflation over the last 12 months like every other fixed cost of every other business. So it’s not that simple to simply reduced cost across the entire portfolio. For the variable costs we’re seeing already and the fixed costs with more moderate inflation, I would expect to see some improvement.
So net-net, I’ll set at the goal is to have much more moderate SG&A spend versus revenue growth, and there’s not a leader, a branch manager, a reasonable person in Watsco, that isn’t 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. We’ve got, I think, world class inventory management systems, world class data management systems to be able to track and know what, where we’re not efficient and where we’re not – 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 they’re 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. Even…
Albert Nahmad
It’s always a good topic by the way with inflation in the last couple of years. Yeah, go ahead.
Tommy Moll
Well, that’s 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
I’ll hand it over to our financial people.
Barry Logan
Yeah. Again, there’s two pieces or probably 25 pieces to the answer, by the way, but I’ll 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 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 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 it’s lower than it is today in absolute dollars, there’s 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, 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. 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 we’re kind of looking forward to the greater simplicity than we’ve been experiencing the last couple of years.
Paul Johnston
Correct. A little bit what Barry’s 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 we’re 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 Barry’s point, as we move into the new inventory, we’re 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 I’ll turn it back.
Albert Nahmad
So 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 started all the forces that are being we’re 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 it’s approximately 27%.
Albert Nahmad
Mr. Logon?
Barry Logan
The – 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. It’s the simplest, most important analysis and 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. And our teams did a great job of sustaining margin. So I don’t think there’s anything that’s changed in our – either our thought process or analysis or what our business leaders are telling us in margin looking forward in 2023. And 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. And, but I don’t think anything’s 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, it’s around $25, $26 per pound of 410A, and that varies by region.
Albert Nahmad
[For a jug] [ph].
Barry Logan
No, that’s pound.
Albert Nahmad
That’s pound. Okay.
Barry Logan
And that varies by region, and it’s 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 you’re 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, I’ll 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 can’t sell that needs to move? Is there any particular noise that we should think about particularly in the first quarter here?
Aaron Nahmad
Well, that’s 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. There’s 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 we’re a national North, South, East, West company, nothing is ever stranded. Because, 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, but we didn’t move the inventory to make sure it’s 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 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.
Albert Nahmad
That’s 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 there’s 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 don’t – 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…
Albert Nahmad
Yeah, some of the OEMs are doing better than others. So it’s pretty good. Our supply chain in that respect.
Barry Logan
To give you the answer, you can see the – 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 we’re 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 don’t ever forget that in the fourth quarter, and even the first quarter drawing inferences and what’s 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, there’s 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, I’m turning it over to somebody knows more about this than I do. But also the mix change or product is affecting our margins. It’s very significant part of what’s 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 it’s also a mix of products. But, Paul, go ahead, or Barry, whoever wants to take that.
Paul Johnston
That’s a very complex question, Ryan. Obviously, we’ve 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 haven’t 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 we’re starting to see hybrid units that are getting into the ducted side. And without getting too far into the wheeze [ph] on that, we’re 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 we’re 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 – just a reminder on the M1 product, obviously, the OEMs needed to capture a higher selling price in the market. And I don’t think anything has changed from what we’re 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 – 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, it’s at least in the range?
Barry Logan
I hate the comments specifically, Ryan, on a range, I would say what you’ve 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 there’s still a big dependency on the contractor going into someone’s 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 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 the heat pump cools and heat, they don’t need a cooler add the furnace. That’s a wonderful use of it. The federal government’s discovered that. So they’re providing already and we’ll 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 don’t see anything that isn’t 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 there’s 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. It’s 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 – 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 it’s a lower price point, lower revenue mix, but better margin? Is that the way to think about it?
Barry Logan
Actually, it’s – for the last 20 years, it’s been growing and growing. And, I think, the – I don’t think it’s going to 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. 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, it’s going to be a nice balance now that we’re going to have between the ductless and the duct free. I call it almost a conversions where I’m 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 that’s been tracking through January perhaps? And when do you think we’ll 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 we’re hoping that they get those ironed out. When – that you’d have to ask the OEMs when they’re going to be able to do that, but it’s our hope that will 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 year.
Albert Nahmad
Yeah, that’s 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 that’s kind of pushing sales along out into the year. And, frankly, with that that particular product, if demand continues where it’s at, it’s going to be probably throughout the entire 2023. We’re going to see disconnect there between availability and demand.
Nigel Coe
But any improvements in that manifests into 1Q with the – 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, it’s mostly with the straight-cool products, and we’re seeing the improvement we’re not today, we’re seeing small improvements on the heat pumps, but not where we want them to get our inventories adjusted.
Nigel Coe
Great. That’s 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 it’s always sunny down there.
Albert Nahmad
Well, you didn’t call me. [indiscernible] And don’t tell anybody it’s going to be, what it’s 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. But…
Albert Nahmad
Well, rain [ph]. 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 don’t 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 everyone’s talking about kind of is it end of the season? What’s kind of your best guess on timing? Thanks.
Albert Nahmad
Well, I’ll give you a number that’s a goal that whether we’ll 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 it’s 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 we’re 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. That’s really helpful. So just on 2023, I know, you guys don’t 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 that’s 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, that’s an easy one this year? Yes. I’ll 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 that’s the target they set for us and other ones, managing all the local businesses that lots go operate. So I wouldn’t say it’s just – not just optimism, it’s 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 I’m glad it’s 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 I’m always – 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 Watsco’s 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 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 7th or 8th straight quarter of being up 20% or more. And I’ll mentioned about the supply chain for commercial simply being truly challenged still. It’s still it’s not restraining growth, the growth rate of over 20%. And, I think, you’ve heard all the OEMs talk about that dynamic over the next year or two. And we’re certainly seeing the same thing.
Albert Nahmad
And to add Barry’s 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
It’s a pretty steady business, and I expect growth there. For sure, it’s very well managed, and even though some of these economies there are not doing well, I’m 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 that’s a new pronunciation of your last one. I haven’t heard.
Joshua Pokrzywinski
I get more creative every time. Well, appreciate the question, guys. So we’ve touched on heat pumps enough times now, we’re just want to check your thoughts, Paul, on how you’re thinking about anything. On the IRA side, there’s 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 we’ve seen to date. I think the 25-C 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. And that’s 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 – we’re ready. We’ve launched programs with our dealers. We 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 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, 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. Places in Northern California, you can’t replace a gas furnace, New York City, it’s fossil fuel heat, forget it. In Canada, we’re 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 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 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. It’s 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 doesn’t matter what the brand is.
Joshua Pokrzywinski
All right. That’s helpful.
Albert Nahmad
I think we’re very – we’re Carrier’s largest customer. We’re 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 – 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, I’m commenting on all of what’s going not certainly, not just carrier, but…
Stephen Tusa
Yeah, totally, totally, all of Watsco. So units were down 8% on equipment. It sounds like you’re 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. That’s it.
Stephen Tusa
Okay. So that’s 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 you’re 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? I’m not sure if you guys answered that before units.
Albert Nahmad
[But you weren’t] [ph] on the call, Steve, just kidding.
Stephen Tusa
Well, you think you’re going to grow sales that includes, obviously, price and mix. So our volumes, actually – I think we had a question before, I’m not sure…
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. It’s already starting to occur because of the new mix, the new products that they’re introducing.
Stephen Tusa
Got it. And then…
Barry Logan
And Steve, I just want to 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 markets going to do and just say, oh my goodness, they listen to what everybody is saying, when wringing our hands, and hoping it’s not right. The last 2 years, it’s 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 we’re doing. Let’s do that that’s not been possible over the last 2 years, because OEMs could not make the product or couldn’t offer the opportunity.
And those types of initiatives are going on right now. I’m not going to list them for you. But there’s 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 we’re doing and grow the market this year.
Stephen Tusa
Got it. Got it. For your share – from a share perspective.
Albert Nahmad
That’s 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 – what do you think is the payback for the consumer? Obviously…
Albert Nahmad
Very good question. Good…
Stephen Tusa
What is the actual payback? Because, I mean, you’re 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 new…
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%. We’re even more on an older system. But I mean, to be able to come up with a year’s analysis, you’d 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 they’re going to 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 home. That’s the way to look at it. We got a lot of homes where they’re already paying X dollars. And if they go to – for their energy, and if they go to a higher efficiency heating and cooling system, they’re going to save half of the half. The overall cost is half dedicated to heating and cooling, and the stuff we’re 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, it’s my understanding that they have – 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
They’re very cost competitive. They’re right in line with the ducted product. And beyond – 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
[Operator Instructions] 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 I’m 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, it’s a very low percentage of the total market. It’s in the low-20s. So we have a huge opportunity to grow the heat pumps here, there. If I go up into the Carolinas, we’re already in the 65%, 70% range. So that’s just a continuation of what we’ve 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. Okay…
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 there’s 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 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. So we haven’t seen a repair versus replace discussion, which generally the industry gets into as we move into a transition to new products. So I think it’s a little early to declare with which way the market is going to go right now. But for right now, we’re seeing a nice balance between our equipment and our parts business.
Aaron Nahmad
Okay. I will say – this is A.J. 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. And, of course, those products often come with a higher margin.
Albert Nahmad
That’s a very unique advantage. I don’t 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. We’re very optimistic and we hope you stay interested. And please don’t 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 we’ll see you the next quarter. Bye-bye.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
