Watsco Inc
NYSE:WSO
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
377.91
549.24
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Watsco Inc
You don't have any saved screeners yet
Good morning, and welcome to the Watsco Second Quarter 2023 Earnings Call. [Operator Instructions] 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. And this is Al Nahmad, Chairman and CEO. And with me is A.J. Nahmad, President; Paul Johnston, Barry Logan and Rick Gomes. 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 to $80 million, and as much as $125 million for the 6-month period ended June 30. 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. And of course, our balance sheet remains strong with little net debt at the peak of our seasonality. As always, the financial position provides us flexibility to invest in virtually any opportunity as we continue to grow and scale in a very fragmented $50 billion-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 under 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 preference 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 us to serve contractors in any environment. We have a leading market share position in Sunbelt markets that provides 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 mandate, it makes a very difficult to repair what you've got, so they have 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 towards electrification and greater adoption of heap pumps with higher average selling prices. Finally, we expect the Inflation Reduction Act, 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.
[Operator Instructions] The first question comes from Ryan Merkel with William Blair.
I had a question on sales and then a question on group margins. So first on sales, you mentioned the weather, Al. 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 will end up with growth rates in the third quarter. And what was the second part of your question?
Yes. And just in terms of the magnitude of the improvement in July relative to what you saw in May and June?
Over May and June or over the same period last year? I gave you the same period last year, we're up low single digits. Paul, if you got have you got that answer?
Yes. I mean we're seeing definite growth rates pretty much across the board, seeing an uptick which -- because the weather was so weak in the first half of the year, we're seeing an uptick in repair parts which is always good for us on a gross profit basis. But really not a big trend towards replace versus repair or repair versus replace, whichever way you're going on this. Both of them were starting to see some upticks on.
Okay. Got it.
And Ryan, it's Barry. The question was how was June versus July, we can't be granular in that way. Obviously, June is a huge month within the quarter. So June looked a lot like our second quarter performance. So July is obviously better, and that's a good thing.
Yes. That was what I was getting at. On the gross margins, everyone's favorite topic. The long-term goal is 27%. You just did 28.1%. So just unpack for us why you're 100 basis points above your target. And then should we think about long-term target of 27% to 28%? Are you willing to make that change here today?
Well, I'm going to raise your expectations. We're shooting for 30%. Now I'm not going to give you a timetable on it, but we believe we can get there and then eventually beyond that. Who wants to take a shot at his questions?
I'd be happy to. And again, there are 5 or 6 important variables in the current performance that have improved versus 3 years ago, whenever our that question was asked. It was asked 2 or 3 years ago, I feel like. And I think all 5 or 6 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 obvious reality we've talked about is we're selling a lot of new products. We had the opportunity this year to go out and get price margin and support our OEM community with all of their new products and sustained profitability. And so far, so good.
Obviously, too, you have a growth in the replacement market relative to new construction, which helps margin some. And I think the overall mix of everything we're selling in terms of efficiencies and higher growth rates of heat pumps, for example, helps margin as well. Now I still haven't answered your question, though, which is where are we on the spectrum of our target and so on. In the short term, I don't think there's anything that is too remarkable to either pressurize or to add to gross profit where we are today. What I was suggesting longer term is we feel far from satisfied that we're doing all the things we can do 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 terms of benefits.
Well, that was a long-winded answer. What was that a good one? I like that, Barry.
The next question comes from Tommy Moll with Stephens Inc.
So I wanted to start with a continuation of pricing theme. We are potentially late in this pricing cycle, and I just wonder if you could give any qualitative commentary on where it feels like we sit today. And then to the extent you can give anything quantitative on what the contribution was in the second quarter, that would be helpful as well.
All right. Who is best to handle that?
Barry, do you want to take a run at that?
Sure, sure. Tommy, again, it's the same variables that we have to go out and prosecute and execute and -- in price and layering costs through the market given all the changes have gone. So I think for the quarter, it's about a 9%, 10% benefit to overall average selling price for our residential business or 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 a mix or from all the new products that are being layered in, and also heat pumps, which obviously have higher average selling price. So in the quarter, and it's pretty much the same number for year-to-date, I think 9% is the overall, call it, average selling price increase for the quarter and the year.
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 December?
That's a very good question. They're a great company, and they're working very hard at it and they're improving. And my guess is that either through the end of this quarter or certainly by the end of the fourth quarter, they will be all caught up.
The next question comes from Dave Manthey from Baird.
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 time lines, but what mechanisms would you see that would move you in that direction?
Well, there are lots of opportunity in the nonequipment side. We sell -- a considerable amount of our revenues comes from nonequipment that people seem to forget. And secondly, the movement towards heat pumps, by the nature of that, creates a higher margin. And that's where the demand is going to expand significantly, motivated by federal government mandates and things like that, plus the value of having heat pumps. And we have other things that our technology is providing ability to compete more effectively. So it's internal and its external forces 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.
And Dave, this is Paul Johnston. You also see an awful lot of change happening with regulation over the next really over the next 5 to 6 years. We've got the refrigeration change that's going to -- that Al mentioned in his opening remarks, which will be in effect next year, which is going to reduce the availability of gas by another 30%. We just saw 10% 2 years ago, now we did another 30%, and we see another 30% happening in 2028. so we're going to 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.
Then we've got the complete change of product line that we're going to be getting in, in 2025, which is kind of a little bit of a flexibility in the time line as far as when that's released, but we're going to be seeing that occur. We've also got 2 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. And there's a potential of an additional refrigerant change, where the government could reduce the global warming potential down from 750 down to 500. So anytime there's a changing market, I think there's an opportunity for an upside in gross profit for Watsco.
Yes, 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. Actually, I expected to be shut down in that question, but I appreciate all of the details.
Well, I went to the resource, I knew we talked them also. You're good. You're good.
Absolutely. Well, so second is on tech spending. If you treat 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. And I'm just wondering if you could help us understand what are the key tech spending priorities and buckets that you're dealing with today?
You mean you want to know who the big spender is?
Yes.
Hey, Mr. President.
Yes, yes. No, I think we've consistently said with our tech spending that we are going to invest [indiscernible] today in an unlimited universe of opportunities to apply technology and innovation and process improvement and smart thinking and mark people to everything we do. And we've been at it now for 10, 12 years, and I think it's had a major impact on the business. And now with the advent of generative AI, there's a whole another world of opportunity. And next chapter is just starting to be written, and we are knee-deep in that opportunity as well now, which is obviously changing very, very fast. So maybe an ambiguous answer, but we're going to continue to invest because we know it's right for the long-term health of the business.
And we might invest more. I think we will. We've been investing more every year. This company is very focused on long term. I know an analyst asked us last year some time, when are you going to stop investing? And I said, "Well, we're never going to do that. This is our advantage, and we're going to continue to increase our advantage."
I think -- yes. I was just going to add a layer of thinking to it for your sake, David, 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 that probably 2/3 of that headcount is actually sitting in the field with customers. It's not sitting in a corporate ivory tower geeking out new technology, we have that. But a lot of the momentum, a lot of 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 market. So just get the sense that's not just invention and development, that's going on for sure, but it's also this ground game that is truly at the ground level in our markets.
And it's worth saying again that our customers that use our technology are better customers. Their growth rates with us are higher, their attrition rates are lower, our cost is serve them is lower. So the more customers we get using the technology more often, the better it is for the company. As well for the customers, by the way. They are more efficient and profitable as a result of using the technology.
The next question comes from Josh Pokrzywinski with Morgan Stanley.
Josh, are you liking us better recently?
You guys have done all right, Al. I'll give you that.
Thank you. Thank you.
A couple of questions here. Maybe one just kind of sticking to the quarter itself. Barry, I know you gave some good color last quarter about maybe some of the moving items in gross margin, basically the selling initiatives maybe versus kind of that inventory or inflation margin phenomenon. I know that there was an extra wrinkle in 2Q with 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 price versus cost, did increase in the quarter. So that's a high-quality important component of gross profit because it is the largest component to the performance. So -- and that's without considering any benefit from some of the pricing actions that came in, in the quarter. So just pure quarter-over-quarter, year-over-year quality of margin improved.
Some of the below-the-line items, I would say we're fairly flat. 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, because we're going through is pretty enormous transition of inventory. But nothing too remarkable, Josh, one way or the other. I think what is replicable is the selling margin, which is, again, simply price and cost being prosecuted in the market was positive without any considering a benefit of pricing actions?
Got it. That's helpful. And then maybe just shifting over more philosophically 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 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 sort of what are the pricing strategy you guys think evolves as IRA becomes more meaningful.
IRA, 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. So that just occurred this week. And of course, because of our technology, we were able to get that out on our dealer apps to a couple of hundred thousand people quickly. So we really haven't felt the benefit of that. There's historically been a spread between a heat pump and a straight cool. There are different components, different electronics involved.
And so I don't think there's any real uptick now that's going to occur where you're going to see heat pump margins going up because of the IRA proposition that we've got on the table right now. So I don't think the 2 are related right now, because there really hasn't been any impact at all on sales from higher rate. And we finally got the word out that the states now have the recommendation from the DOE on how to manage their rebate programs from mid- and low-income people. And so we're not going to see any of that probably until end of first quarter, beginning of second quarter next year, perhaps.
The next question comes from Jeff Hammond with KeyBanc Capital Markets.
This is Mitch Moore on for Jeff. I just had a quick question. How much inventory do you guys want or need to take out in the second half? I think you said you'd address inventory levels once you had a better handle on the selling season.
Who wants to take a shot? I'll say that my sense of it is we can -- we're capable of taking out another $200 million when things settle down, and that will be helpful in terms of inventory turns and in terms of cash flow.
I would agree. That's a fair assessment.
Okay. Great. And then just one more. On the SG&A line, what can you guys do to temper decrementals if we continue to see volume declines in the second half?
I mean I can answer it if you like, Al.
Sure.
Yes. I mean, first, what helps in that equation to be conservative, if you're asking let's be conservative on the top line, what happens below the top line, if that's your question. So SG&A becomes a focused item, obviously. SG&A went down this quarter in the second quarter, it's good. If I look inside that number, variable costs are down in the teens. Somewhere between 15% and 20%. Our variable costs that we've been expecting to reflect kind of the change in the top line is occurring. And fixed costs were up 4% in the 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 that our teams have focused on.
So I don't -- I'm not going to predict precisely where SG&A has, 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, but there is an immense amount of effort and challenge and data and technology, looking at SG&A for the rest of the year in terms of how we can reduce it further. So that would help the decremental equation. And if there's any level of growth, it certainly helps the earnings growth rate.
The next question comes from Brett Linzey with Mizuho.
Just wanted to come back to the refrigerant changeover beginning in '25. Clearly, the regional SEER transition created some impediments for Watsco with the OE issue. How does that change or maybe inform the way you think about prebuy next year ahead of the '25 changeover as you look to maybe secure more inventory?
That's a good question for Paul. He follows it.
Yes, I don't -- we've been out -- we discussed this with all of our OEMs. We're not looking at a prebuy. I don't think anybody is right now looking at prebuy on 410A. As I indicated earlier, there's already been a 30% reduction in the GWP allocations for next year, which means we're going to be at 60% of what was allocated in 2011. And there's going to be a further one in 2028. So we're going to be down to basically 30%. So offering a unit and doing a prebuy on a unit where the refrigerant is going to be in short supply or very, very expensive, I don't think would be a prudent business opportunity for anybody.
Okay. Got it. And then just shifting to the consumer backdrop, clearly mix. I was wondering if there's anything you can glean from credit metrics across the organization or anything specific to the complexion of parts growth versus equipment that might suggest you're seeing some repair versus replacement trade down.
Yes. We -- there's two primary components that we look at when we look at what the repair buses replace is doing, and it's motors and compressors. And what's happening with motors and compressors is we're seeing -- we are -- we finally are seeing -- in the month of July, we're finally seeing an uptick, which we didn't see in the first half of the year. And so as we see a growth in that, that would indicate that there would be more repair happening. We also monitor any sort of warranty claims back to the OEMs that we make to make sure that, 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 the -- in July, but it's not a not a major trend, I don't think yet. It's only been -- all I've got is 3 weeks of information. But at this point, I wouldn't say it's a major trend. But certainly, it's there and it's positive, and I'm happy about it.
The next question comes from Steve Tusa with JPMorgan.
My first question is, who had the sweet pipes at the beginning of the call there? That was -- that was nice thinking. That's good. I know 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 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 was -- what's kind of like the equipment unit? Would that be down high singles equipment unit volume in July?
Paul? Barry?
Yes, I would say it is. Yes, Barry, if you want you to take that.
First, I think when we talk about growth, we're talking about the whole business, Steve. And our part sales are not consequential enough to matter in that equation. Is it up? Yes, but consequential to 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 use common sense, and that's about it. I think -- and we're up against, again, 15% comps of a year ago. So if we're still not -- we're still -- as we've said many times now, we're still up against blockbuster stuff with the year ago. And so for July to have some growth, that's good.
Yes. And then I just want to -- 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 2 dynamics?
And accounting for you, Mr. Logan.
I think that's a little more basic than accounting, I don't know. You tell me.
I'm trying to prove I'm not just an accountant anymore after 30 years.
You're everything, Barry.
So Steve, the irony of the question is if you look at -- if you took our data, looked through it and said I'm going to pick the whole universe of equipment, which is indoor unit outdoor units, 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. So your question is why is inventory higher, right? Well, first, the cost is higher. The mix is higher. The mix is richer. And so 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 retail or any business that emptied out 60% of its products over the last 6 months and are carrying new products that are roughly 10%, 12% more in cost. And every customer, every price list, every into technology, everything had to be updated in the last 6 months to accommodate that. So it's the noisiest, most difficult, analytically reality time to ever measure anything in this industry, I think. And if I cut through with the crop 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. And then one last one for you just on this kind of product transition dynamic. As they come back and supply you, do you -- you'll -- will you ship back to them as kind of -- as they can ship? And my guess is you took on more of somebody else's to make up for that this past quarter?
Yes. I would say we use the term balance. And it's not -- what that means is every store having matching systems that fit the need of any customer who calls or e-mails or e-commerces us is an order. The balance is having the right mix of everything, the right matching systems of everything. And that's been what has been the trickiest part, is the OEMs needing to manufacture matching systems in a very rich mix of new products that meets the local need of every customer in a local store. And so that's the challenge. And that balance is not fully balanced at this point in all the stores because of all the transitions that have gone up. So Paul, that's my abstract random thought answer, right? You're very close to this, too, maybe you have some thoughts.
Yes. I want to make sure I totally understand your question. Your question was, are we going to move back to that OEM? Yes, of course, we are. We're going to support them in every way we can, and we're going to claw back any sales loss that we had and any share loss that we had. And collaboration that we have with that OEM is such that it's going to be a joint effort to be able to get that back. So yes, things happen. And when they happen, good partners stand together and work together.
Yes. Sorry, one last quick one for you. You mentioned that inventories are down, but obviously, your sell-through unit wise is also down, probably a bit more meaningfully than I think we would have expected. If somebody were to come out and say like, industry residential HVAC unit inventories are in balance or that already seen a destock and that's over, it doesn't sound like that's the case with you guys saying you want to reduce your inventory by another $200 million. I mean it seems like there's a way to go here from that perspective.
Yes. There still is some destock left to be performed. As Barry indicated, we have some -- you have some mismatch where you're going to have the outdoor units and not the indoor units to put the system there. The coil will be there, but not the not the air handling. So there is some destock as far as getting the proper match of inventory on hand and sold through. And we're still seeing a lot of great backlog on the commercial side, which we indicated in the open comments, where units are still as hot as it can be and we have a nice backlog of those. That we have in inventory in some of those, but they're awaiting jobs to be completed to be moved into. So I think there's some destocking that could be happening and then just some management that we're going to have to take on ourselves in order to reduce the inventory by $200 million.
The next question comes from Joe Ahlersmeyer with Deutsche Bank.
Just want to follow up on that prior comment and the comments in the prepared remarks about commercial. You mentioned the double-digit growth in backlogs into next year. Is there -- could you give us a sense of whether those backlogs are coming down at this point? Are your current sales sort of greater than what you're adding to those backlogs?
Good question. Paul, you've got the data.
I think it varies based upon -- commercial is a very broad subject. Talking about commercial applied, where it's made to order for the job, I think we've still seen those backlogs continue to increase. When you get into commercial rooftop units, I think we've got a stabilization there. It supplies equaling demand right now. So I don't see that growing much further than where we are today. So it's kind of a mixed bag when you look at all the components that's going on in commercial.
Okay. Understood. And another couple, just a 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 margin dynamics. And then on the resi side, just any number you might have in mind around how big heat pumps could be as a percentage of your overall equipment business today.
And I would say 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 game has historically continues to be on the replacement side.
And then heat pumps?
And heat pumps continue to grow as a percent of our total business. I think you can get that information on the HRI website. You'll see that heat pumps now have exceeded -- in 2022, they exceeded the gas furnace sales. And now they've moved up to 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. And so you're going to find more heat pump activity, obviously south of the Mason-Dixon line than you will north. However, that will change as the technology, the heat pump changes, and as government programs and utility programs push heat pumps into the northern climb.
The next question comes from Damian Karas from UBS.
So I appreciate the details 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 pricing mix uplift that you're seeing pretty consistent out there in the market?
I would say it's been fairly consistent. We haven't really seen any breaks. Obviously, if you listen to the salesman, all the prices are going down. But if you really look at the reality of it, the marketplace is fairly disciplined, and we have not really seen a decline in the equipment pricing.
Understood. Appreciate that. And then a follow-up question on the refrigerant change. I mean you're effectively going to have multiple refrigerants competing. I think that's a little bit different than past cycles. And I believe you do work with OEMs that are on both sides of that. So I'm just curious how you see that dual refrigerant dynamic playing out and what it means for Watsco?
Well, we have one of our companies that sells their OEM is going to go at the 32A, and then we have the rest of our companies where they're going with the 454B. It's very discrete and divided amongst our companies. So we have 1 company that will be carrying 2 flavors, 410 and 32A, 410 for repair and 32A for the new equipment. And the rest of our companies will be carrying 454 and 410. So I don't see a big deal there.
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 want to come visit and learn more about technology, the innovations that we're doing, feel free. We will happy to present to you the information that would be helpful to you.
So 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.