Al Nahmad: Wow. Okay, Barry, you’re the numbers guy.
Barry Logan: On the — first on the gross profit side, I think we — I think I chimed in on that probably 2.5 years ago when we said what we thought the long term would look like and it’s held up pretty well. So I’ll sustain my opinion and what our capabilities are in the near term and for this year. Obviously, there is always 10, 15 variables coming up with that that are subject to change, but I don’t think our conviction has changed at all for this year, if that answers your question. On the non-recurring side, we — and we mentioned all of our stores, all of our leadership across Watsco in a responsible way reduced headcount in the first quarter. There’s obviously some costs incurred in making those decisions and those reductions.
So that would be a component of that, probably the major component of the number. And as far as other things, there’s no one item [Technical Difficulty], it’s probably four or five $0.5 million items that are just in our minds, clearly something that is behind us and not a recurring item.
Dave Manthey: Okay. And second, it looks like Florida is now going to accept the IRA funding to the tune of about $346 million. And some of our contacts are saying in different states that that might start to benefit in maybe the fourth quarter this year or something. Can you give us a read, anything you’re seeing in terms of when consumers might start to see that help from the Inflation Reduction Act?
Paul Johnston: Yes. I think you’re correct. Probably the third quarter, fourth quarter, depends on what part of the country. Right now, New York is the one that’s been funded. And so we’re hoping to see what that — what sort of impulse that generates so that we can find out what the impact of it is going to be. And then from there, I think it’s going to be California, we’ll probably be in second place. So it’s going to be a gradual spreading of the wealth throughout the US as this thing rolls forward. So it’s going to be interesting to see what the first two states lay out before we really jump in and say it’s going to be a big deal.
Al Nahmad: Yeah. I was going to say something similar, Paul, that it should be a good thing, but how good and when we don’t know.
Paul Johnston: Yeah. But I will say this, absent a benefit right now in the first quarter, for example, and we’ll see how this plays out in the trend in the summer, but at least the first quarter, if I look at heat pump growth versus everything else, it’s remarkably better. If that’s one of the promises of incentives and so on, we’re seeing improved heat pump sales period without necessarily a benefit coming. And the second is part of the recalibration of all the new products last year was essentially a reinvention of all the higher-efficiency products that the industry makes. So 16th year, 17th year and above are new products essentially this year. And again, growth rates in that higher mix category grew nicely in the quarter.
So those are just good things without a regulatory incentive. I’ll accept it as good things, and again, it needs to play out for the full year. And if the incentives can add to that, that’s a good thing. But right now, it’s been nice to see the mix improving in the early part of the year and could be good for the rest of the year if it continues.
Dave Manthey: Sounds good. Thanks a lot, guys.
Operator: The next question is from Ryan Merkel with William Blair. Please go ahead.
Al Nahmad: Good morning, Ryan.
Ryan Merkel: Hey, everyone. Hey, good morning. I wanted to start on gross margin and I’m curious if the second quarter will see a sequential lift from the first quarter. My thinking is some of the OEM pricing came a little later this year. Is that the right way to think about it?
Al Nahmad: Gosh. You have a fortune ball there, Barry? Who knows? I mean you can take a shot at it if you wish.
Barry Logan: Yeah, Ryan, there are pricing actions that came in later, you’re right. And obviously, it’s still — it’s a better market, but it’s still not a strong market. So I will always handicap some conservatism just because of what the market is doing and if I’m wrong, it will be hopefully on the upside of that discussion. So I’m not — I want to change the tune this early in the season. We’ll be conservative about our commentary and the market will educate us over the next six months of really what’s going on.
Paul Johnston: Yeah. And like you said earlier, Barry, there is half a dozen — a dozen different things that make up gross margin. So that’s an important one, but it’s not alone.
Ryan Merkel: Okay. No, thank you for that. That’s helpful. And then I wanted to ask about the A2L pricing. I think you mentioned you’re starting to get some of the letters from the OEMs. Just what range are we seeing, I think 10% to 15% is what we’ve heard? And then the other question I had is, do you expect to get the full list price increase because it’s a transition in new equipment because sometimes you don’t get full list if it’s just a normal increase. I don’t know if that’s hard to answer, but…
Barry Logan: Yeah, that’s really tough. But the initial wins we’ve gotten in are in the 10% to 15% range. And in fact, they’re right in the middle. And so that pretty much held true. I didn’t think that would vary. Are we going to see a variance on that price as we move into the season? And if we do, it’s going to be, like I said, very late this year, early next year before we really see an adjustment to that. I think we’re going to have four, 10 units to sell right through and then we’ll start seeing some of the A2L units moving into the marketplace probably in the third quarter, fourth quarter.
Al Nahmad: Yeah, I’ll just add quickly. I mean with our advanced pricing systems, which are relatively new to the company still, we do expect to capture price increases at a rate — a more complete rate than previously, if that makes sense?
Ryan Merkel: Yeah, it does. Yeah. And then just quickly, one of your competitors is forecasting that A2L next year will be 50%, 65% of the market. Does that seem fair to you?
Al Nahmad: Boy, it’d be great if it would. I don’t think anybody has got a crystal ball that’s going to allow them to see exactly what the impact of the A2L product is going to be next year. I would say it would be somewhere between 50% and 60%.
Ryan Merkel: Okay. Great. I’ll pass it on. Thanks a lot.
Al Nahmad: It’s a positive move. All these are major moves that are positive, which a little difficult is to summarize on the timing of it all. But long term, it’s all good.
Ryan Merkel: Thank you.
Operator: The next question is from Patrick Bauman with JPMorgan. Please go ahead.
Patrick Bauman: Good morning, Al. Thanks for letting me in here. A couple of quick ones. The — what you saw in the quarter in terms of the HVAC equipment sales being down 1% on a same-store basis. Any way to give us more color on the residential equipment unit volumes versus the average selling prices year-over-year in the quarter?
Rick Gomez: Yeah, Patrick, this is Rick. Good morning. On the residential side, we saw unit declines of mid-single-digits and that mirrors sort of what’s happening with broader industry trends and sell-in to the channel. Actually, I think we’re outperforming that trend a little bit. And price was positive, not hugely positive, but it was positive. And commercial continues to do better than residential. The backlog there is still very healthy and a lot of strength in Latin America to support that. So that’s the color we would give.
Paul Johnston: I mean — I’m very sorry. We provided a little bit of data on top of this. So just to be helpful. So kind of the unitary product, deducted product that is the OEM — US OEM type product, price and mix was up around 3% for the quarter. I use the word mix, price and mix purposely in that. And as we’ve said routinely now, those pricing actions happen ultimately later in the quarter as opposed to early. So that gives you some read of it. Our ductless products, which is part of our unit discussion, pricing there is a bit more flat. But in that case, our largest vendor this year decided to have April 1 pricing action. So that kind of makes sense. And on commercial, as Rick said, it’s outperformed. It grew in the quarter-end, is in a steady state, I think, at this point of, call it, mid-single-digit growth.
Patrick Bauman: And the comment on resi, I mean I’m sorry, on units trending up in April, that applies to resi as well?
Rick Gomez: Yes. That’s only resi when I say that.
Patrick Bauman: Yeah, okay. And then I know HVAC products is a bunch of different things going on in that sub-segment. Is there any color you can give on the sales decline you saw in the quarter? Was it volumes or price or maybe any color on like what you’re seeing in commodity products like refrigerants?
Barry Logan: Sure. I’ll give a color. It’s probably our third quarter where we’ve had essentially commodity deflation going on and average selling price just being simply a headwind during a quarter. And when we use the word commodities, that’s refrigerant, copper tubing and sheet metal products as a category. It’s around between 5% and 6% of Watsco’s total sales to give a context, but it does have a bigger imputation of reality in that non-equipment products category. The good news is that margins and pricing have stabilized. The good news is copper is increasing in price. And the better news is that we’re kind of getting through this year-over-year cycle and expect less impact if in fact no impact and perhaps even positive impact as we get into the rest of this year. So this seems to be the end of the line with some of that discussion I’m hoping so and expect so based on kind of what we’re seeing as we look into the spring — the spring time here.
Patrick Bauman: Super helpful. And then last one for me, just on the same-store SG&A side. I think last time we talked you were thinking maybe flat to down slightly for the year. Is that still a reasonable expectation on a same-store basis?
Paul Johnston: Well, it’s a good aspiration and goal and it’s not a dictate. That’s not how we manage Watsco. We manage it through our leadership who if they want to find investments or do something that’s important for a market or a customer, they’ll do it. But I think from a mindset, from a cultural point of view, it’s what we’ve been after. But again, carrying that out in a market — if there’s sales generation going on to the extent that there is today, let’s say, variable costs are going to increase and we’ll probably violate that concept of flat SG&A, which is not a bad thing. Variable expenses would drive — would go along with the sales growth. So it’s early days. I’m glad there’s growth going on. I will tell, there was some noise in the first quarter SG&A that we’ve quantified to an extent and I would expect better performance as the year goes on.
Patrick Bauman: Super helpful. Thanks so much. Best of luck.
Operator: The next question is from Damian Karas with UBS. Please go ahead.
Al Nahmad: Good morning, Damian.
Damian Karas: Hey, good morning. How you all doing?
Al Nahmad: Good.
