Good morning, and welcome to the Watsco Incorporated fourth quarter and full year 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Al Nahmad, Chief Executive Officer. Please go ahead. Morning, everyone. Hope you're safe and healthy wherever you are. I want to welcome you to our fourth quarter earnings call. This is Al Nahmad, Chairman and CEO. With me is A.J. Nahmad, President of Watsco, and Paul Johnston, Barry Logan, and Rick Gomez. Before we start our report, here's our cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws, and ultimate results may differ materially from the forward-looking statements. On to our report. Watsco delivered an exceptional quarter to close out a fantastic year. New records were set for virtually every measure of performance. During the quarter, earnings per share jumped 77% to a record $2.02 per share. Sales grew 31% to a record $1.5 billion, and operating income increased 76% to a record $123 million. Operating margins expanded 210 basis points to a record 8.1% in the fourth quarter. Now on the results for the year. Earnings per share increased 54% to a record $10.78 per share as sales grew 24% to a record $6.3 billion. During the year, operating income increased $227 million or 57% to a record $629 million. Operating margins reached 10%, a 210 basis points increase from last year. Very important, I always like to emphasize this because this is our culture. We ended the year with a strong balance sheet with very little debt. In fact, our performance gives us confidence to share once again with our shareholders by boosting our dividend 13% to an annual rate of $8.80 per share. Our strong balance sheet also gives us the ability to invest in most any size opportunity as we continue to build scale in a very fragmented $50 billion North American market. We continue to look for acquisitions as Watsco is a great home for family businesses, given that we sustain their cultures, invest in people, and provide technology to secure and build on their great legacies. Beyond sales and profits, it is important to understand Watsco's immense potential to impact climate change. Let me explain that. Heating and air conditioning systems account for roughly half of U.S. household energy consumption. Therefore, the purchase and installation of high-efficiency replacement systems is one of the most meaningful steps a homeowner can take to lower his energy costs and reduce CO2 emissions. Given our scale, our access to capital, our entrepreneurial spirit and technology, we believe we're well-positioned to help the greatest number of contractors who in turn can help more homeowners and businesses to reduce CO2 emissions. Now, in terms of impact on CO2, over the last two years, we estimated Watsco sales of more efficient systems help avoid 10.1 million metric tons of CO2 emissions, which is equivalent to taking 2.2 million cars off the roads. This is over a two-year period. Now I'm moving on to a different subject. The government has now moved to make changes that will take effect at the beginning of next year. These changes mandate an increase in the minimum efficiency for our HVAC equipment. Excuse me, I've got a cold. Regulatory changes are also on the horizon related to refrigerants to also aid with climate change. That's also a very big move on the emphasis on climate change. OEMs are actively engineering new products to meet the new requirements, all of which should take shape over the next couple of years. Moving on to technology. We continue to invest in technologies to transform our contractor customer experience. Greater adoption and use of our technologies was achieved during 2021. An example is e-commerce sales, which now approach $2 billion a year. We can see that our active users continue to grow at faster rates than others. If you have an interest in learning more about Watsco technology, please let us know. We will schedule some time with A.J. and his team. We enjoy sharing our passion and the long-term view that is transforming our business. My final thought before we answer questions is to thank all of the Watsco teams across our markets. They have done an extraordinary job to serve customers and produce this type of performance. With that, let's move on to Q&A. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. How many are on, Gary? Right now it looks like we have a queue of about eight participants, and the first question is from Tommy Moll with Stephens. Please go ahead. Morning, Tommy. Morning, and thanks for taking my questions. Sure. Another record quarter for gross margin, which I hope we could unpack a bit here. Never heard that question put that way. I'm glad that's good. Anything you could share on mix? Anything on accounting we should be aware of? I don't know if you're FIFO or LIFO and maybe a more interesting component there. What could you share about any of the latest on pricing strategy and realization? Well, I'm gonna call on two of the resources on the phone, starting with Barry and then followed by Paul. Good morning, Tommy. I appreciate that. Well, again, I think there are several layers to the discussion and one of which is not accounting. You know, we use weighted average cost on a FIFO basis. As we buy products and sell them and mark them up, it's a pretty clean mechanism to get the gross margin. There's nothing that's interesting or that's not ordinary in terms of that simple equation. But in terms of the layers, again, you're right. Sales mix does drive higher margin. We do see higher margins as we sell a richer mix of efficiency. We give some inference in that in our press release in terms of growth rate of high efficiency versus the base efficiency or the overall, I should say, the overall growth rates. Also, you know, inflation, as we pass through inflation, as we receive higher costs from OEMs and we move that product through to our customers, it is an opportunity for us to be a good merchant and, you know, realize some margin dollars as we pass that through. You can also see that the non-equipment business has had a terrific year. Gross margin rates in our non-equipment business have done very well, and again, yields an overall improvement in margin. There probably are a few more layers maybe Paul can cover, but if you listen to my words carefully, this is about, you know, buying products, passing them through the value chain to our customer and yielding a terrific result. There's really not much more to it than that. Paul? Yeah. Part of that, you know, we made a strong investment in the latest technology for pricing systems. So we have a better handle on as the price increases occur, we're able to move them through faster and also make sure that we're getting the yield from the price increase that we expect. Are we continuing to see price increases? Yes. There were price increases from most OEMs on the equipment side that were passed through January 1, and we've implemented those. Secondly, we're seeing price increases on a lot of different non-equipment products, which we don't talk about an awful lot, but as Barry indicated, has been a very strong growth area for us, both in the way of sales as well as emphasis. I don't see any letdown in prices or a reduction in prices. It's pretty much been full steam ahead. A.J., perhaps you could add something regarding our capability now to see what's going on with competitors and how we react to that. Yeah. Paul mentioned we've made major investments in technology regarding pricing and pricing optimization, and that does give us visibility to all of our customers who all buy all the products that we sell at different prices, believe it or not. The tool gives us and our teams and our analysts very quick access to see, are we matching the right pricing profiles with the right customers and giving them a price that's appropriate for them to buy. It's not just about raising prices per se, it's also about selling more product. That is in the early days, but we expect it to have a continued impact on our margin realization. Thank you all. Appreciate the context. If I could follow up, going to the topic of your OEM, your key OEM relationships. In the recent past, you've talked about a body of work, an ongoing body of work, to enhance those partnerships and plan more closely. What initiatives do you have in place for the next year as you look ahead to 2022? What initiatives do we have with our OEMs? Well, you got all day? Who wants to deal with that? I can give it a start. You know, we're in constant communication with our OEMs. They're vital to our success, and we're vital to their success. We have generally weekly meetings with most of our major OEMs, where we go through inventory analysis, pricing that we see in the field, opportunities that we could get in front of to do marketing programs, you know, the whole list of things that we do with our OEMs. Our relationship is very strong. Yeah, if I may, this is A.J. again. I mean, yeah, I hate to be just the technology guy, but as we speak, our senior technology folks are sitting with the senior technology folks of one of our leading OEMs and plotting how we can leverage each other's capabilities and data sets to make one plus one equal three, serve our collective customers better and help them grow their businesses. Those are opportunities that Watsco has, I think, pretty uniquely with our OEM partners because of our strength and what we do and in the technologies and platforms that we've made. Very good. Excellent. Appreciate the context, and I'll turn it back. The next question is from David Manthey with Baird. Please go ahead. Hi, David. Thank you. Hey, good morning, Al. In the press release, you said that you achieved 9% price in 2021 in residential HVAC. Last quarter, I think you told us year- to- date, you were at running plus six. Mathematically, that would put you closer to 20% in the fourth quarter if I'm doing that math right. I'm just thinking about moving into next year, and I know you're just passing through these manufacturer price increases as they come to you. But if we just think about the glide path from the price increases that have already been implemented and maybe including this one, should we assume that pricing is gonna be still double digits throughout 2022 as a year or maybe high single digits? That's even if prices don't change at all from here. Is that logic somewhat correct? I have to say, I don't understand your 20% calculation, and how you arrived at that. Probably the best resource we have to deal with that is Paul, to answer your question. As you know, we saw record price increases last year from the OEMs. As I indicated, you know, we started the year with a price increase. Do we see a second price increase? I don't know. I have no idea if the OEMs are gonna be having to put through another price increase. However, we do know that we've got a change in standards coming, which is going to result in another price increase as we implement the new products that are coming out that are gonna meet the new higher efficiency. Let's describe unit growth. He's so focused on pricing. Yeah, yeah, I was gonna fill in the blanks for you, Dave. You know, first, our math and our numbers and as you see in the press release, a 22% growth in HVAC equipment, and that excludes acquisitions. Price and mix together is somewhere in the low double digits, and the rest closer to 10% is the unit growth in the quarter. If I look at it in a context of a year, unit growth in the quarter and unit growth for the year is exactly the same at 9%. Okay. That sounds good. As you think about 2022, I know you're very decentralized as an organization, but when you roll up the business unit operating budgets, is there any reason to believe that we should expect unit growth to be abnormally high or low in the coming year? I'm just thinking about, you know, the components of growth that you expect to see. Is mid-single digit what the operating units are arriving at when you roll everything up to the corporate level? A.J.? I'm not sure. I gave you the hard one. Yeah. I'm not sure that's the information we're, you know, ready, willing, able to share. I don't think that there's any reason to expect abnormally high or low unit growth to answer your question, Dave. Paul, maybe you have a better answer than that. I guess, you know, we've all got our models, and I've read a lot about your models. You know, all models are great, you know, but they're all wrong. I guess what I'm looking at is I'm looking at, you know, what are the currents that go on in the marketplace that really drive our sales? You know, one, existing home sales are strong right now, so I feel good about that because generally people will buy or upgrade their system when they buy an existing home. We've already talked about price. We've seen a continuous trend of heat pump growth in the marketplace, and heat pumps command a higher price than a straight cool unit. The efficiency progress that we've made in the past, we expect to continue. All in all, I expect a, you know, a normal year. Regardless of what the models say, I see a normal year. If we had a model January, we'd be very excited. January is very strong. That's all great color. Thanks very much, guys. The next question is from Jeff Sprague with Vertical Research. Please go ahead. Hi, Jeff. Hey, good morning, everyone. Yeah, I get the same math. You know, you go from 6% price and, you know, through nine months to 9%, you know, for a year implies 18 or so in the quarter. I guess we'll circle back and figure this out. We're missing something on price mix there, I guess. Could you just give us a little update on inventories? You know, usually your inventories come down sequentially in Q4. Yeah. Good question. That didn't happen. I imagine there's some inflation and some other things going on there, but would just love some perspective on that. Well, our inventory king is Barry Logan. Okay. Yeah. Jeff, good morning. You're right. Sequentially, they grew, and sequentially last year, they, you know, it was in a much different position. Year-over-year, if you look at it that way, it's a peculiar comparison. Third quarter to fourth quarter, you're right, there is a measure of inflation. Put things in this context, looking at a longer time period. I'm gonna make everyone do that, look at longer time periods than just a quarter. Mm-hmm. Which is inventory today or year-end versus two years ago, and take the volatility of all the supply chain out. Let's look out over a two-year period, like, inventories are up around 12%. From 2019 to 2021, Watsco is obviously a 20% larger company, you know, over that time period. I'm adjusting for acquisitions when I do that math. I think as we said in the press release, it's kind of reestablishing inventories kind of where they should be given the outlook. The OEMs, you know, in the off-season here are having more capability of doing that. It puts our inventory more in line with where it should be given what's going on. Great. Thanks for that. Are you still of the view that there would be a, you know, relatively muted attempt at kind of pre-buying and things of that nature in front of the, you know, the SEER change here at year-end? Yes. Yeah, definitely. You know, the pre-buys in the past were predicated on, you know, an availability or a channel that was able to supply, you know, the units to the distribution, which, you know, hasn't existed here in the last, what, 18-24 months. The second reason why I don't see a real big pre-buy on anybody's part is because some of the equipment is based upon date of sale and not date of manufacturer. If it's been manufactured after a certain date or if you sell it after a certain date, you're not allowed to do that. Just speaking of higher efficiency, that 26% growth rate you cited in the press release, is that a unit number or that's a revenue number? They're both revenue numbers. Can compare 26% to the overall 17%. Right. Thank you very much, guys. Appreciate it. Sure. The next question, excuse me, the next question is from Jeff Hammond with KeyBanc Capital Markets. Please go ahead. Hi, Jeff. Hey, good morning, everyone. Maybe first, the acquisition contribution was higher than I had in my model, and I just didn't know if that's particular strength from the acquisitions or if there's any kind of nuanced differences in seasonality with respect to, you know, some of the deals coming in. Barry. Yeah. Morning, Jeff. No, the big company that was acquired in, I think March or April was TEC, and they've had a record year and it's a terrific contribution to our results this year. The smaller ones also performed well and contributed what they contributed. Nothing other than great performance on their part as being their first year as part of Watsco. Another way to say it is our entire network is growing at a very rapid rate throughout the system to 673 locations. Okay, great. Just back on price. You know, I think the 9% you gave was for equipment. Just, you know, ballpark, is the non-equipment kind of a comparable number for the year? Then just back on the. You know, if you just take all the OEM and pricing that you've gotten plus the carryover, like, you know, is it just kind of a mid-single digit starting point for, you know, pricing in the 2022 year, you know, kind of the right way to look at it? Hmm. I'm not sure I even understand. Yeah. Paul, if you got it. Yeah. You know, I don't know if the mid-single digit or the single digit is the starting point or not. You know, the non-equipment that you asked about, yes, that varies by product type. Some products obviously like steel products, steel duct board, flat steel, that type of thing, have been going up at a higher rate than that. Whereas things like motors and thermostats have been going up at a more planned rate. You know, it's pretty much across the board, equipment and non-equipment have seen price increases. Okay. Thanks, guys. The next question is from Stephen Volkmann with Jefferies. Please go ahead. Morning, Steve. Hi. Good morning, guys. Maybe just a quick follow-up, if I could, on the gross margin. Barry, it sounded like from your commentary earlier that there's no real reason that this should revert back at all, and that maybe this 27% run rate is kinda sustainable. But I don't wanna put words in your mouth. Would you agree with that, or is there a little something that could cause it to pull back a little bit? Well, again. If he can answer that, he's a better man than me. Go ahead, Barry. Well, kind of as Paul said, you know, all the variables we believe wholly always will have some variability going forward. You know, that's just the reality of business and again, being a merchant and managing all the variables as they play out and not having necessarily, you know, live and die by the metrics. You know, probably the thing that is realistic in the answer is that any kind of inflation that we pass through to our customers that we absorb and move through, you know, benefits gross margin. There's a benefit to the inventory that we own at a certain cost as our prices increase and our. It passes through the system, so to speak. There's a benefit to that, a margin benefit to that. Every distributor of every kind that is public that you can invest in will have that same capability of yielding slightly higher margins as things pass through. I would say there is a benefit there that is reliant on continued growth in price, as Paul suggested. I think we're comfortable with seeing a higher price environment this year. We have new products on the horizon next year that relate to, you know, the higher SEER units that will pass through. Then we're talking about different refrigerant products a couple years out. I think the industry as a whole has, you know, this inflationary feel to it. The manufacturers are having to invest a bunch of their R&D in these new products, so they're under pressure to sustain pricing, I believe. I think we're in a good place in terms of that inflationary feeling that is helpful. Well, there's also the climate change that we see is a growing part of our demand, because it's becoming more and more in the minds of homeowners and business owners, and we started to discuss that in the press release, or we're adding more to it, I should say, than we started. I see that as a constant increasing demand for these higher efficiency products. I see it as a positive in the short term and the long term, and it does a lot of good by removing CO2 emissions every time we sell one of these install one of these things. These units require less power, and less power means less CO2 emissions by the power companies. That's a not a short-term issue. It's gonna go on for quite a while. It's just beginning, actually. We, as the largest player in the industry, I think can make the most significant impact. I agree with Al. I mean, it's even without inflation, we're still gonna have to trend towards more heat pumps. We're still gonna have to trend to higher efficiency. That is going to be not just a trend, but a regulation from the federal government. As Barry indicated, we go through a second phase of this on a longer term basis as we change refrigerants and move away from the R-410A that we've used for the last 15 years and move into new, lower CO2 emitting refrigerants. I mean, this country and the rest of the world, most of the rest of the world, they want less CO2 emission, and they're gonna regulate to get it. Our industry is no exception. That's what the regulations are to mandate higher efficiency rates and also to mandate a change of the refrigerant, so it reduces the harm to the climate. Those are big factors that will drive our performance. Just one last thought that we really haven't covered, and we kind of covered it, but I want to cover it more specifically, is we are the largest customer of most of our manufacturers. I say that with no bravado or ego. It's an opportunity. If our OEMs want to grow share and grow the market and grow their business and grow their profitability, we collaborate together and do it. The equation that we obviously work on together is the profitability when we sell their products and how much we can invest in the markets to help grow the mutual share of our OEMs. That's an equation that is obviously always being worked on and always being examined to not just be more profitable, but to grow the business. Super. All right. Thanks for the color. I appreciate it. Maybe just a quick follow-up, A.J., since you're the tech guy today, maybe- Well, he's more than that. Yeah. He started in tech, for sure, and led it, and he put together an extraordinary team. Nothing like it anywhere that I'm aware of in the industry. Ask him anything. It doesn't have to be technology involved. Great. Well, I meant that as a compliment, to be clear. I'm curious just how you're feeling about the various kind of adoption rates on the things that you guys are pursuing on the tech front. I was sort of struck by the 11% growth in Contractor Assist. I know it's not apples and oranges. It seems a little slower than the growth of the overall business. Maybe we're just early in the S-curve, but you know, either that or any of the others in terms of adoption, just any of your comments would be great. Yeah. Well, for starters, we're never satisfied. I mean, we sell product to 100,000 contractors. In my opinion, all of them should be using all of our technologies all the time. I mean, that's the end goal. I'd say that there's some encouraging data and there's some opportunities to do better. You heard us say that e-commerce, for example, which is a good barometer for most of it, is about a third of our sales. Well, we have some regions, major regions of our business, $400 million-$500 million regions that are over 60% of our sales goes through e-commerce. You know it's possible. When that happens, it's good for everybody. It's good for our customers because they have a more efficient means to find the products they need, get them ordered, and increase their efficiency. It's good for our business because it reduces our cost to serve. It frees up the time of our sales force to go be consultative instead of taking orders. Those customers, as we always mention, that are buying online, they're way stickier. Their attrition rates are way about a third of the rate of non-users, and they grow faster with us. It's just good all the way around. We are, I would say, relentless in our pursuit of driving adoption and you know, maybe not a great answer, but I think in some areas we've seen great adoption. In others, there's still a lot of room for improvement, but it's a major focus of ours and will be for the long term. I still think that we're in the early days in this whole changing the industry, but I also still think we're at the forefront of it. I'll pass it on. Thank you, guys. The next question is from Steve Tusa with JP Morgan. Please go ahead. Hello, Steve. Hey, good morning. Congrats to you guys and you know and A.J. on a great year on all this technology advances. It really is impressive. Thank you. Thank you. What's the, when you look at your HVAC equipment, could you just, you know, 68% of sales or whatever it is, how much of that now is resi? Barry? Yeah, Steve, let me look at it here. Yeah. Paul with you now. Go ahead. Yeah. The number I have right now is that it's for the quarter. I'm just doing quick math here. Boom. It's around 15%-20%. Excuse me, it's reverse of that, 80%-85%. Oh, yeah. Yeah. Mr. Brown. I was doing the reverse. I was re-doing the reverse math, Steve. Yeah, that seems a little bit low. Carrier said something about, you know, mid-single-digit movement in the quarter on units. Obviously, you guys are, you know, a big percentage of their movement. Yeah, can you help reconcile that number? Is that roughly about kind of the unit movement you guys saw for the quarter? I won't speak to Carrier, Steve. We said earlier that overall unit growth was 9% in the quarter. Yeah. For resi or for every, like, the whole equipment business? That would be primarily resi, yes. Okay. Got it. I mean, if I kind of look at your... Is the profitability of your resi equipment business... I kinda lost track over the years because I know the parts and pieces were, you know, were pretty strong margin for you guys. Is resi equipment kind of about average when it comes to your gross margin? I would assume, given it's such a big piece of the pie. Yeah. I would not get too specific about that. What I'll say is this, which is kind of an inverted way of saying, of answering your question, 'cause I don't wanna speak to residential margins versus the overall. The growth rate in the quarter for equipment was 22%. The growth rate for commercial versus residential in the quarter was within a fraction of that percent, 22%. The residential versus commercial in the quarter or in the year for that matter would not have influenced gross margin percent very much. Okay. Growth rate is almost identical. Yeah. Got it. I guess I'm just thinking, like, just on an annual basis. I just wanted to make sure that I mean, resi is such a big piece. I would assume it's around the average of your gross margin for the year. No comment. Okay. Just one last one. Are there certain OEMs that are growing kind of faster than others within your mix? Is there anything else you want us to tell you? We love all our OEMs, and they're all doing the best they can with us to stay up with our demands. Okay. Gotcha. Just one last one for you. I don't know if this was asked before, but what's your kind of assumption on price capture into 2022? Are you just assuming kind of a wraparound from what you've gotten and what you put through on January 1, or is there, you know, are you assuming you're gonna get more as kind of the year progresses? I think we touched on that with the introduction of the whole new lineup of products to meet the regulatory demands. Paul, you can answer that if you want to. Yeah. We really don't have a crystal ball. The OEMs do not consult with us on their price increases. We do not know if they have another one planned or if they're gonna have to have another one planned. You know, what we do know is that there's going to be product introduced that meets the new energy requirements, and hopefully we start introducing that in the third or fourth quarter, and that will have a higher price than what we currently sell. You kind of wait for an email from Carrier that's going to everybody else as far as price increases are concerned? That's right. You guys don't discuss that? We do not. Okay. One- Although we always ask for lower prices no matter what. One last one, because it's only 10:30 A.M., so I feel like we have a little bit of time. Sure, take all you got. Out of that 9%, you know, benefit for the year, how much of that for on price and resi products, how much of that was from mix? How much was that for, from just, you know, pure price? 'Cause you said ASP, so I would assume that there's some mix impact in there as well. Yeah, more from price than mix, Steve. Yeah. Like 1% or 2% from mix? It's more from price than mix, Steve. Okay. Got it. Just to, you know, just an interesting, you know, kind of asterisk to put on that number is, you know, part of the, we talked about this last quarter, part of the supply chain shortage in the most fractured part of the supply chain was ultra-high efficiency equipment. You know, that's almost missing from the equation this year as OEMs ramp up production of 20 SEER and above, for example, assuming that they get the chips and the technology in place, is actually a mixed opportunity that didn't play out in 2021. You know what, you guys? I got one more that just popped into my mind from that conversation. We're hearing a lot of distributors are kind of ordering out, you know, almost for the entire season, orders not necessarily taking inventory obviously, but ordering. Which is kind of unusual, I think, relative to history. Are you guys, you know, did you guys kind of approach things that way with your orders? I know they're kind of non-binding, and you don't really even have to put down a deposit, but like, have you guys changed your patterns when it comes to ordering here? No. That requires a more complete question that's specific how we deal with inventory. A.J., you wanna talk about what we use to determine inventory needs? Yeah. I would say that our demand planning, demand forecasting, inventory optimization efforts are maturing and we're much more sophisticated than we ever have been. That includes in helping us in our ability to collaborate with our OEM partners and help them with their supply chain challenges as well. We're, you know, without answering your question directly, we're trying to be helpful to our OEM partners. If they want orders ahead of time so they can help with their planning, we're happy to help with that. If they want us to adjust, we're happy to help with that. It's very much a collaborative effort. It's no longer a one-way street where we just place an order and wait. It's a lot of conversation, a lot of data driving around it, and with that collaboration comes a lot of flexibility, and we feel like we're in a very good position. Great. All right. Thanks for all the color, guys. I appreciate it. You bet. The next question is from Ryan Merkel with William Blair. Please go ahead. Hi. Hey, good morning, everyone. Nice quarter. Let's start off on SG&A. SG&A outgrows sales in the quarter and for the year. I think we know why. My question is, how do we think about 2022? Does some of that start to normalize as supply chain fixes itself? Do you think you can leverage SG&A in 2022? Well, I sure hope so. That's the plan anyway. Well, if we continue to do what we did in January, I doubt it, 'cause it's just too powerful. The growth is too high. Barry, you got a better answer or Paul or A.J? Yeah. I mean, there is a first in the performance-based compensation, Ryan. I'd say, you know, if we grow EBIT 57% again in 2022, we're gonna pay, you know, we're gonna reward our entire team for it. So to the extent, you know, growth rates like that moderate, then there, you know, then those variable costs will m oderate in the same way too. In that respect, you know, freight and some of the variable costs that were typically very predictable became more unpredictable to get products to customers and to compete in the market. You know, I would, you know, just it's an abstract answer, I realize, but I would expect our variable costs to adjust to whatever the typical business model is. Some of the incremental spending on the fire drills that had to go on this year to serve customers, I would expect to moderate some. As Al said, it's not visibility that we can point to yet because the business is still very strong. Got it. Okay. No, fair answer. I wanted to follow up on. It's a good problem to have. Well, it is. I hope to grow EBIT 50% again, for the record. That would be amazing. We'll try for you. Yeah, us too. I wanted to follow up on mix. I had that question ready. I guess two parts to the question. What was the mix of equipment for high efficiency versus sort of base units? It seems to me that there's a few tailwinds, right? You got the SEER change, the OEMs couldn't produce the high stuff, right? That should probably improve a little bit this year at least. You mentioned OnCall Air, I think, is helping you sell or the contractor sell more high efficiency units. What does that look like over the next couple of years? It feels like it could be a real tailwind. A.J? I think you're right. I mean, specific to OnCall, first of all, it's a focus of ours, more so than it ever has been, and we're increasing our focus in a time that's challenging, like you said. Yeah, the high efficiency systems, especially on the high end of the high efficiency systems, are largely not available because of supply chain issues, specifically around the shortage of chips that we all read about that go on our cell phones and everything else. They also go on the high efficiency HVAC systems. But we are increasing our focus on it as a means to help to do our part and help reduce the climate change dynamic. You know, every time we sell high efficiency systems, it leads to fewer CO2e reduction or emissions, and we feel like we should do our part to help drive that. OnCall Air, as you mentioned, is a phenomenal tool in that mission. I think roughly the math is that about a third of our sales in total are high efficiency systems. OnCall Air is roughly two-thirds of the sales. Last year we did almost $650 million of gross merchandise volume through that tool, meaning our customer sales to their customers were almost $700 million. We expect that number to hopefully double this year. Going back to a question we got earlier about adoption, you know, if and when we drive the adoption of that tool for another 1,000, 2,000, 3,000 customers and they're using that tool at scale, it's a good thing. It's a good thing for those businesses that will be driving more sales. It's a good thing for our business, driving more sales. It's a good thing for the mix of hopefully high efficiency systems will continue to increase as a part of our sales. Got it. All right. Thanks a lot. Again, if you have a question, please press star then one. The next question is from Josh Pokrzywinski with Morgan Stanley. Please go ahead. Hi, Josh. Hi, good morning, guys. How is it- Barry, you've sort of referenced it, you know, a few times here, and I think, you know, maybe directly in a question to Stephen Volkmann on, you know, this whole kind of merchant, you know, distributor behavior of kind of passing along price increases, you know, pretty orderly or maybe relative to what your inventory carrying costs are. Any way to sort of separate, you know, how much of that has really been a function of inventory inflation, maybe on the equipment side versus something more commoditized? I mean, I think we can all sort of conceptualize that, like, equipment prices don't really go backwards, but, you know, maybe some of the inventory related stuff could be a bit more volatile, you know, over the next 12 months. Yeah. Again, it's hard to put numbers around all the different product lines, 'cause you're right. If it's duct tape, there may have been a you know, increase in pricing and inflation related to duct tape. Paul, maybe you cover the waterfront on not just equipment, but all the non-equipment stuff as well. What's your read? Yeah. On the non-equipment things, you know, it's, you know, nobody focuses, you know, that much on it. They're always focused on the OEMs. I mean, most everything that we've seen on the non-commodity side, on the non-equipment, has been increasing at a pretty steady rate, more comparable to that of what the OEMs are seeing on the equipment side. You know, a lot of petroleum-based, a lot of freight costs going up for those vendors and a lot of disruption in their supply chain. On the commodity side, you know, there's, you know, steel and copper. I never try to predict and we don't hedge and we don't buy forward, you know, based on any sort of mystical knowledge that we have on where those products are going. On some of the other commodities, you know, there's a regulation out, you know, like on refrigerant, where this year the industry has to cut back at least 10% of their carbon emissions that they have on refrigerant. So definitely seeing a supply that's been planned by the government that's gonna reduce it. We see another step coming in 2024, where they cut back another 30% on the amount of carbon dioxide emissions that you can have with the refrigerant. That one, at least I can say, I think that's gonna continue to go up as the supply becomes more limited. Josh, to put it in perspective. Got it. The word commodity is kind of a big word. You know, what we look at commodities in our business is roughly 6% of what we do. Just to put some, again, a number on it, where you know, it's kind of this yo-yo that can play out. A big chunk of that is refrigerant. As Paul said, there's more than just commodity activities going on with the refrigerant, for example. Got it. You know, you mentioned high efficiency a couple times here, and maybe some of the bottlenecks that are more focused on that given, you know, electronics stuff and stuff like that. Just given the level of inflation, has the payback for a customer actually increased, like, pretty substantially over the past two years? I gotta imagine if, you know, the price point is 15% or 20% higher, whatever the number is, like it'll take it several extra years to kinda claw back, you know, whatever the annual savings are to be in the black there. Like, is that something that, you know, kinda comes forward at the kitchen table when the contractor's talking about that? I think there's more to it, Josh, than just the payback. You know, I think the payback has been a difficult nut for several years for high efficiency. I think there's a number of consumers that are buying the units for more than just the efficiency. They're also buying it for the increased comfort because it has variable speed motors in it. It's quieter running. It has less temperature change up and down as the unit comes on and goes off or stays on at a lower speed. There's other reasons why people buy high-efficiency equipment besides the economic payback. Got it. Then just in terms of the volume growth in the quarter, you know, obviously more of the shoulder season right now. You know, I get that, you know, maybe where some of you guys are, you know, where some of the locations are regionally, you know, could still be some cooling weather earlier in the fourth quarter. How much would you say is just sort of catch up from stuff that didn't get done, you know, maybe in 2Q or 3Q versus kinda, you know, new breakage? I know, you know, that's probably more anecdotal in terms of what you guys would have access to, but, like, is this really kinda new demand that sprung up or more, you know, some industry backlog from, you know, farther down the chain that, you know, just needed to get made up over on a later date? I think that would really be anecdotal. Yeah. I don't have a good answer for that. F or us to be able to say that. I, you know, let's not forget, you know, air conditioning means heating and cooling. As it gets cold in the north, Watsco now has a great presence in the northern climates all through the northeast and now in the Midwest. As that happens, we get more into the heating season. It's still not as large to us as the cooling season, but it's getting larger. Secondly, as I've said three times about heat pumps, heat pumps are becoming more and more important and a bigger percent of sales, and heat pumps are all about heating indoor air. Okay. I'll leave it there. This concludes our question and answer session. I would like to turn the conference back over to Al Nahmad for any closing remarks. Well, thanks for listening and thanks for your interest in our company. Once again, I hope that all of you stay safe and healthy during this pandemic. Appreciate the interest, and don't hesitate to contact us if you need more answers to questions. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.