Q4 2021 Watsco Inc Earnings Call

Speaker 1: you

Speaker 2: Good morning and welcome to the WOSCO 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.

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.

Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is not a

After today's presentation there'll 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.

Speaker 2: I would now like to turn the conference over to Albert Namud, Chief Executive Officer. Please go ahead.

I would now like to turn the conference open Albert Nomad Chief Executive Officer. Please go ahead.

Good morning, everyone.

Speaker 3: Hope you're safe and healthy wherever you are.

Hello Pierre.

Safe and healthy wherever you are.

I want to welcome you to our fourth quarter earnings call.

And this is al <unk>, chairman and CEO .

Speaker 3: And this is Al Nomet, Chairman and CEO . With me is Ajay Nomet.

With me is a J Ahmed.

Speaker 3: President of Watsco and Paul Johnson, Barry Logan and Rick Gomez.

The Watsco and Paul Johnson, Barry Logan and Rick Gomez.

Before we start our <unk>.

Speaker 3: report here's a cautionary statement this conference call was as forward-looking statement

Our report here's our cautionary statement. This conference call is as forward looking statements.

Speaker 3: as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws.

As defined by SEC laws and regulations that are made pursuant to the safe Harbor provisions of these various laws.

Speaker 3: and ultimate results may differ materially from the forward-looking statements.

And ultimate results may differ materially from the forward looking statements.

Onto our report.

Watsco delivered an exceptional quarter to close all of that fantastic year.

Speaker 3: Well, to deliver an exceptional quarter to close out a fantastic year.

Speaker 3: New records were set for virtually every measure of performance.

New records were set for virtually every measure of performance.

Speaker 3: During the quarter, earnings per share jumped 77% to a record $2.02 per share.

During the quarter earnings per share jumped 77%.

To a record $2 <unk> per share.

Sales grew 31% to a record $1.5 billion and operating income increased 76% to a record $123 million.

Speaker 3: Sales grew 31% to a record $1.5 billion. And operating income increased 76% to a record $123 million.

And.

Operating margins expanded 210 basis points to a record eight 1%.

Speaker 3: Operating margins expanded 210 basis points to a record 8.1 percent in the fourth quarter. Ending of circuit of Before schedule

In the fourth quarter now.

Now.

Speaker 3: per result for the year. Earnings per share increased 54% to a record $10.78 per share. A sales group 24% to a record $6.3 billion.

Our 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.

Speaker 3: During the year, operating income increased $227 million, or 57%, to a record $629 million. And operating margins reached 10%.

During the year operating income increased $227 million.

Or 57% to record $629 million.

And operating margins reached 10%.

A 210 basis points increase.

From last year.

Speaker 3: And very important, I always like to emphasize this because this is our culture.

And 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.

Speaker 3: We ended the year with a strong balance sheet with very little debt.

In fact, our performance gives us confidence to share once again.

Speaker 3: In fact, our performance gives us confidence to share once again.

Speaker 3: with our shareholders by boosting our dividend 13% to a non-yar rate of $8.80 per share.

With our shareholders by boosting our dividend, 13% to and now Youre right at $8 80 per share.

Our strong balance sheet also gives us the ability to invest in most any size opportunity.

Speaker 3: Our strong balance sheet also gives us the ability to invest in most any size opportunity.

Speaker 3: as we continue to build scale in a very fragmented $50 billion North American market.

As we continue to build scale in a very fragmented $50 billion North American market.

Speaker 3: Continue to look for acquisitions as Wattsville is a great home for family business.

We continue to look for acquisitions as Watsco is a great home for family businesses, given that we sustained their cultures and invest in people and provide technology to secure and build under great legacy.

Speaker 3: given that we sustain their cultures, invest in people, and provide technology to secure and build under great legacy.

Beyond sales and profits. It is important to understand watsco is immense potential to impact climate change.

Speaker 3: Beyond sales and profits, it is important to understand Watskow's immense potential to impact climate change.

Speaker 3: let me explain that heating and air conditioning systems account for roughly half of the u.s. household energy control

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 higher efficiency replacement systems is one of the most meaningful steps a homeowner can take to Lora is energy costs and reduce cotwo emissions.

Speaker 3: Therefore, the purchase and installation of a higher efficiency replacement system is one of the most meaningful steps a homeowner can take to lower his energy costs and reduce CO2 emissions.

Speaker 3: given our scale, our access to capital.

Given our scale.

Our access to capital.

Speaker 3: our entrepreneurial spirit and technology. We believe we are well positioned to help the greatest number of contracts.

Our entrepreneurial spirit and technology, we believe we are well positioned to help the greatest number of contractors, who in turn can help more homeowners and businesses to reduce cotwo emissions.

Speaker 3: who in turn can help more homeowners and businesses to reduce CO2 emissions.

In terms of impact.

Speaker 3: on CO2. Over the last two years, we estimated watchful sales of more efficient systems help avoid 10.1 million metric tons of CO2 emissions.

On C O two over the last two years, we estimate at watsco sales a more efficient system to help avoid 10.1 million metric tons of Cotwo emissions.

Speaker 3: which is equivalent to taking 2.2 million cars off the roads. This is over a two year period.

Is equivalent to taking 2.2 million cars off the road.

Over a two year period.

We note that the regulatory changes.

Speaker 3: I'm moving on to a different subject. The government has now moved to make changes that will take effect the beginning of next year. These changes mandate an increase in the minimum efficiency for our HVAC equipment.

I'm moving on to a different subject.

The government has not moved to change.

Make changes.

It will take effect at the beginning of next year. These shakes his mandate and increase in the minimum efficient minimum efficiency.

For our HVAC equipment.

We note.

Excuse me I've got a cold.

Speaker 3: Regulatory changes are also on the horizon related to refrigerants to also aid with climate change. That's also a very big move.

Regulatory changes are also on the horizon related to refrigerants due also aid with climate change. That's also a very big move.

On the emphasis on climate change.

Speaker 3: OEMs are actively engineering new products to meet the new requirements, all of which should take shape over the next couple of years.

Oh, yes are actively engineering new products to meet the new requirements all of which had take shape over the next couple of years.

Speaker 3: Moving on to technology, we continue to invest in technologies to transform our contractor customer experience.

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.

Speaker 3: Greater adoption and use of our technologies was achieved during 2021. An example is e-commerce sales, which now approach $2 billion a year.

Which now approached $2 billion, a year and we can see that our active users continue to grow at faster rates than others.

Speaker 3: And we can see that our active users continue to grow at faster rates than others.

If you have an interest.

Speaker 3: In learning more about Watsco technology, please let us know. We will schedule some time with AJ and his team. We enjoy sharing our passion and the long-term view that is transforming our business.

And learning more about Watsco technology. Please let us know we will schedule some time with a Jay and his team.

We enjoy sharing a passion and a long term view that is transforming our business.

Speaker 3: 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.

My final thought before we answer your 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 onto Q&A.

We will now begin the question and answer session.

Speaker 2: To ask a question, you may press star then 1 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 2. At this time, we will pause momentarily to assemble our roster.

To ask a question you May press Star then one on your telephone keypad.

If you were 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.

Speaker 2: Right now, it looks like we have a queue of about eight participants, and the first question is from Tommy Maul with Stevens. Please go ahead. Good morning, Tommy. Good morning, and thanks for taking my call.

Good morning, and thanks for taking my questions sure.

So another record quarter for gross margin, which I hope, we can unpack a bit here.

Speaker 3: unpack a bit here. Never heard that question put that way, I'm not that good. Anything, anything you could share on mix?

[laughter] never heard that question put it that way.

[laughter] anything anything you could share on mix.

Speaker 4: 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?

Thing on accounting, we should be aware of I don't know if your FIFO LIFO and maybe a more interesting component there.

What what could you share about any any of the latest on pricing strategy and realization.

Well I'm going to call on two of the resources on the phone starting with Barry and then followed by Paul.

Speaker 3: Well, I'm going to call on two of the resources on the phone, starting with Barry and then followed by Paul.

Speaker 5: Good morning, Tommy. I appreciate that. Well, again, I think there are several things to layer to the discussion, and one of which is not accounting. You know, we use weighted average cost on a FIFO basis, and as we buy products and sell them and mark them up, it's a pretty clean mechanism to get to gross margin. There's nothing...

Good morning, Toni I appreciate that.

Well again I think there are several things to two layers to the discussion and one of which is not accounting.

We use a weighted average cost on a FIFO basis, and as we byproducts and sell them in market and the markets are pretty clean.

Mechanism to get the gross margin there's nothing.

Speaker 5: that's interesting or that's not ordinary in terms of that simple equation.

That's interesting or.

The ordinary in terms of that that simple equation.

Speaker 5: 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.

In terms of the layers again youre right. Our sales mix does drive higher margin, we do see higher margins as we sell a richer mix of efficiency.

It gives some influence in that in our <unk>.

Press release in terms of growth rate of high efficiency versus.

Speaker 5: the base efficiency or the overall, I should say the overall growth rate.

The basic efficiency or the overall I should say the overall growth rates.

Speaker 5: Also, inflation, as we pass through inflation, as we receive higher costs from OEMs.

Also you know inflation as we pass through inflation as we received higher costs from Oems and we we move that product through to our customers.

Speaker 5: We move that product through to our customers. It is an opportunity for us to be a good merchant.

It is an opportunity for us to be a good merchant.

Speaker 5: and realize some margin dollars as we pass that through.

And and realize some margin dollars as we pass that through.

You can also see that the non equipment business has had a terrific year.

Speaker 5: You can also see that the non-equipment business has had a terrific year.

Speaker 5: Uh, gross margin rates and our non-equipment business, uh, have done very well and again yields, uh, an overall improvement in margin.

Gross margin rates in our non equipment business I have done very well.

And again yields and overall improvement in margin.

Speaker 5: So probably a few more layers maybe Paul can cover, but if you listen to my words carefully, this is about buying products, passing them through a value chain to our customer and yielding a terrific result. There's really not much more to it than that.

There's probably 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 and yielding a terrific result, there's really not much more to it than that.

Speaker 5: Paul? Yeah, and part of that, you know, we made a, part of our technology investment, we made a strong investment in the latest technology for pricing systems. So we have a better

Paul.

And part of that.

We made a part of our technology investment we made a strong investment in the latest technologies 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.

Speaker 6: 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.

Getting the yield from the price increase that we expect.

Speaker 6: Are we continuing to see price increases? Yes, there were price increases from most OEMs on the equipment side that were passed through.

Are we continuing to see price increases, yes, there were price increases for most of the Oems on the equipment side with pass through.

Speaker 6: January 1, and we've implemented those.

January one.

And we've implemented those.

Speaker 6: 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...

Secondly, we're seeing.

This 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 so it's.

I don't see any let down in.

Speaker 6: in prices or a reduction in prices, it's pretty much been full steam ahead.

In prices or a reduction in prices, it's pretty much been full steam ahead.

Hey, Jay perhaps you could add something regarding.

Speaker 3: AJ, perhaps you could add something regarding our capability now to see what's going out with competitors and how we react to them.

<unk> capability now to see what's going on with competitors and how we react to that.

Speaker 7: 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. So the tool gives us, in our teams, and our analysts, very quick access to see

Yes, Paul mentioned, we've made a major investment in tech and technology regarding pricing and pricing optimization and that does give us visibility to all of our customers who all by all the products that we sell at different prices believe it or not so.

It gives us and our teams and our analysts very quick access to see.

Speaker 7: are we matching the right pricing profiles with the right customers and giving them a price that's appropriate for them to buy? So it's not just about raising prices per se, it's also about selling more products.

Are the right Uh huh.

Are we matching the right pricing profiles with the right customers and giving them.

Price, it's appropriate for them to buy so it's not just about raising prices per se. It's also about selling more product.

Speaker 7: And 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.

And that is.

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.

Boeing are going to the topic of your OEM key OEM relationships in recent in the recent past you've talked about a body of work and ongoing body of work.

Speaker 4: OEM, your key OEM relationships, and 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.

To enhance those partnerships.

Plan.

More closely.

What initiatives do you have.

<unk> for the next year as you look ahead to 'twenty 2022.

What initiatives that we have with our Oems.

Speaker 5: Well, you got all day. Who wants to deal with that?

Well you got all day.

[laughter], who wants to deal with it.

Speaker 6: I can give it a start. We're in constant communication with our OEMs. They're vital to our success and we're vital to their success.

I can I can give it a start you know we were in constant communication with our Oems there. They are vital to our success and more vital to their success and so we have generally a weekly meetings with most of our major Oems, where we go to inventory analysis pricing that we see in the fee.

Speaker 6: And so 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, the whole list of things that we do with our OEMs.

L.

Opportunities that are 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.

Speaker 7: If I may, this is AJ again. I mean, I hate to be just a 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 1 plus 1 equals 3, serve our collective customers better, and help them grow their businesses.

Yes, if I may some day, Jay again, I hate to be just the technology, but as we speak our senior technology folks are sitting with a senior technology folks at 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.

Our collective customers better and help them grow their businesses.

None of those are opportunities that watsco has I think pretty uniquely with our OEM partners because of our strength in.

Speaker 7: Those are opportunities that Wasco has, I think, pretty uniquely with our OAM partners because of our strength and what we do and in the technologies and platforms that we've made. Very good.

And what we do and in the technologies and platforms that we've made.

Very good.

Good.

I appreciate the context and I'll turn it back.

Speaker 2: The next question is from David Manthe with Baird. Please go ahead. Hi, David.

The next question is from David Manthey with Baird. Please go ahead.

David.

Thank you Hey, good morning al.

Speaker 6: In the press release, you said that you achieved 9% price in 2021 in residential HVAC and last quarter, I think you told us year-to-date, you were at running plus six.

In the press release, you said that you achieved 9% price in 2021 in residential HVAC and <unk>.

Last quarter, I think you told us year to date, you're running plus six.

Speaker 5: Mathematically, that would put you closer to 20% in the fourth quarter if I'm doing that math right. So, 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 Chan 1,

Medically that would put you closer to 20% in the fourth quarter, if I'm doing that math right.

So 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 made including this Chad one.

Should we assume that pricing is going to be still double digits throughout 2022 as.

Speaker 5: Should we assume that pricing is going to be still double digits throughout 2022 as a year and or maybe high single digits and 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 derive that depth, but probably the best resource we have to deal with that is Paul.

As of year end.

Maybe high single digits, and that's even if prices don't change at all from here is that logic.

Somehow correct I have to say I don't understand your 20% calculation.

So and how you derived that but probably the best resources, we have to deal with that as Paul.

Speaker 6: to answer your question. As you know, we saw record price increases last year from the OEMs. And as I indicated, we started the year with a price increase.

To answer your question.

As you know we saw record price increases last year from the Oems and as I indicated when we started the year with the price increase.

Speaker 6: 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.

Do we see a second price increase I don't know.

No idea if the Oems are going to be having to put through another price increase. However, we do know that we've got a change in standards come in which is going to result in another price increase as we implement the.

Speaker 6: as we implement the new products that are coming out that are going to meet the new higher efficiency.

The new products, the new products that are coming out they're going to meet the new higher efficiency.

But let's describe unit growth.

Speaker 5: Let's describe unit growth, he's kind of focused on prices. Yeah, I was going to fill in the blanks for you, Dave. First, our math and our numbers, and as you see in the press release, it's a 22% growth in HVAC equipment, and that excludes...

Focused on price yes.

Yeah, I was going to I was going to fill that go in the blanks for you today first our map.

Our numbers and as you see in the press release, it was 22% growth in HVAC equipment.

And that excludes acquisitions.

Speaker 5: Price and mix together is somewhere in the in the low double digits and the rest Closer to 10% is because the unit growth in the quarter

Price and mix together is somewhere in the low double digits and the rest are closer to 10% as the unit growth in the quarter.

Speaker 3: So 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%.

So if I 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.

Okay that sounds good.

Speaker 5: Okay, that sounds good. As you think about 2022, and I know you're very decentralized as an organization, but when you roll up the business unit operating budget,

As you think about.

2022, and I know youre very decentralized as an organization, but when you roll up the business unit operating budgets.

Speaker 5: Is there any reason to believe that we should expect unit growth to be abnormally high or low in the coming year? And 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?

Is there any reason to believe that.

We should expect unit growth to be abnormally higher LOE in the coming year and I'm just thinking about the components of growth that you expect to see.

Mid single digit what the what the operating units are arriving at when you roll everything up to the corporate level.

Jay.

Speaker 7: I'm not sure that's the information we're ready, willing, able to share, but 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'm not sure I gave you the hard way.

Yeah.

I'm not sure that the information wherever you.

Ready willing and able to share, but I don't think that there is any reason to expect abnormally high or low unit growth to answer your question, Dave Paul maybe you have a better answer than that.

Speaker 6: I guess, you know, we've all got our models and I've read a lot about your models.

I guess.

<unk> got our models and I've read a lot about your models.

Speaker 6: But, you know, all models are great, you know, but they're all wrong. But, you know, what I guess what I'm looking at is is I'm looking at, you know, what are the what are the currents that go on in the marketplace that really drive our sales? And, 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.

All models are great, but they are all wrong.

And what I guess, what I'm looking at is I'm looking at you know what what are the what are the currency going on in the marketplace that really drive our sales.

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.

Speaker 6: 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.

We've already talked about price we'd.

We've seen a continuous trend of heat pump growth in the marketplace and heat pumps command, a higher higher priced than a straight cool unit.

Speaker 6: The efficiency progress that we've made in the past, we expect to continue. So, all in all, I expect a normal year, regardless of what the models say.

The efficiency.

The progress that we've made in the past we expect to continue so.

All in all I expect a.

A normal year.

Regardless of what the model say I see a normal year.

Speaker 3: Or if we had a model January , we'd be very excited. January is very strong.

Or if we buy a marble January we'd be very excited January is very strong.

That's all great color, thanks, very much guys.

Speaker 2: The next question is from Jeff Sprague with Vertical Research. Please go ahead. Hi, Jeff.

The next question is from Jeff Sprague with vertical research. Please go ahead.

Hi, Jeff.

Hey, good morning, everyone.

Yeah I did the same math you go from 6% price and three.

Speaker 6: 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, it implies 18 or so in the quarter. But I guess we'll circle back and figure out this. We're missing something on price mix there, I guess, but.

Through nine months to 9%.

Full year, it implies 18 or sell in the quarter, but yes, we will circle back and figure out what I'm missing something on price mix, there I guess, but.

<unk>.

Speaker 5: Could you just give us a little update on inventories? You know, usually your inventories come down sequentially in Q4, right? That didn't happen. I imagine there's some inflation and some other things going on there, but we'd just love some perspective on that. Well, our inventory king is Barry Logan.

Could.

Could you just give us a little update on inventories usually your inventories come down sequentially.

Alright.

That didn't happen.

I imagine there is some inflation and some other things going on there, but would just love some perspective on that well our inventory King as Barry Logan.

Yeah, Jeff good morning.

Speaker 5: Yeah, good morning. You're right. You're right. Sequentially, they grew and sequentially last year, they, you know, it was in a much different position. So year over year, if you look at it that way, it's a peculiar comparison.

Right, you're right sequentially they grew in.

Sequentially last year.

It was in a much different position so year over year. If you look at it that way, it's a peculiar comparison.

Speaker 8: Third quarter to fourth quarter, you're right, there is a measure of inflation, but

Third quarter to fourth quarter, you are right there is a measure of inflation, but.

Speaker 8: Put things in this context, looking at a longer time period. I'm going to make everyone do that, look at longer time periods than just a quarter, 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. I think inventories are up around 12 percent, around 19 to 21.

But to put things in this context looking at a longer time period, and I'm going to make everyone do that look at longer time periods, and then just a quarter.

Which is inventory today or at year end.

Versus two years ago and pick the volatility of all the supply chain out, let's look out over a two year period, I think inventories are up around 12%.

19% to 21.

And what's because obviously at 20% larger company.

Speaker 8: uh you know over that time period and i'm adjusting for acquisitions when i make that do that math so

Over that time period, and I'm adjusting for acquisitions, when I make that do that math so.

Speaker 8: I think as we said in the press release, it's kind of re-establishing inventories, kind of where they should be given the outlook.

I think as we said in the press release, it's kind of reestablishing inventory is kind of where they were.

Where they should be given the outlook.

Speaker 8: And the OEMs in the offseason here are having more capability of doing that, and it puts our inventory more in line with where it should be given what's going on.

And the Oems in the off season here, having more capability of doing that.

And and it puts our inventory more in line with where it should be given what's going on.

Great. Thanks for that and are you still of the view that there would be.

Speaker 8: Great. Thanks for that. And 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, this year change here at your end? Yes.

Relatively muted attempt to kind of pre buying and things of that nature in front of that.

This year changed here at year end.

Yes.

Yeah definitely.

The pre buys in the past were predicated on an availability or a channel that was able to supply the units to the to the distribution, which hasnt existed here in the last.

Speaker 6: 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, to the distribution, which, you know, hasn't existed here in the last, what, 18 to 24 months.

2018 to 24 months, but 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 data sale and that data manufacturer.

Speaker 6: But 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 manufacture.

And so.

Speaker 6: And so if it's been manufactured after a certain date or if you sell it after a certain date,

It's been manufactured after a certain date or if you sell it after a certain date.

You're not allowed to do that.

Oh, okay.

Speaker 8: Okay. And 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?

And 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.

Speaker 8: But they're both revenue numbers can compare in 26 to the overall of 17. Right. Right.

They're both revenue numbers can compare from 26 to the overall 2017.

Right Alright, Thank you very much guys I appreciate it.

Sure.

Speaker 2: The next question, excuse me, the next question is from Jeff Hammond with KeyBank Capital Markets. Please go ahead. Hi Jeff. Hey, good morning everyone.

Margin excuse me. The next question is from Jeff Hammond with Keybanc capital markets. Please go ahead, Hi, Joe Hey, good morning, everyone.

Speaker 8: So, 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 some of the deals coming in.

So maybe first on the acquisition contribution was higher than.

Then I had in my model and I just didn't know if that's particular strength from the acquisitions or if theres any kind of nuanced differences in seasonality with respect to some of the deals coming in.

Barry.

Speaker 8: Morning, Jeff. The big company that was acquired in March or April was TEC, and they've had a record year and has a terrific contribution to our results this year. The smaller ones also performed well and contributed what they contributed.

Good morning, Jeff.

The Big Big Company that was acquired in I think March March or April as GEC, and they've had a record year.

Terrific contribution to our results this year.

<unk> also performed well and contributed what they contributed so.

Speaker 8: Nothing other than great performance on their part as being, you know, their first year as part of Watska.

Nothing nothing other than a great performance on their part as being the first year as part of Watsco.

Speaker 3: Or another way to say it is our entire network is growing at a very rapid rate throughout the system. It's at 673 locations.

Or another way to say it is our entire network is growing at a very rapid rate.

Throw up your assistant to 673 locations.

Speaker 9: 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. And 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 22-year, you know, kind of the right way to look at it?

Okay, Great just back on price.

I think the 9% you gave was for equipment just.

Ballpark is the non equipment kind of a comparable number for the year and then just back on the.

If you just take all the OEM and pricing that you've gotten plus the carryover like.

It just kind of a mid single digit starting point for pricing.

In the 22 year kind of the right way to look at it.

I'm not sure I, even understand but if you got it yeah.

Speaker 6: I don't know if the mid-single-digit or the single-digit is the starting point or not, but the non-equipment that you asked about, yes, that varies by product type.

You know I I don't know if that made the mid single digit or single digit as the starting point or not.

But you have the non equipment that you asked about yes that that varies by product type.

Speaker 6: 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. But it's pretty much across the board, equipment and non-equipment have seen price increases. For more information, visit www.FEMA.gov

Some products, obviously like steel products field, Duckboard flat flat steel that type of thing had been going up at.

At a higher rate in that whereas things like motors and some in thermostats had been going after the more more more planned rate, but it's.

It's pretty much across the board equipment and on equipment I have seen price increases.

Okay. Thanks, guys.

Speaker 2: The next question is from Stephen Bookman with Jeffries. Please go ahead. Good morning, Steve.

The next question is from Stephen Volkmann with Jefferies. Please go ahead good morning.

Steve.

Speaker 5: 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 kind of sustainable. But I don't want to 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?

Hi, Good morning, guys, maybe just a quick follow up if I could on the gross margin dairy 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 kind of sustainable, but I don't want to put words in your mouth, but would you agree with that or is there.

A little something that that could cause it to hold back a little bit.

Well again, you can answer that he's a bedroom and May go ahead.

Speaker 8: If you can answer that, he's a better man than me. Go ahead. Well, kind of as Paul said, all the variables we believe wholly always will have some variability going forward. So that's just the reality of business and, again, being a merchant.

[laughter] well it kind of as Paul said.

All of the variables, we believe wholly.

We'll have some variability going forward. So that's just the reality of our business and again being a merchant.

Speaker 8: And managing all the variables as they play out, you know, not having a necessary.

And managing all the variables as they play out not having.

Necessarily you know Oh.

Speaker 8: live and die by the metrics. 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 benefits gross margin. There's a benefit to the inventory that we own.

A live and die by biometric so.

The thing that is realistic and you and the answer is that any kind of inflation that we pass through to our customers that we absorb and move through benefits gross margin and there's a there's a benefit to the inventory that we own.

Speaker 8: at a certain cost as our prices increase and it passes through the system, so to speak.

At a certain cost is that as our prices increase in our it passes through the system so to speak.

Speaker 8: there's a benefit to that, a margin benefit to that. And 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.

There's a benefit to that a margin benefit to that and every distributor of every kind that is public that you can invest and we'll have that same capability of yielding slightly higher margins as things pass through.

Speaker 8: And so, so that would, I would say there is a benefit there that is reliant on contained.

So that was I would say there is a benefit there that is reliant on continued.

Growth in price as Paul suggested I think we were comfortable with.

Speaker 8: uh... growth in price as paul suggested i think we were comfortable with

Speaker 8: seeing a higher price environment this year. We have new products on the horizon next year that relate to the higher SEER units that will pass through. Then we're talking about different refrigerant products a couple of years out. So I think the industry as a whole has this inflationary feel to it.

A higher price environment this year.

We have new products on the horizon next year that related to the higher seer higher seer.

So your units that will pass through.

We're talking about different refrigerant products, a couple of years out so I think the industry as a whole.

Has this been inflationary you now feel to it.

And and the manufacturers are having to invest a bunch of their R&D in these new products. So they are under pressure to sustained pricing I believe.

Speaker 8: And 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.

And so I think we're in a good place in terms of that inflationary feeling that is helpful.

Speaker 8: And so I think we're in a good place in terms of that inflationary feeling that is helpful.

Well, it's all going to be the climate change.

Speaker 3: that we see is a growing part of our demand.

We see as a growing part of our book.

Our.

Our demand.

Yeah.

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.

Speaker 3: 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 and I see that as

Adding more to it I should say than we started.

I see that as a constant.

Speaker 3: increase increasing demand for 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 the install one of these things. These units require less power and less power means less CO2 emissions by the power company.

Increase increasing demand for <unk>.

These higher efficiency products.

It is a positive in the short term and the long term and it does a lot of good by removing C. O. Two emissions every time, we sell when we solve all of these things. These units required less power less pardon me less cotwo emission by the power companies.

That's that's not a short term.

Speaker 3: That's a, that's a not a short term.

Yeah.

Speaker 3: issue. It's going to go on for quite a while. It's just beginning.

Issue, it's going to go out for quite a while it's just beginning actually.

Speaker 3: And we as the largest player in the industry, I think, can make the most significant impact.

We are the largest player in the industry I think can make them the most significant impact.

I agree with al I mean, that's even without inflation.

Speaker 6: I agree with Al, even without inflation.

Without inflation, we're still gonna have to trend towards more heat pumps were still going to have the trend of higher efficiency that is going to be not just a trend but.

Speaker 6: Without inflation, we're still going to have the trend towards more heat pumps. We're still going to have the trend to higher efficiency that is going to be not just a trend, but a regulation from the federal government. And 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 410 that we've used for the last 15 years and move into new lower CO2-emitting refrigerants.

Regulation from the federal government and as Barry indicated we go to a second phase of this and a longer term basis, as we changed refrigerants and move away from the <unk> 10 that we've used for the last 15 years and move into a new lower Cotwo maybe refrigerants.

Speaker 3: I mean, this country and the rest of the world, most of the rest of the world, they want less CO2 emissions.

I mean, the credit trading in this country and the rest of the world most of the rest of the world They want less cotwo emission.

Speaker 3: and they're going to regulate to get it. And our industry is no exception.

And they're going to regulate to get it and our industry is no exception.

Speaker 3: That's what the regulations are to mandate high efficiency rates and also to mandate a change in the refrigerant so it harms the, so it reduces the...

That's what the regulations are mandate high efficiency rate and also the mandate to change the refrigerant.

Harvest.

So it reduces the harm to the climate.

Speaker 3: Those are big factors that will drive our performance.

Those are big factors that will drive our performance.

Speaker 8: And 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. And the equation that we obviously

And just one last thought that we really havent covered and we kind of covered it but I want to cover it more specifically as 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, who want to grow share and grow the market and grow their business and grow their profitability, we collaborate together and do it in the equation that we that we obviously.

Speaker 8: work on together is the profitability when we sell the products and how much we can invest in the markets to help grow the mutual share of our OEM. So that's an equation that is obviously always being worked on and always being examined to not just be more profitable.

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 OEM so that.

That's an equation that is obviously always being worked on it always being examined to now.

Just be more profitable, but to grow the business.

Super Alright, thanks for the color I appreciate it.

Speaker 5: Super, all right, thanks for the color, I appreciate it. Maybe just a quick follow-up, AJ, since you're the tech guy today. Maybe- Well, he's more than that. He started at tech, for sure, and let it put together an extraordinary.

Maybe just a quick follow up Ajay since the tech Guy today, maybe Martin that he wrote.

He started the tech.

For sure it let it and.

Put together an extraordinary team.

Speaker 3: Nothing like it anywhere that I'm aware of in the industry, but he Ask him anything it does not

Nothing like it anywhere.

I'm aware of in the industry.

But he.

Ask them anything it doesn't have to be technology involved.

Speaker 5: Well, I meant that as a compliment, to be clear, but 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. And 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.

Well I meant that as a complement to be clear but.

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 and 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.

Speaker 5: 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.

Maybe we're just early in the S curve, but.

Either that or any of the others in terms of adoption just any of your comments would be great.

Speaker 7: Yeah, well, for starters, we're never satisfied. I mean, we sell products to 100,000 contractors.

Yes, Hello, sorry, guys, we're never satisfied.

We stopped by to 100000 contract there.

Speaker 7: And in my opinion, all of them should be using all of our technology all the time. I mean, that's the end goal. I would say that there's some encouraging data and there's opportunities to do better. And you heard us say that.

In my opinion all of them should be using all of our technology. All the time I mean, that's the that's the angle.

I have to say that there are some encouraging data and there are some opportunities to do better.

And you heard us say that.

Speaker 7: 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, $500 million regions that are over 60% of our sales, both e-commerce.

E Commerce for example, which is a good barometer for most of it was about a third of ourselves well, we have some regions major regions of our business 400 $500 million regions that are over 60% of our sales growth rate commerce.

So.

Speaker 7: So, A, so you know it's possible, and 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 reduce their, or I should say, 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.

You know its possible and when that happens its good for everybody. It's good for our customers because they have a more efficient means to find the products they need kind of order.

There are actually to increase their efficiency.

Good for our business because it reduces our cost to serve it frees up the time with our sales force to go become.

Salted instead of taking.

Taking orders.

Speaker 7: And that 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 it. So it's just good all the way around. And so 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

And those customers as we always mentioned that are buying online there ways stickier their attrition rates are way about a third of the rate of non users and they grow faster with us. So it's just good all the way around.

So we are relentless in our pursuit of driving adoption.

You know maybe not a great answer, but I think in some areas we see great.

Speaker 7: great adoption and 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 early days in this whole

Great adoption and 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 early days Paul.

Speaker 7: changing the industry or.

Changing industry.

Sure.

Knievel.

Speaker 7: But I also still think we're at the forefront of it.

But I also think we're at the forefront of it.

I'll pass it on thank you guys.

Speaker 2: The next question is from Steve Tussa with J.P. Morgan. Please go ahead. Hello, Steve. Hey, good morning.

The next question is from Steve Tusa with Jpmorgan. Please go ahead, Hello, Steve Hey, good morning.

Speaker 4: Congrats to you guys and AJ on a great year and all this technology advances, it really is impressive.

Congrats congrats to you guys in.

And a J on a great year and all this technology advances it really is impressive thank.

Speaker 10: When you look at your HVAC equipment, 68% of sales or whatever it is, how much of that now is Resi?

Thank you. Thank you.

What's the when you look at your HVAC equipment could you just 68% of sales or whatever it is.

How much of that now is ramzi.

Alright.

Yes.

Speaker 8: Yeah, let's see, let me look at it here, yeah.

Let me look at it here yeah.

Paul as you know go ahead.

Yes, the number I have right now is that it's for the quarter.

Speaker 6: Yeah, the number I have right now is that it's for the quarter. Just doing.

Yes.

I'm just doing quick math here.

Boom to run 15% to 20%.

Excuse me.

Speaker 10: reverse of that. 85, 80 days. I was doing the reverse math, Steve. Yeah, that seems a little bit low. Carrier said something about mid-single-digit movement in the quarter on units. Obviously, you guys are a big percentage of their movement.

It's reverse of that 80 580 days.

Yes.

Yeah.

John the reverse I was reviewing the reverse.

[laughter] yeah.

That seems.

That seemed a little bit low.

Carrier said something about.

Mid single digit movement in the quarter on units. Obviously, you guys are a big percentage of their of their movement.

Speaker 10: Can you help reconcile that number? Is that roughly about kind of the unit movement you guys saw?

Yes.

Can you help reconcile that number is that roughly about kind of the Union unit movement you guys saw.

Speaker 8: for the quarter. Yeah, I won't speak to carrier Steve, but we said earlier that overall unit growth was 9%. Yeah, for for resi or for every for like, the whole equipment business.

For the quarter I wont speak to carrier, Steve, but we said earlier that overall unit growth was 9% yeah.

Third for resi or for every for like the whole equipment business.

Speaker 10: That would be primarily Rezzy, yes. Okay, got it. And I mean, if I kind of look at your, is the profitability of your Rezzy equipment business, I've kind of lost track over the years because I know the parts and pieces were, you know, a pretty strong margin for you guys. Is Rezzy 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.

That would be primarily resin, yes, okay got it.

And if.

If I, if I kind of.

Look at your is there is the profitability of your resi equipment business.

I kind of lost track over the years, but I know the parts and pieces, where we're pretty strong margin for you guys.

Is ready 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.

Speaker 8: Yeah, I don't want to get I would not get too specific about that. What I'll say is this, which is kind of an inverted way of saying, I'm answering your question because I don't want to speak to the residential margins versus the overall.

I don't want to I would not get too specific about that what I'll say is this which is kind of an inverted way of saying I was answering your question.

I don't want to speak to the residential margins versus the overall.

Speaker 8: The growth rate in the quarter for equipment was 22%.

The growth rate in the quarter for equipment was 22%.

Speaker 8: The growth rate for commercial versus residential in the quarter was within a fraction of that percent.

The growth rate for commercial versus residential in the quarter. It was within a fraction of.

Of that of that percent 22%.

So residential versus commercial in the quarter or in the year for that matter would not have influence gross margin percent very much growth.

Speaker 8: So residential versus commercial in a quarter, or in a year for that matter, would not have influenced gross margin percent very much.

Speaker 10: growth rates are almost identical, yeah. God, I assume he's thinking just on an annual basis. I just wanted to make sure that, I mean, resi's such a big piece, I would assume it's around the average of your gross margin.

Growth rates are almost identical.

Got it I guess I'm just thinking like just on an annual basis I just wanted to make sure that <unk> such a big piece I would assume it's around the average of your gross margin.

For the year.

No comment.

Speaker 10: Okay. And then 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 demand. Okay. Gotcha. And then 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?

And then just one last one.

Are there.

Certain Oems that are growing faster than others within your mix.

[laughter] is there anything else you want us to.

All of our Oems and they're all doing the best they again with us to stay up with our demand.

[laughter].

Okay got you and then just 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.

Into 'twenty two.

Assuming kind of a wrap around from what you've gotten and what you put through on Jan one or is there.

Speaker 10: from what you've gotten uh... and what you put through on jan one or is there uh... you know you think you're gonna get more is kind of a year

Are you, assuming youre going to get more as kind of a year progresses I think we touched on that with the introduction of the whole new lineup of products to meet the regulatory demands.

Speaker 3: I think we touched on that with the introduction of the whole new lineup of products to meet the regulatory demands.

Paul you can add to that if he wants to.

Speaker 6: Yeah, we really don't have a crystal ball. The OEMs do not consult with us on their prices.

We really don't have a crystal ball we see.

The Oems do not consult with us on their price increases. So we do not know once they have another one planned where if theyre going to have to have another one plant.

Speaker 6: So we do not know if they have another one planned, or if they're gonna have to.

On the <unk>.

Speaker 6: on the, 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.

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.

Speaker 10: So you kind of wait for an email from Carrier that's going to everybody else as far as price increases are concerned? You guys don't discuss that? We do not.

So you kind of wait for an email from carrier that's gone everybody else as far as price increases are concerned you guys don't discuss that.

Uh huh.

Speaker 10: I thought you always asked for lower prices, no matter what I said. One last one, because it's only 10.30, so I feel like we have a little bit of time. Out of that 9% benefit for the year, how much of that on price and resi products, how much of that was from mix?

Okay.

And then he has asked the lower prices no matter what.

And then one last Reuters.

One last one because it's only 10, it's only 10 30, so I feel like we have a little bit of time.

Out of that 9%.

Benefit for the year, how much of that.

On price in resi products, how much of that was from mix and how much of that from just a pure price because you said asps. So I would assume that there is some mix impact in there as well.

Speaker 10: And how much was that from just, you know, pure price? Because you said ASP, so I would assume that there's some mixed impact in there as well.

Yes, more from price and mix Steve Yep.

Speaker 10: Like a percent or two from mix?

Yeah.

Like a percent or two from mix.

Yeah.

Speaker 8: It's more from price than mixed fees. Okay. Got it. And I, but just to, just to, you know, it's 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.

It's more from price and mix Steve Okay.

Got it.

Just so you know.

Is this an interesting astra's to put on that number as part of the we talked about this last quarter part of the supply chain shortage.

And the most fractured part of the supply chain was ultra high efficiency equipment.

Speaker 8: And the most fractured part of the supply chain was ultra-high efficiency equipment.

Speaker 8: So, you know, that's almost missing from the equation this year as OEMs ramp up production of 20 serine above, for example.

So that's.

That's almost missing from the equation this year as Oems ramp up production of 20 seer and above for example.

Speaker 8: assuming that they get the chips and the technology in place is actually a mixed opportunity that didn't play out in 2021.

Assuming that they get the chips and the technology in place, there's actually a mix opportunity that didnt play out in 2021.

Speaker 10: unit you know what you got to date that you'd you got i got one more that that just popped in my mind from that conversation uh... we're in a lot of distributors are kind of ordering out you know almost for the entire season

You know what you guys did.

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 almost for the entire season.

Speaker 10: 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? Well, that requires a more...

Orders not necessarily taking inventory, obviously, but ordering.

Which is kind of unusual I think relative to history.

Are you guys 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 you don't have to put down a deposit but like have you guys changed your patterns when it comes to ordering here well.

That requires a more.

Can take question that that specific how do we deal with inventory as they wanted to talk about what we used to determine inventory needs.

Speaker 3: a complete question that's specific to how we deal with inventory. AJ, you want to talk about what we use to determine inventory needs?

Yeah, I'd say that.

Speaker 7: Yeah, I would say that our demand planning, demand forecasting, demand planning inventory optimization efforts are maturing, and we're much more sophisticated than we ever have been, and that includes in the

Our demand planning demand forecasting demand planning inventory optimization optimization efforts are maturing and we're much more sophisticated than I ever have been and that includes in it.

Speaker 7: helping us in our ability to collaborate with our OEM partners and help them.

And our ability to collaborate with our OEM partner and help them.

Speaker 7: with their supply chain challenges as well. So, 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. So, it's very much a collaborative effort. It's not a, it's no longer a one-way street where.

But their supply chain challenges as well so without answering your question directly where we're trying to be helpful to our OEM partners that they want orders ahead of time. So they can 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.

So it's very much a collaborative effort, it's not it's no longer a one way street wear.

Speaker 7: We just placed an order in 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.

We just placed an order and weight is a lot of conversation a lot of data data driving around it and but that collaboration cause a lot of flexibility and we feel like we're in a very good position.

Great Alright, thanks for all the color guys I appreciate it.

The next question is from Ryan Merkel with William Blair. Please go ahead.

Speaker 2: The next question is from Ryan Merkell with William Blair. Please go ahead. Hi. Hey.

Hi.

Hey, good morning, everyone.

Speaker 5: Nice quarter. So let's start off on SG&A. So SG&A grows sales in the quarter and for the year. I think we know why. But my question is, how do we think about 22? Does some of that start to normalize as supply chain fixes itself? Do you think you can leverage SG&A in 22?

Nice quarter.

Let's start off on SG&A, so SG&A and gross sales in the quarter and for the year I think we know why but my question is how do we think about 'twenty. Two does some of that check normalize the supply chain fixes itself do you think you can leverage SG&A in 'twenty two.

Well I sure hope so.

Speaker 4: January ... Got to plan anyway. Well...

January in anyway, well.

If we continue to do what we did in January I doubt it because it's just too powerful the growth is too high.

Speaker 3: If we continue to do what we did in January , I doubt it, because it's just too powerful. The growth is too high. Barry, you got a better?

Barry you got a better answer Paul.

Jay.

Yeah, I mean, there is a first in the performance based compensation ran it I'd say, if we grow EBIT of 57% again in 2022.

Speaker 8: 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 going to pay, we're going to reward our entire team for it. So to the extent, you know, growth rates like that moderate, you know, then those variable costs will moderate in the same way too, in that respect, you know, freight and, you know,

We're gonna pay that we're going to pay you know what we're going to we're going to reward our entire team for it so to the extent.

Growth rates like that moderate in there.

Those variable costs.

Moderate moderate in the same way too in that respect you know afraid in.

Speaker 8: 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.

And some of the variable costs that are typically very predictable became more unpredictable.

Do we get products to customers and to compete in the market. So.

Speaker 8: You know, I would, you know, just it's an abstract answer, I realized, but I would expect our variable cost to to adjust to whatever the typical business model is some of the incremental spending on on the fire drills that have had to go on this had to go on this year to serve customers, I would expect to moderate some

I would.

It's it's an abstract answer I realize but I would expect our variable costs to.

To adjust to whatever the typical business model is.

Some of the incremental spending on.

The fire drills that have had it gone on this had to go on this year to serve customers I would expect a moderate some.

Speaker 8: But as Al said, it's not a visibility that we can point to yet because the business is still very strong.

But as al said, its not a visibility that we can.

0.2, yet because the business is still very strong.

Speaker 5: Got it. Okay, no fair answer. And then I wanted to follow up. It's a good problem to have. Well, it is. I hope to grow EBIT 50% again for the record. I would be amazed. Yeah, us too. So, I wanted to follow up on MIPS. So, I had that question ready. So, I guess two parts of the question.

Got it Okay Fair answer and then I'm wondering if that's a good it's a good problem to have.

Well it is I hope, you're all EBIT, 50% again for the record.

That's right for you.

Yes.

So I wanted to follow up on mix. So I had to I had that question already.

Two parts of the question.

Speaker 5: What was the mix of in-equipment for high-efficiency versus sort of base units? And then 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. And then you mentioned on-call error, I think, is helping you sell or the contractors sell more high-efficiency units. So I don't know, what does that look like over the next couple of years? It feels like it could be a real tailwind.

What was the mix of equipment for high efficiency versus sort of base units and then it seems to me that Theres a few tailwind right. You've got this year change the Oems couldn't produce a high stuff right that should probably improve a little bit. This year at least and then you mentioned Oncall Air I think is helping you sell with a contract or sell more high efficiency units.

I don't know what does that look like over the next couple of years it feels like it could be a real tailwind.

Hey.

Speaker 7: I think you're right. I mean, specific to ENCLA, well, first of all, it's a focus of ours, more so than ever has been. And we're increasing our focus in a time that's challenging, like you said, or has been said.

I think I think you're right I mean specific to uncle that well first of all it's a focus of ours more so than ever has been.

We're increasing our focus in the time, that's challenging like you said.

Our has been set.

Speaker 7: 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.

High efficiency system, especially on the high end or the high efficiency systems are largely not available because of supply chain issues typically around the.

The shortage of ships that we all read about that go on our cellphones and everything else. They also go into high efficiency HVAC systems.

But we are increasing our focus on it as a as a means to help.

Speaker 7: to do our part and help reduce the climate change.

And do our part and help reduce the climate change.

Speaker 7: You know, every time we sell high-efficiency systems, it leads to fewer, you know, 2E reduction or emissions, and we feel like we should do our part to help drive that. On-call 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, and on-call air is roughly two-thirds of the sales.

Dynamic every time, we sell.

Hi, Chris.

It leads to fewer.

<unk> E <unk>.

Reduction emission and we feel like we should do our part to help drive that I'll call. There 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 system and I'll call Air It's roughly two thirds of the sales.

Speaker 7: and last year we did almost 650 or so million dollars of gross merchandise volume through that tool, meaning our customers' sales to their customers were almost $700 million, and we expect that number to...

And last year, we did almost 650 or so million dollars of gross merchandise volume through that tool in meeting our customers sell their customers were.

Almost $700 million.

And we expect that number to.

Speaker 7: hopefully double this year.

Hopefully double this year.

So.

Speaker 7: And going back to the question we got earlier about adoption, if and when we drive the adoption of that tool to 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.

Going back to the question, we got earlier about adoption.

If and when we drive the adoption of that tool for up to another 1000, 2000, 3000 customers and they're using that pool of scale. It's a good thing that's a good thing for them or for those businesses that will be driving more.

Speaker 7: sales. It's a good thing for our business, driving more sales. It's a good thing for the mix. Hopefully, high-efficiency systems will continue to increase as a part of our sales.

Good thing for our business driving Marcella good thing for the Mexico, hopefully high efficiency will continue.

The increase as a part of our.

Ourself.

Got it alright, thanks a lot.

Again, if you have a question. Please press Star then one the next question is from Josh <unk> with Morgan Stanley . Please go ahead Josh.

Speaker 2: Again, if you have a question, please press star then 1. The next question is from Josh Pokrzewinski with Morgan's family. Please go ahead. Hi, Josh.

Hi, good morning, guys.

Speaker 11: Hi. Good morning, guys. So, Barry, you've sort of referenced it a few times here, and I think maybe directly in a question to Steve Holtman on this whole kind of merchant distributor behavior of kind of passing along price increases pretty orderly or maybe relative to what your inventory carrying costs are.

Barry you've sort of referenced it a few times here and I think maybe directly in the question to Steve Volkmann.

This whole kind of merchant distributor behavior kind of passing along price increases pretty orderly maybe relative to what your inventory carrying costs are.

Speaker 11: any way to sort of separate, you know, how much of that has really been a function of

Any way to sort of separate how much of that has really been a function of.

Speaker 11: Inventory inflation, maybe on the equipment side versus something more commoditized. I mean, I think we can all sort of conceptualize that equipment prices don't really go backwards, but maybe some of the inventory-related stuff could be a bit more volatile over the next 12 years.

Inventory inflation, maybe on the equipment side versus something more commoditized I think we can all sort of conceptualize that like equipment prices don't really go backwards, but maybe some of the inventory related stuff could be could be a bit more volatile.

Over the next 12 months.

Okay.

Yeah again, it's hard to put numbers around around all the different product lines, because youre right. If it's duct tape there may have been.

Speaker 8: Yeah, again, it's hard to put numbers around around all the different product lines, because you're right, if it's duct tape, there may have been a, you know, increase in pricing and inflation related to duct tape.

Kris and pricing and inflation related to just take that.

Speaker 8: Paul, maybe you cover the waterfront, not just equipment, but all the non-equipment stuff as well. What's your read?

Paul maybe how you cover the waterfront on not just equipment, but all the non equipment stuff as well what's your what's your read.

Speaker 6: On the non-equipment things, nobody focuses that much on it. They're always focused on the OEMs. But most everything that we've seen on the non-commodity

And then non equipment.

Things you know.

Nobody focus as you know that much on it they were always focused on the Oems, but most everything that we've seen on the non commodity side on.

Speaker 6: 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. A lot of petroleum base, a lot of freight costs going up for those vendors, and a lot of disruption in their supply chain. On the commodity side,

On the non equipment has been increasing.

At a pretty steady rate more comparable to that of what the Oems are you 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.

Speaker 6: You know, steel and copper, I never try to predict and we don't we don't hedge and we don't fly forward, you know, based on any sort of

Steel and copper I never try to predict and we don't we don't hedge and we don't fly forward based on any sort of.

Speaker 6: mystical knowledge that we have on where those products are going. But on some of the other commodities, you know, there's there's a regulation out, you know, like on refrigerant, where this year the the industry has to cut back at least 10 percent of their.

Mystical knowledge that we have on where those products are going but.

And some of the other commodities you know there is a there was a regulation out you know like on refrigerant, where this year the.

The industry has to cut back at least 10% of their.

Speaker 6: of their carbon emissions that they have on refrigerants. So definitely seeing a supply that's been planned by the government that's going to reduce.

There carbon emissions that they have on refrigerant, so definitely seen a supply that's been planned by the government, it's going to reduce it.

Speaker 6: And 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 refrigerants. So that one, at least I can say, I think it's going to continue to go up as the supply becomes more limited.

And 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 refrigerants. So.

So that one I at least I can say I think that's going to continue to go up and as the supply becomes more limited.

Speaker 8: Josh, to put it in perspective, the word commodity is kind of a big word and what we look at commodities in our business is roughly 6% of what we do, just to put a number on it.

So just to put it in perspective, they're worried commodity is kind of a big word in and what we look at commodities in our business is roughly 6% of what we do just to put it put some again a number on it.

It's kind of this.

Speaker 8: You know, yo-yo, that can play out. And a big chunk of that is refrigerant. And as Paul said, there's more than just commodity activities going on with refrigerant, for example.

Yoga that can play out and a big chunk of that is is refrigerant and as Paul said theres more than just.

Commodity activities going on with the refrigerant for example.

Got it and then.

Speaker 11: You mentioned high efficiency a couple of times here and maybe some of the bottlenecks that are more focused on that given electronics and stuff like that. But just given the level of inflation,

You mentioned high efficiency, a couple of times here and maybe some of the bottlenecks that are more focused on that given electronics and stuff like that but just given the level of inflation is the payback for a customer actually increased pretty substantially over the past two years I got to imagine if you know the <unk>.

Speaker 11: Has the payback for a customer actually increased pretty substantially over the past two years? I got to imagine if the price point is 15 or 20% higher, whatever the number is, it'll take it several extra years to kind of claw back whatever the annual savings are to be in the black there. Is that something that kind of comes forward at the kitchen table when the contractor's talking about that?

This point is 15 or 20% higher or whatever the number is like it'll take at several extra years to kind of claw back whatever the annual savings are to be in the black there like is that something that.

You know kind of comes forward at the kitchen table and the contractors talking about that.

Speaker 6: I think there's more to it, Josh, than just the payback. I think the payback has been a difficult nut for several years for high-efficiency.

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 theres a number of consumers.

Speaker 6: 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. And I think that's a really good point. I think that's a really good point.

Our buying units for more than just the efficiencies are also buying it for the increased comfort.

Because it is variable speed motors entity, it's quieter running it has less temperature change up and down as the as he comes on and goes off or stays on at a lower speed.

So there's other reasons why people buy high efficiency equipment, Besides the economic payback.

Got it and then.

Speaker 11: 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, you know, where some of the locations are regionally, you know, could still be some cooling weather earlier in the fourth quarter, but...

In terms of the volume growth in the quarter.

Obviously more of the shoulder season right now.

I get that maybe where some of your guys where some of the locations are regionally could still be some cooling weather earlier in the fourth quarter, but.

Speaker 11: 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 kind of, 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 kind of 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?

How much would you say is just sort of catch up from stuff that didn't get done maybe in <unk> versus kind of new breakage I know.

That's probably more anecdotal in terms of what you guys would have access to but like this.

This really kind of new demand that sprung up or more.

Some industry backlog from farther down the chain that just needed to get made up over on a later date.

I think that would really be anecdotal.

Speaker 6: And, you know, let's not forget, you know, air conditioning means heating and cooling. So as it gets cold in the north, Wasco now has a great presence in the northern climates all through the northeast and now in the Midwest.

Yes.

And let's not forget air conditioning means heating and cooling so as it gets cold in the North Watsco now has a great presence in the in the northern climates, all through the northeast and now in the Midwest.

Speaker 6: And 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. And secondly, as I've said three times about heat pumps, heat pumps are becoming more and more important in a bigger percent of sales, and heat pumps are all about heating indoor air.

That happens we get more into the heating season. It is still not as large to us as the cooling season, but it is getting larger and secondly, and as I've said three times about heat pumps heat pumps are becoming more and more important in a bigger percent of sales and heat pumps are all about heating indoor air.

Okay I'll leave it there.

Speaker 3: This concludes our question and answer session. I would like to turn the conference back over to Albert Named for any closing remarks. Well, thanks for listening and thanks for your interest in our company. And once again, I hope that all of you stay safe and healthy during this pandemic.

This concludes our question and answer session I would like to turn the conference back over to Albert <unk> for any closing remarks.

Thanks for listening and thanks for your interest in our company and once again.

I hope that all of you stay safe and healthy given this pandemic.

Speaker 3: the interest and don't hesitate to contact us if you need more answers to questions.

I appreciate the interest and don't hesitate to contact us if you need more answers to questions Bye bye.

Speaker 2: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Gary, how many were on the call?

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect Gary how many were on the call.

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