Watsco Inc (WSO.B) 2021 Q4 法說會逐字稿

Good morning. And welcome to the Watsco, Inc. Fourth Quarter and Full Year 2021 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Albert Nahmad, Chief Executive Officer. Please go ahead.

Good morning, everyone. I hope you're safe and healthy wherever you are. I want to welcome you to our fourth quarter earnings call. And this is Al Nahmad, Chairman and CEO. And with me is A.J. Nahmad, President of Watsco; and Paul Johnson, Barry Logan and Rick Gomez.

Before we start our report, here is our cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws 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. And operating margins expanded 210 basis points to a record 8.1% in the fourth quarter.

Now on -- for 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, and operating margins reached 10%, a 210 basis points increase from last year.

And very important, I only 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 the 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 cost and reduce CO2 emissions. Given our scale, our access to capital, 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 CO2 emissions.

Now in terms of impact on CO2. Over the last 2 years, we estimated Watsco's sales of more efficient systems helped avoid 10.1 million metric tons of CO2 emissions, which is equivalent to taking 2.2 million cars off the road. This is over a 2-year period.

We note that the regulatory changes -- I'm moving on to a different subject. The government has now moved to change -- make changes that will take effect the beginning of next year. These changes mandate an increase in the minimum efficiency for our HVAC equipment. We note -- 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, and 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.

(Operator Instructions)

How many are on queue?

Right now, it looks like we have a queue of about 8 participants. And the first question is from Tommy Moll with Stephens.

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

Never heard that question put it 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 going to call on 2 of the resources on the phone, starting with Barry and then followed by Paul.

Tommy, appreciate that. Well, again, I think there are several things to -- layers to the discussion, and one of which is not accounting. 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 that's interesting or that's unordinary 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, inflation, as we pass through inflation, as we receive higher cost from OEMs and we move that product through to our customers, it is an opportunity for us to be a good merchant and 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.

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 the value chain to our customer and yielding a terrific result. There's really not much more to it than that. Paul?

Yes. And part of that, 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 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 nonequipment 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 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.

Yes. 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 and our teams and our analysts very quick access to see are the right -- 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 product. And that is in the early days, but we expect it to have a continued impact on our margin realization.

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've got all day? Who wants to deal with that?

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. 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. Our relationship is very strong.

Yes, if I may, this is A.J. 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. Those are opportunities that Watsco has, I think, pretty uniquely with our OEM partners because of our strength and what we do and the technologies and platforms that we've made.

The next question is from David Manthey from Baird.

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're at running plus 6%. 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, 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 gen 1, should we assume that pricing is going to be still double digits throughout 2022 as the 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 derived that. But 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. And as I indicated, 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 going to 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 going to meet the new higher efficiency.

Let's describe unit growth. He's focused on pricing.

I was going to fill in the blanks for you, Dave. First, our math and our numbers, 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. 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, 9%.

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 budgets, 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 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 ways.

Yes. I'm not sure that 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 on that.

I guess we've all got our models, and I've read a lot about your models. But all models are great, but they're all wrong. But I guess what I'm looking at is I'm looking at what are the current signal on the marketplace that really drive our sales? And 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. So all in all, I expect a normal year. Regardless of what the models say, I see a normal year.

Or if we model January, we'd be very excited. January is very strong.

The next question is from Jeff Sprague with Vertical Research.

Yes. I get the same math. You go from 6% price through 9 months to 9% for a year, it implies 18% or so in the quarter. But I guess we'll circle back and figure out. We're missing something on price/mix there, I guess. But could you just give us a little update on inventories? Usually your inventories come down sequentially in Q4. 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.

Yes. Jeff, you're right, you're right, sequentially they grew. And 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. Third quarter to fourth quarter, you're right, there is a measure of inflation. But put things in this context, looking at a longer time period, I'm going to make everyone do that, look at longer time periods, not just a quarter, which is inventory today or year-end versus 2 years ago and take the volatility of all the supply chain out, let's look out over a 2-year period, like inventories are up around 12% '19 to '21. And Watsco is obviously a 20% larger company over that time period. And I'm adjusting for acquisitions when I make that -- do that math.

So I think as we said in the press release, it's kind of reestablishing inventories kind of where they should be given the outlook and the OEMs in the off-season here having more capability of doing that. And it puts our inventory more in line with where it should be given what's going on.

Great. And are you still of the view that there would be relatively muted attempt to kind of prebuying and things of that nature in front of the SEER change here at year-end?

Yes.

Yes, definitely. The pre-buys in the past were predicated on an availability or a channel that was able to supply the units to the distribution which hasn't existed here in the last, what, 18 to 24 months.

But the second reason why I don't see a real big prebuy on anybody's part is because some of the equipment is based upon date of sale and not date of manufacture. And so 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.

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?

They're both revenue numbers. You can compare 26 to the overall of 17.

The next question is from Jeff Hammond with KeyBanc Capital Markets.

So maybe first, the acquisition contribution was higher than I had in my model. And I just didn't know if that's a 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.

Barry.

Jeff, the big company that was acquired in, I think, 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. So nothing other than great performance on their part as being the first year as part of Watsco.

Or another way to say it is our entire network is growing at a very rapid rate throughout 673 locations.

Okay. Great. Just back on price. I think the 9% you gave was for equipment. Just ballpark, is the nonequipment 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 is it -- is kind of a mid-single-digit starting point for pricing in the '22 year kind of the right way to look at it?

Not sure I even understand. But Paul, if you got it.

Yes. I don't know if the mid-single digit or the single digit is the starting point or not. But the nonequipment that you asked about, yes, that varies by product type. Some products, obviously like steel products, steel duckboard, flat steel, that type of thing, they've been going up at a higher rate than that. Whereas things like motors and some -- and thermostats have been going up at a more planned rate. But it's pretty much across the board, equipment and nonequipment have seen price increases.

The next question is from Stephen Volkmann with Jefferies.

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.

He can answer that, he's a better man than me. Go ahead, Barry.

Well, kind of as Paul said, all the variables we believe always will have some variability going forward. So that's just the reality of business. And again, being a merchant and managing all the variables as they play out, not having necessarily live and die by the metric.

So probably the thing that is realistic 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. There's a benefit to the inventory that we own at a certain cost as that -- as our prices increase and it passes through the system, so to speak, 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.

And so that -- I would say there's a benefit there that is reliant on continued growth in price. As Paul suggested, I think we were comfortable with 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, and 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. 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.

Well, there's also the climate change that we see as 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. And I see that as a constant increasing demand for these higher efficiency products. I see this 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 install one of these things. These units require less power and less power means less CO2 emissions by the power companies.

That's not a short-term issue. It's going to go on for quite a while. It's just beginning actually. And we are 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, without inflation, we're still going to have to trend towards more heat pumps. We're still going to have to 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.

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 going to regulate to get it. And our industry is no exception. That's what the regulations are, to mandate higher efficiency rates and also to mandate the change of the refrigerant. So it harms -- so it reduces the harm to the climate. Those are big factors that will drive our performance.

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 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. So 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. I appreciate it. Maybe just a quick follow-up, A.J., since you are the tech guy today maybe...

He's more than that. He started at tech for sure, and let it -- he's put together an extraordinary team, nothing like it anywhere that I'm aware of in the industry. But he -- ask him anything, it doesn't have to be technology involved.

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. 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.

Yes. Well, for starters, we're never satisfied. I mean, we sell products to 100,000 contractors. And in my opinion, all of them should be using all of our technologies all the time. I mean that's the end goal.

I have said that there are some encouraging data and there's some opportunities to do better. And you heard us say that e-commerce, for example, which is a good barometer for most of it, is about 1/3 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. Those are e-commerce.

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 product they need, get them order 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.

And those customers, as we always mention, that are buying online, they're way stickier. Their attrition rates are way -- about 1/3 of the rate of nonusers and they grow faster with us. So it's just good all the way around. And so we are, I would say, relentless in our pursuit of driving adoption. And 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 early days in this whole changing the industry or enabled. But I also still think we're at the forefront of it.

The next question is from Steve Tusa with JPMorgan.

Congrats to you guys and A.J. on a great year and all these technology advances, it really is impressive. 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 resi?

Barry?

Yes, Steve. Let me look at it here. Yes.

Paul, would you know? Go ahead.

Yes. The number I have right now is that it's, for the quarter -- just one quick math here. It's around 15% to 20% -- excuse me, it's reverse of that, 85% -- 80% to 85%. I was doing the reverse math, Steve.

Yes, 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. Do you -- can you help reconcile that number? Is that roughly about kind of the unit movement you guys saw for the quarter?

Yes. Yes, I won't speak to Carrier, Steve. But we said earlier that overall unit growth was 9% in the quarter.

Yes. For resi or for like the whole equipment business?

That would be primarily resi, yes.

Okay. Got it. And I mean if I kind of look at your -- is the profitability of your resi equipment business, I kind of lost track over this because I know the parts and pieces 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 buy.

Yes. 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 -- answering your question -- because I don't want to 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%. Residential versus commercial in the quarter or in the year, for that matter, would not have influenced gross margin percent very much. Growth was almost identical.

Got it. 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. 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 talk -- all our OEMs, they're all doing the best they can with us to stay up with our demand.

Okay. Got you. 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 '22? Are you assuming kind of a wraparound from what you've gotten and what you put through on Jan 1? Or is there -- are you assuming you're going to 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. But Paul, you could answer that if you want to.

Yes. We really don't have a crystal ball. We -- the OEMs do not consult with us on their price increases. So we do not know if they have another one planned or if they're going to have to have another one planned on the -- what we do know is 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.

So you kind of wait for an e-mail from Carrier that's going to everybody else as far as the price increases are concerned? You guys don't discuss that? Okay.

We do not. Although we always ask for lower prices, no matter what.

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

Yes, more from price than mix, Steve, yes.

Like a percent or 2 for mix?

It's more from price than mix, Steve. Just to -- an interesting kind of asterisk to put on that number is 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. So 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 mix opportunity that didn't play out in 2021.

You know what, you guys -- I got one more that just popped in my mind from that conversation. We're hearing a lot of distributors are kind of ordering out 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 -- did you guys kind of approach things that way with your orders? I know they're kind of nonbinding. You don't 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., want to talk about what we use to determine inventory needs?

Yes. I could say that we're -- our demand planning, demand forecasting, demand planning, inventory optimization efforts are maturing and they're much more sophisticated than they ever have been. And that includes helping us in our ability to collaborate with our OEM partners and help them with their supply chain challenges as well.

So 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 -- 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.

Next question is from Ryan Merkel with William Blair.

Nice quarter. So let's start off on SG&A. So SG&A gross 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, the supply chain fixes itself? Do you think you can leverage SG&A in '22?

I sure hope so. January...

That's the plan 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. Barry, you got a better answer? Or Paul? or A.J.?

Yes. I mean there is -- first in the performance-based compensation, Ryan, I'd say 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 growth rates like that moderate, then those variable costs will moderate in the same way, too, in that respect. Freight and some of the variable costs that are typically very predictable became more unpredictable to get products to customers and to compete in the market.

So I would -- it's an abstract answer, I realize, but I would expect our variable cost to adjust to whatever the typical business model is. Some of the incremental spending on the fire drills that have had to go on this year to serve customers, I would expect to moderate some. But as Al said, it's not a visibility that we can point to yet because the business is still very strong.

Got it. Okay. No, fair answer. And then I wanted to...

It's a good problem to have.

It is. I hope to grow EBIT 50% again for the record. So I wanted to follow up on mix. So I had that question ready. So I guess 2 parts of the question. 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 OnCall Air, 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.

A.J.?

I think you're right. I mean specific to -- well, first of all, it's a focus of ours, more so than it ever has been. And we're increasing our focus in the time that's challenging, like you said or has been said. 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. Every time we sell high-efficiency system, it leads to fewer -- CO2e reduction or emission, 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 1/3 of our sales in total are high-efficiency systems. And OnCall Air is roughly 2/3 of the sales. And last year, we did almost $650 million or so of gross merchandise volume through that tool, meaning our customer sales to their customers were almost $700 million, and we expect that number to hopefully double this year.

So -- and going back to a question you 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, it will be driving more sales. It's a good thing for our business, driving more sales. It's a good thing for the mix. Hopefully, our high-efficiency systems will continue to increase as a part of our sales.

(Operator Instructions) The next question is from Joshua Pokrzywinski with Morgan Stanley.

So Barry, you've sort of referenced it a few times here and I think maybe directly in the question to Steve Volkmann 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. Any way to sort of separate 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 like 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 months?

Yes. Again, it's hard to put numbers around all the different product lines because you're right, it's duct tape, there may have been an increase in pricing and inflation related to duct tape. But Paul, maybe you have -- you cover a lot of fronts on not just equipment, but all the nonequipment stuff as well. What's your read?

On the nonequipment things, it's -- nobody focuses that much on it, they're always focused on the OEMs. But I mean, most, everything that we've seen on the noncommodity side on the nonequipment 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, there's -- steel and copper, I never try to predict and we don't hedge and we don't buy forward based on any sort of mystical knowledge that we have on where those products are going with.

On some of the other commodities, there's a regulation out, like on refrigerant, where this year the industry has to cut back at least 10% of their carbon emissions that they have on refrigerants. So definitely seeing a supply that's been planned by the government. It's going to reduce it.

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 that's going to continue to go up as the supply becomes more limited.

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 it -- put some, again, a number on it, where it's kind of this a year ago 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 the refrigerant, for example.

Got it. And then you mentioned high efficiency a couple of times here and maybe some of the bottlenecks that are more focused on that given electronics, stuff like that. But just given the level of inflation, has the payback for a customer actually increased like pretty substantially over the past 2 years? I got to imagine if the price point is 15% or 20% higher or whatever the number is, like it will take you several extra years to kind of claw back whatever the annual savings are to be in the black there. Like is that something that kind of comes forward at the kitchen table and the contractors talking about that?

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

Got it. And then just in terms of the volume growth in the quarter, obviously, more of the shoulder season right now. I get that maybe where some of you guys -- where some of the locations are regionally, there could still be some cooling weather earlier in the fourth quarter. But how much would you say is just sort of catch-up from stuff that didn't get done maybe in 2Q or 3Q versus kind of new breakage? I 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 some industry backlog from further down the chain that just needed to get made up over on a later date?

Boy, I think that would really be anecdotal. Yes, I would say. 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 northern climates, all through the Northeast and now in the Midwest. 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 3 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.

This concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad 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 in this pandemic. Appreciate the interest and don't hesitate to contact us if you need more answers to questions. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.