The Heating, Airconditioning and Refrigeration Distributors International (HARDI) has partnered with J.P. Morgan Equity Research in the company’s latest proprietary HVAC distributor survey released in July 2009, which collected market projections for this cooling season. This is the first time that the firm’s research department has worked with HARDI to survey its U.S. HVAC equipment distributors.

Results from the survey revealed a soft start to the summer selling season, driven by weather and continued deferrals by customers in a weak economy.

The survey included responses from 93 HVAC equipment distributor HARDI-member companies. J. P. Morgan stated that results were largely in line with expectations, though there were interesting comments surrounding price, inventories, and stimulus. J.P. Morgan continues to see a difficult 2009, with a recovery in 2010 for residential driven by pent-up replacement demand.

J.P. Morgan has conducted intensive research into the HVAC industry for a number of years in an effort to provide its clients with valuable information to guide investment decisions. However, HARDI has been authorized to make the initial report available to all its member companies.

The NEWS was granted permission to review the survey and subsequent report, and to provide some information to the general industry. In addition to the obvious slow-down in the economy, the report provides insight to other key facets of the HVAC market sector.

An increased repair rate appears to continue for the near-term, but these systems are likely to be replaced in coming years, a key point in sustainable long-term recovery. According to Steve Tusa of J.P. Morgan, “Results suggest that customers continue to repair (versus replace) broken units; however, 80 percent of distributors believe that these units will face problems again within three years. The useful life following repairs is shorter than our standing expectation, suggesting pent-up demand could come back sooner than expected.”

According to the report, nearly all distributors said that inventory channels are lean relative to normal levels, but relative to unusually low sales levels. About 50 percent of distributors acknowledge that inventories are about in line with expectations, and 17 percent actually said levels were too high. However, distributors are keeping some safety stock in anticipation of the R-410A refrigerant transition (64 percent keeping some safety stock, most of which are 0-20 percent additional inventory.) J.P. Morgan calls the inventory position as “near-term neutral,” and that destocking has largely played out, but inventories aren’t so low as to trigger an imminent restock without a major pickup in demand, which given early summer trends, is seen as unlikely.

HFC PHASEOUT

Regarding the R-410A refrigerant transition, 60 percent of distributors felt that the changeover would not lead to increased replacement rates in 2010, while 40 percent believed it would be a positive catalyst. This confirms the view at the investment firm that R-410A is not likely to be a major mover of the HVAC economy in 2010, but could push some consumers to decide to replace their systems, particularly given the tax credits available in 2010.

HARDI Executive Vice President/COO, Don Frendberg, said, “Like most regulatory action, the transition to R-410A does not inherently create demand in the marketplace so our members’ responses are not a surprise. The key will be making sure as many of the replacements as possible that do occur from this point forward are with HFC-using equipment so the industry doesn’t continue to add greater pressure to a highly-constrained R-22 market after Jan. 1, 2010. The greatest catalyst for R-410A equipment sales now and in 2010 will continue to be consumers’ increasing interest in high-efficiency products coupled with unprecedented government and utility incentives for the most efficient systems.”

Publication date: 09/07/2009