Independent contractors keep an eye on utilities

September 14, 2000
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The New Jersey hvac arena is no place for the weak-kneed or squeamish. There is a blur of activity going on that has contractors merging, selling, and shoring up their reserves.

In this article, we look at two companies that merged to cut costs and fight competition, one that was acquired by a national consolidator, and one whose uniqueness could leave them competing for more than just service contracts.

Air Group, LLC

It’s early morning and the rain is coming down hard in the New Jersey town of Whippany, 21 miles northwest of Newark. John Conforti and Joe DiGangi are preparing for another busy day at their newly merged company, Air Group LLC. The two men, competitors for many years, are now looking forward to a partnership that will provide for a larger customer base and drive a wedge between them and encroaching utility competition.

Conforti got the idea for the merger by working with national consolidator Blue Dot. He said it was Blue Dot’s intention to acquire Conforti’s business, Comfort Conditioning Co., and “tuck in” DiGangi’s Polar-Air Heating & A/C Co.

“I said, why don’t we do this [merger] ourselves?” Conforti added. “Why should we do all of this work for Blue Dot?”

Conforti said that a local New Jersey consolidation group, National Service Pros, also contacted him about acquiring his company but he turned them down. The idea of a merger sounded good because it would save the two owners a lot of money. One cost-saving idea involved their Yellow Pages ads.

“Joe was spending around $35,000 on Yellow Pages ads and I was spending $24,000,” Conforti said. “We’re going to spend half of that total on a new ad.”

Conforti said when he first proposed the idea to DiGangi, he didn’t get a response for a few days. As it turned out, the gears were already turning in DiGangi’s head.

“Then he called me back and told me some other ways the merger would save us money,” he added. Conforti figures a 20% saving by combining resources. That equates to around $140,000 a year in expenses.

But it wasn’t just the money savings that interested the two owners. Both men have family in the business and would like to keep the business for their children.

Conforti said that the new company has a goal of $7 million in sales in 1999, an increase of 8% over the combined totals for 1998. The business centers on residential and commercial service. Although he doesn’t get involved in new construction, Conforti does occasional work for some of the larger contractors who build $3 million to $5 million homes, including a $250,000 contract for one home.

He credits his sales force for aggressively going out and landing new jobs for the company.

“We feel that we have one of the best sales forces in the state,” added Conforti. “No one else has people the same quality as ours.”

“This goes down the line to service techs and installers, too,” said DiGangi. “When we combined the companies, we put together a lot of talent that is second to none.”

It is going to take that kind of talent and commitment to compete against utilities. Relying heavily on residential service contracts, Air Group will feel the utility push more than other predominantly commercial contractors.

“We can’t compete with utilities on price,” said DiGangi. “We don’t believe utilities can supply good one-on-one service. There are people without heat who have to wait three or four days for utilities to service them when we can usually be there the same day. There are going to be people who want a cheap $39.95 insurance contract that utilities are offering and there are other people who are going to want service — our target customers.”

Conforti added another reason why his company has an advantage over utilities.

“If we tell someone we’ll be at their house by 9:30, we’ll be there,” he said. “The utilities will say any time between 8 and 5, if they show up at all. We’ve lost customers to utilities who are now calling us again.”

Both men agree that the merger of the companies has increased their value to consolidators. They have done a lot of the leg work that consolidators normally do before making an offer to buy. Although they aren’t thinking about selling, they do like the idea of consolidation.

“It’s the greatest thing since sliced bread,” said Conforti. “Our ways are being changed. Our businesses are being over-valued. I have been offered three and four times the value of the business.”

Conforti likes to emulate the consolidators but he isn’t looking to sell, at least not right now. However, he concedes that two months from now, everything may change again.

“Everything I say today is in pencil,” he laughed.

Fras-Air/Service Experts

Bill Fraser has been in the hvac business for a long time. The president of Fras-Air/Service Experts in Manville started as a 14-year-old working in his father’s contracting company. He eventually worked his way up through Ortho Pharmaceutical beginning as a maintenance electrician and eventually as a supervisor of hvac and plumbing services.

Fraser had a burning desire to complete his college education, so he put himself through school by starting his own contracting company. After he graduated, he turned his attention full-time to the hvac trade. Along the way, he picked up a few tricks of the trade, including one that foreshadowed his own future.

Long before the word “consolidation” entered the contractor’s vocabulary, Fraser made a move to strengthen his company. He acquired a company called Arrowhead that at its peak was generating about $2.2 million.

“The owners were old and both had become ill,” Fraser said. “The business ran down to where it was only doing about $400,000 a year, but it had a tremendous customer base.”

Fraser’s place in the market (50-50 residential and commercial service) and his appetizing sales volume (approaching $5 million) was a beacon for attracting national consolidators to his door. He listened to the overtures and eventually selected Service Experts.

“I thought they were the better-run organization and their business philosophy fit mine the best,” Fraser added.

Fraser considered consolidation because people he knew, including the men he purchased Arrowhead from, were aging and not able to sell their business for a good price.

“It was a means of looking for an exit without having to do it instantly,” he added. “I’d like to stay on for another six years, maybe longer, and Service Experts wants me to. It’s just a matter of health and right now I feel good and enjoy what I’m doing.”

In the meantime, Fraser is gearing up for a battle with New Jersey utilities for the service contract business.

“It’s difficult to assess the threat of utilities,” he said. “Customers often call Public Service Electric & Gas Co. (PSE&G) first if there is a problem with their heat. If it is an emergency situation, they usually retain the utility for repair services. Even if the customer doesn’t have a service agreement, they’ll probably call PSE&G first.”

Fraser isn’t sure what effect utility competition has had on him. But if he uses the number of service calls on a hot day as a gauge, then the impact is obvious.

“When we get a 95°F summer day, we would typically get up to 300 calls a day,” he added. “Now we get about 50 calls, which is still more than usual and manageable, too.”

Fraser believes that a loyal customer base, who have enjoyed FrasAir’s quality and reliability, will provide a strong hedge against competition. He stresses professionalism and care and he readily admits that his service comes with one of the higher price tags around. But he sees that as an advantage.

“I think the lower-priced contractors will have a harder time competing with utilities because they’ve already lowered their prices to get the job,” he added. “They don’t provide every service available. For example, I know of one contractor who has a message on his after-hours voice mail. It tells the listener to call PSE&G if there is an emergency.”

Fraser said that having the backing of Service Experts has definitely helped in his battles with the utilities. The consolidator’s buying power and marketing capabilities have been a real plus for FrasAir.

“Being with Service Experts gives us better credibility with our employees, too,” Fraser added. “Now an employee has the opportunity to move up, they are not locked in one position. Utilities have always talked about opportunities to grow.”

With all the talk about utility competition, Fraser thinks that one of the contractor’s biggest competitors is often forgotten about.

“Sears is one of the biggest competitors that a contractor has and most don’t even realize it,” he said. “They are behind the scenes and provide easy financing for customers, which is something that private contractors can’t offer. They have revolving credit and credit cards. They tell the customer if there is ever a problem, they’ll take it back or they’ll fix it.”

Fraser suggests that one sure way to stay competitive is to have a well-trained staff that genuinely cares about the customer’s needs.

“Contractors are typically concerned about getting in and getting out,” he said. “A lot of them don’t care about the customer’s homes. Guys are wearing muddy boots and don’t use drop cloths and have dirty hands, marking up the walls. We just can’t tolerate that.

“We train people on how to interact with customers. The typical vo-tech graduate doesn’t have customer relations or people skills. The customer has to feel comfortable with you.”

Reel-Strong Fuel Co.

Back in 1925, before the words “air conditioning” and “service contracts” became a regular part of an hvac contractor’s offerings, Jim Reel and Bill Strong were busy providing comfort to their customers, in the form of coal deliveries. Reel and Strong founded a company in Cranford that provided a source of energy for people with coal furnaces.

Later that evolved into a fuel oil delivery business and eventually spawned an air conditioning, air filtration, and in general, a “home comfort” business. President Clint Crane and his brother Pete run the business now, having learned the trade from their father, who worked for Reel and Strong.

Although Crane would prefer to devote his attention to servicing his customers, he feels obligated to join fellow New Jersey contractors in their fight for fairness in utility competition.

“The passing of utility deregulation in New Jersey will certainly affect how I operate and how utilities operate,” he said. “It’s going to be interesting because now the utilities will not only be involved in the transmission of gas and electricity, they’ll be involved in the full house service business too.”

Crane has been vocal in his fight against utility cross-subsidization of ratepayer money to fund their ventures in the service business.

Reel-Strong, because of its history in the fuel delivery business, can compete with utilities outside of the service arena, something not an average hvac contractor has the ability to do.

“I can go into the gas and electric business and provide energy for my customers,” Crane said. “I have a few thousand customers who have trusted my company for years and if they can’t get satisfaction from the utility’s customer service department, maybe I’ll become their energy provider.”

For now, Crane will continue to fight the small battles and hope he can get his message across to other mechanical contractors. He said the legal bills during the fight for fair competition have been astronomical.

The company has a keen interest in residential customer satisfaction since 95% of its service work is in the residential market. Crane feels strongly about guaranteeing his work and offers customers extended warranties on his installation and service work.

His 12 employees are kept busy, servicing a market which covers a six-mile radius of Cranford, located in the center of Union County. Reel-Strong’s ledger sheet shows over $800,000 in equipment sales (of which 75% to 80% is manufactured by Rheem) and over $2 million in fuel oil sales in 1998. With those figures, it’s no wonder that consolidators have shown some interest.

Crane believes that consolidated contractors have every right to be in the hvac business but he doesn’t pay much attention to what they’re doing.

Some of his past transactions have included acquisitions of small oil companies. He believes there is room for consolidation within the oil business. He said that oil companies provide a very marketable asset to prospective buyers. One major east coast company is looking to consolidate oil companies but Crane isn’t taking the bait.

“Petro is a big company paying fair prices for businesses,” he added. “But I would not be comfortable consolidating and going to work for them.”

Crane is confident that the strength of his oil business will help him weather the storm of utility competition in his market.

“If something happens to affect our service business, we’ll be OK,” he added. “We’re not in a position to lose too much because of our oil business.”

If he were to lose some of his service business, it wouldn’t be because of poor service. Crane takes no chances when it comes to his service business. All of his technicians are certified and he lets his customers know that.

“We’re fortunate to have a lot of employees with longevity,” he said. “If one were to get sick or retire, there is no question that we would have a problem replacing him.”

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