Distributors Predict Slow, Steady Growth
Concerns Remain Regarding the Economy’s Fragility
The latest report from Heating, Air-conditioning, and Refrigeration Distributors International (HARDI) showed that average sales for HARDI distributor members increased 9.4 percent in November 2014, but that annualized growth through November was 6.9 percent, which is where it was throughout 2014. HARDI senior economist Danielle Marceau noted the economic health of the U.S. consumer is improving, thanks in part to lower oil prices, which are reducing the cost of natural gas and heating fuel. “This is great for U.S. consumers, who will spend less on these necessities and have more money in their pockets for home improvements.”
That being said, HARDI president Bill Bergamini, president, Illco Inc., Countryside, Illinois, noted distributors should not expect a windfall year anytime soon. “While all indications are the economy is moving in the right direction, most people I talk to in our industry remain cautiously optimistic. Most economists have agreed over the past several years that growth will be slow. I think they are right on the money.”
Modest Growth
Alex Hutcherson, vice president — HVAC, Ferguson Enterprises, Newport News, Virginia, also believes the economy will continue to be a concern for the HVAC industry this year. “In many ways, the economy is still fragile, but we are optimistic the trend of slow, steady growth will continue. New residential construction has been improving over the last couple of years but is still below the historical 20-year average, and we expect multi-family to continue being a bright spot in 2015. But, commercial is still lagging, and we’re concerned about what oil price deflation will do in the industrial sector.”
Distributors have reason to be optimistic about the new residential construction market, given that the Department of Commerce just reported that new housing starts for 2014 were up approximately 8.8 percent from 2013 to an estimated 1,005,800 housing units. Of course, given that housing starts topped 2 million units in 2006, there is still a long way to go. On the commercial side, nonresidential construction spending expanded only 0.4 percent in December, according to the U.S. Census Bureau, but total nonresidential construction spending in 2014 was 6.6 percent higher than in 2013.
For these reasons, Jeff Corken, president, The Corken Steel Products Co., Florence, Kentucky, is optimistic that all market segments will see growth this year, especially if hot weather materializes this summer. But, he added, the economy is still fragile, and a wild card will be how the Department of Energy’s (DOE) new regional efficiency standards will impact the market. These standards increased the minimum cooling efficiency requirements for split-system central air conditioners and heat pumps in the South and Southwest as of Jan. 1, 2015.
“Also unknown is the price and availability of R-22, and these are factors that will impact the replacement product mix. I’m not so sure there is any pent-up demand at the moment,” said Corken.
Bergamini is also skeptical of pent-up demand, which many keep hoping will finally move customers to replace rather than repair their aging HVAC systems.
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“I think everyone is moving forward with caution,” he said. “There are many factors influencing the replacement business, including lingering effects of the federal tax credits. Whenever you have a program like that, there is premature replacement business, because the units that normally would be replaced years down the road due to failure have already been replaced. In addition, dry-shipped condensing units — which have multiyear warranties — have delayed another million or so replacements.”
Another issue that may affect the replacement market is the grace period allowed in the DOE’s regional efficiency standards, which permits the sale of 13 SEER units in Southern regions for 18 months. “If there are a lot of units replaced in those regions, that will distort the demand curve as well,” said Bergamini. “As long as the economy and consumer confidence remain positive, replacements will come, but I’d be wary of any straight-line projections failing to take into account these other anomalies.”
Concerns Ahead
The regional efficiency standards will affect the industry in other ways, as well, said Hutcherson, as the DOE’s made the issue so complex that execution will be difficult for the manufacturer, the distributor, and the contractor.
“These difficulties are compounded for those located in areas that border two regions that mandate two different standards. We have several locations in bordering states that will face these challenges. Our plan is to implement extensive training and education for our associates to comply fully with the new regulations. It is going to be challenging to ensure everyone understands the new requirements, but it is necessary, because vendors, distributors, and contractors will all have increased responsibility for documenting product movement.”
The new regional standards will also make it difficult to have a balanced inventory in 2015, said Hutcherson, because, last fall, distributors made forecasts and placed orders to cover their needs for the first portion of 2015. “This will likely cause inventory to balloon during the first few months of the year. As the summer heats up, we would expect distributors to be working diligently to fill holes they didn’t account for in their forecasts.”
These issues are impacting Corken, who has locations in the North and South. “We are scheduling meetings and training sessions with our dealers to make sure they fully understand all of the changes and what their responsibilities are, including the maintenance of accurate records, as well as where, when, and what products they can sell.”
Other regulatory issues, such as tax reform, are also on the minds of many distributors, including Bergamini, who is concerned there is little discussion in Congress about protecting pass-through entities, such as S Corporations and limited partnerships, from tax increases.
“There are also additional costs in the Affordable Care Act, as well as proposals for paid family leave, which make it difficult for employers to increase wages, because so much of the compensation package is wrapped up in benefits. We all understand some federal oversight is necessary in a free society, but continuing to make it harder for businesses to grow and prosper holds our economy back from its true potential.”
Another area of concern for Bergamini is online and retail sales. “Over the last decade, Washington has made a real push to regulate what our industry sells and where we sell it. HVACR distributors track refrigerant certifications for regulated product purchases; inform customers of product bans, regulations, and technology advancements; and disseminate information regarding the proper use and safety of the products we sell. We need to constantly train our employees and our customers to keep up with new technologies and new regulations. If the goal is competence and accountability, online retail sales are a step in the wrong direction.”
And, there will be more issues facing distributors this year, as the HVAC industry experiences an evolution in regulation and technology, said Hutcherson. “Questions come to mind, such as, what will happen to dry-charged units? How long will it take to see a noticeable shift from 13- to 14-SEER products? Is inverter technology the wave of the future? How many mini-split companies will be in the market by the end of 2015? Will commercial mini-splits start to dominate commercial specifications?”
Like Hutcherson, many in the industry will be waiting to see how these issues play out, but one thing is for certain — it is going to be a very interesting year.
Publication date: 3/16/2015
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