According to the most recent report from Heating, Air-conditioning and Refrigeration Distributors International (HARDI), average sales for HARDI distributor members declined by 2.8 percent in December 2017, and the average annualized growth for the 12 months through December 2017 was 5.3 percent.
“December is not a seasonally significant month. The decline is associated with very strong prior year sales and one less billing day this year,” said Brian Loftus, market research and benchmarking analyst, HARDI. “That is difficult to overcome.”
Even so, he noted, 5.3 percent growth is the slowest calendar year since 2011 when the industry was recovering from the recession.
“This is somewhat at odds with the other strong signs we see, like the positive slope to the leading indicators,” said Connor Lokar, senior economist, HARDI. “HARDI members did post strong growth in November and December 2016 and January 2017, so they set themselves up with some tall bars to clear. The decelerating growth is a noteworthy trend to watch.”
Still, distributors are optimistic the economic indicators will continue to point to strong sales this year.
SALES ARE UP
A solid economy, combined with strong consumer and business sentiment, should result in good stable growth in the light commercial and residential markets this year, said Carlton Harwood, vice president of HVAC business, Ferguson, Newport News, Virginia.
“Going into 2018, our backlog is strong, and we feel like we are in a great position to build upon our value proposition as well as our strong customer and vendor relationships,” he said. “As far as the economy is concerned, I remain optimistic that 2018 will provide ample opportunity to hit the objectives that we have put into place.”
Regionally, wet weather during the fall and winter had an impact on performance in 2017, but the overall result was quite positive, especially in the multi-family and light commercial markets, according to Harwood.
“The ductless market also continues to expand, and connected home products experienced a high percentage of growth last year,” he said. “We expect that more HVAC contractors will see the value in offering connected and lifestyle products to their customers.”
Sales at Nefco Corp., East Hartford, Connecticut, were also up in 2017, and Executive Vice President, Skip Maxfield, expects more of the same this year.
“Sales in our core products to the construction trades continued an upward trend, as evidenced by double-digit sales over the last several years, including 2016 and 2017,” he said. “We see no evidence of this slowing down in 2018.”
Nefco experienced healthy growth in a variety of safety equipment, such as fall protection, arc flash protection, gloves, and tool tethering, said Robert Klemyk, director of marketing.
“On the tool side, we saw similar growth for silica dust extraction products and increased spending in strut channel, hardware/fasteners, anchoring, rod, and pipe hangers (STRUT),” he said.
Sales were strong in the last quarter for ACR Supply Co., Durham, North Carolina, and company President, Troy Meachum, who is also HARDI president, is extremely optimistic about 2018.
“The economy in North Carolina is very strong,” he said. “That, combined with a new equipment line and some hot weather, is leading us to be very hopeful about the year ahead.”
Meachum also believes the new tax reform bill will give the economy a much needed boost this year.
“That is going to be rocket fuel for the economy in 2018,” he exclaimed. “The corporate tax rate reduction to 21 percent is going to be fantastic and will allow us to keep more of our profits, so we can invest in our people and our growth.”
Herb Woerpel, editor-in-chief of Distribution Center magazine, said the distribution sector may also benefit from the expansion of HVACR expensing, which was a key element in the tax reform bill that was passed late last year.
“The expansion of Section 179 in the new tax law may prove to be a real game changer for HVACR distributors,” he said. “This allows up to $2.5 million in new and used HVACR purchases — with a $1 million limit — to be deducted immediately via the tax code rather than through a 39-year depreciation period. This could provide hundreds of thousands of dollars in immediate savings in HVACR upgrades. Distributors need to make their contracting partners aware of this new deduction and insist they flaunt this significant savings to their commercial contractors.”
While distributors are very optimistic about business growth this year, there are a few issues causing concern. For example, the growing e-commerce channel will continue to challenge the traditional supply chain, much like it has in many other industries, noted Harwood.
“Technology often creates disruption, and new entrants will emerge,” he said. “Who, where, and when is anybody’s guess, but that should be expected, not feared. We embrace the disruption and see it as an opportunity for everyone in our industry to understand and challenge themselves, evolve, and respond to how business will be conducted in the not-too-distant future.”
There is no doubt e-commerce is here to stay, and, chances are, it will only increase in the future as more end users — millennials, in particular — prefer to buy products online, said Meachum.
“E-commerce will continue to impact distributors, and we must put our best foot forward in this area,” he said. “We are working hard to provide the best online experience we can for our customers, and we have seen some measurable success.”
Meachum would also like to see Congress do even more to reduce the burden of the Affordable Care Act (ACA), which he referred to as an albatross around the necks of businesses.
“The individual mandate being repealed in the tax reform bill will help, but the amount of regulation, paperwork, and bureaucracy in the ACA has been stifling,” he said.
The average worker in the HVAC industry is approximately 56 years old.
“That’s why attracting younger talent is vital,” said Maxfield. “On the other hand, we are optimistic about the future. The alignment of technology and innovation creates the perfect storm of opportunity for those companies willing to embrace what we consider to be a once-in-a-lifetime chance to seize market share.”
Even with these concerns in mind, most distributors see smooth sailing ahead, with strong consumer and business sentiment helping to fuel economic growth.
“Overall, the distribution and wholesale market is healthy and has recovered well from the previous economic downturn,” said Harwood. “The current economic expansion, derived in part from increased consumer spending and corporate profits, is expected to continue for another 18-24 months.
“We believe this economic growth will help to further drive the demand for the distribution and wholesale market upwards,” he continued.
Publication date: 3/12/2018