The HVACR industry seems to be enjoying some much-needed growth.

At the 2011 Heating, Air-conditioning and Refrigeration Distributors International Conference in Hawaii, economist Alan Beaulieu noted, "The world will be a better place in 2012 and that will help the U.S. economy." He also told attendees that they will be busier and are likely to make more money in 2012, and should be even busier in 2013.

The National Association of Home Builders (NAHB) reported a growing sense of optimism following its annual International Builders Show. Single-family housing starts rose 4.4 percent in December, moving at their fastest pace since the end of the home buyer tax credit program in 2010, and builder confidence improved, based on the NAHB/Wells Fargo Housing Market Index, which rose to 25 in January its highest level since the summer of 2007.

This positive industry outlook was reflected in the findings of the new Distribution Center magazine Top 50 U.S. HVACR Distributors survey, which revealed that 80 percent of respondents saw increased HVACR sales in fiscal 2011 vs. 2010, and 79 percent said they expected 2012 HVACR sales to surpass 2011.

A CLOSER LOOK AT RESULTS

The overall ranking chart lists the top 50 HVACR distributors in the United States, based on responses to our survey, ranked by their total HVACR sales for 2011.

The top 50 U.S. HVACR distributors listed here represent more than $10.3 billion in HVACR sales.

The mean increase in 2011 reported by survey respondents was 9.1 percent. Another 6 percent said their HVACR sales had remained flat in 2011. Among the 14 percent of respondents who said their 2011 HVACR sales had decreased versus 2010, the mean decline was 4.4 percent.

HVACR sales rose by 10 percent or more in 2011 versus 2010 for 13 of the top 50 distributors.

The mean increase projected for 2012 was 7.1 percent. Another 13 percent said they expect to see flat sales for 2012, while only 6 percent said they anticipate a decrease in HVACR sales, with a mean decline of 4.3 percent.

Survey participants were ranked based on their total HVACR sales for fiscal 2011, including sales of heating, ventilation, air conditioning, cooling and refrigeration equipment, as well as related parts, supplies, refrigerant, controls, tools, and other items considered part of the HVACR segment of their business.

They were asked what percent of their total business is in HVACR and to indicate what percentage of their HVACR sales are represented by HVAC heating (air side)/cooling equipment and supplies; hydronic heating; refrigeration; and "other." Their responses in the "other" category included: controls, sheet metal, coils, ductwork, plumbing, propane systems, electrical, HVAC accessories, foodservice, commercial ventilation, noise and vibration control, rain goods, roofing products, solar panels, inverters, racking, common system components, appliances, grilles, tubing, insulation, filtration, geothermal, test equipment, and sheet metal fabricating machinery.

Among all survey respondents, 84 percent said they were HARDI members. Of the top 50 distributors, only three were not members of HARDI.

The survey asked distributors for the number of warehouses they had at the end of fiscal 2011. Some companies responded with the number of locations, but others may have identified "warehouses" more narrowly, reporting fewer locations than expected. In future studies we plan to ask participants for the number of locations to avoid any confusion.

"This strong list of companies reaffirms the old saying, 'you can try to replace the distributor, but you can never replace distribution,' and takes it a step farther by showing how effective professional, profit-minded distribution really is. From their comments, however, they all share deep concerns about the anchor government seems to be on their growth potential, coupled with general economic uncertainty and malaise further eroding margins. To combat these downward pressures and remain on or rise on this Top 50 list, distributors will need to become even more data-driven and scientific in their strategy development and execution," said Talbot Gee, executive vice president and COO of the Heating, Air-conditioning & Refrigeration Distributors International (HARDI).

COMMENTS

Here is what HVACR distributors mentioned as factors that will most impact their business in 2012:

• The economy, the Department of Energy, and the Environmental Protection Agency, according to Mike Michel, vice president of marketing, R.E. Michel Co., Glen Burnie, Md.;

• Increases in both housing starts and commercial construction spending, per William Newland, president, Hercules Industries, Denver;

• The economy, especially in Southern California, which has higher unemployment than the national average; once we get a hot summer (we have not had one in the last two years) people will start to repair or replace their air conditioners, according to John Scarsi, executive vice president and CFO, US Air Conditioning Distributors, City of Industry, Calif.;

• Margin erosion and uncertainty over R-22 dry ship, said Jay McDaniel, president, Team Air Distributing, Nashville, Tenn.;

• Project work, according to Douglas B. O'Neil, controller, ABR Wholesalers, Rochester, N.Y.;

• The economy... depressed inner city conditions, said Russell P. Urzi, president, N&N Supply Co., Philadelphia;

• Job increase or decrease and optimism of western region, according to Tim Mann, president, Indio Heating & Cooling Supply, Indio, Calif.;

• More stable world economy leading to more investment in commercial and industrial, said Greg Peddie, president, Hayward Pipe & Supply, Hayward, Calif.

Other survey respondents cited weather, the election, government regulation, taxes, energy, fallout from Europe, gross margin deterioration from weak demand and competitors cutting prices, the end of tax credits, flat residential housing, new construction, consumer confidence, manufacturer/distributor relationships, employment, and freon and raw material costs as impactful factors.

THE MARKET AND ECONOMIC OUTLOOK

HARDI noted that results reported in October 2011 finally reversed a seven-month decline in the annual distributor growth rate, perhaps signaling a positive turn in the business cycle. HARDI's Monthly Targeted and Regional Economic News for Distribution Strategies (TRENDS) report showed growth in six of eight North American regions. U.S.-only distributor sales growth averaged 3.6 percent for the month.

The ACHR NEWS reported that distributors in all U.S. regions ended 2011 in positive territory and also reported higher inventory levels than the same time in 2010.

In his presentation at the 2011 HARDI Conference, Beaulieu shared forecasts by his group: a 4.3 percent growth in 2012 and a 3 percent growth in 2013. He based his positive economic outlook on these factors: leading indicators pointing up; liquidity not an issue; exports up; stimulative monetary policy; rising employment; banks lending; and a normal seasonal rise in retail sales.

NAHB reported that builder confidence in the market for newly built, single-family homes was unchanged in March 2012. Following five consecutive months of gains, the Housing Market Index by NAHB and Wells Fargo was holding at its highest level since June 2007.

TIDBITS ON LEADING DISTRIBUTORS

Hajoca Corp., Ardmore, Pa., acquired the plumbing and HVAC business of Atlanta-based HD Supply in August 2011.

F. W. Webb Co., Bedford, Mass., aims to be its market's leader in promoting alternative energy HVAC, wrote Jim Olsztynski, former editor of Supply House Times, in a March 2011 feature. He pointed out that the distributor had incorporated thermal solar panels and an open loop geothermal system with distributed heat pumps in addition to other green features at its expanded Hyannis, Mass., branch in 2010 and intended to install similar hybrid solar/geothermal systems (except closed loop versions of geothermal) in new facilities planned for Waterford, Conn., and Boston.

Johnstone Supply, Portland, Ore., a cooperative wholesale distributor, describes itself as a national leader in the HVACR industry. The company has regional distribution centers in Portland; Memphis, Tenn.; Allentown, Pa.; Jacksonville, Fla.; and Las Vegas. According to its web site, it has more than 350 independently owned stores throughout the United States and beyond.

Famous Enterprises in Akron, Ohio, hosts an expo that is said to be one of the top regional distributor trade shows in the HVACR industry, with approximately 4,500 attending during the two-day event.

Sigler Wholesale Distributors, Tolleson, Ariz., said that its Totaline Mobile Warehouse is a 16-foot box truck and functions as a parts warehouse on wheels, stocked with 600 stockkeeping units of frequently used HVAC parts. The company currently has Totaline Mobile Warehouses in Phoenix and Tucson, according to Sigler's website.

MISCELLANEOUS COMMENTS FROM DISTRIBUTORS

The survey invited participants to comment on anything related to the HVACR industry, such as HVACR sales, competition, legislation, rebates, consolidation or any other concerns. Below are some of the comments received:

• "14 SEER mandate for 2013 along with increased regulation by CEC will have a negative impact on sales," said Tim Mann of Indio Heating & Cooling Supply.

• "Illinois needs to have state [required] testing for all HVAC contractors," said Harry West of Southend Supply.

• "R-22 dry ship is a real step backward for our industry. It seems as a group we are always searching for a lower common denominator," said Jay McDaniel of Team Air Distributing.

The following comments were submitted by HVACR distributors who asked not to be named:

• "Wish the industry could get past R-22 and nitrogen shipped equipment. Want to eliminate the need to stock full line of 22 AND 410a equipment...won't happen until the EPA cuts off R-22!"

• "If we do not get a 'Pro business' administration elected and in office, we are all going to be in trouble. Over-regulation, threat of higher taxes, uncertainty in so many areas is killing small business and our economy."

• "Concerned about deflation short-term, then inflation. Concerned about delay in setting HCFC caps restricting available/price of R-22. EPA CO2 regulations."

• "Our industry is being whipsawed by the excessive and uncoordinated regulatory burden of DOE and EPA at a time when we are facing a fragile economy without the support of the expiring federal tax credits."

• “The new minimum efficiency standards could mean much more paperwork and recordkeeping for the distributor if it stays as written."

• "Sales of geothermal equipment should continue steady with the tax credits still in place."

• "Dry units need to go away."

• "Becoming a 13 SEER market again with no tax credits available."'

• "Federal government regulations such as R-22 phase out and enforcement of regional energy standards. Also fed tax policies."

• "More manufacturers entering the distribution channel."

• "It would be nice to have an actual winter in the Northeast. The lack of frigid temperatures has had an impact. How often are contractors able to place condensers in January? Also, continued tax incentive rebates would be helpful."

• "Would like to see equipment manufacturers ally with distributors in a stronger stance to drive business in the marketplace."

• "Erratic [federal government] regulations makes managing a business difficult."

• "Economic uncertainty and high unemployment driven by generally dysfunctional governance seem to be the key factors influencing muted economic activity."

• "Likely to see additional consolidation in industry, as private equity is looking for higher returns than is otherwise available and relative bargains likely to persist through 2012."