HVACR Distributors Navigate the Path to Prosperity in 2017
From a handful of hurricanes to a new president to the threat of online sales, 2017 was full of potential pitfalls for wholesalers.
And while 2017 brought its fair share of challenges, it was also padded with positivity.
For example, the U.S. economy registered 3 percent growth in the second quarter of 2017, the Dow Jones Industrial Average surpassed 23,000 for the first time on Oct. 17, consumer confidence reached a five-month high in August, and year-over-year privately-owned housing completions were up 10.3 percent in September.
Despite boasting more ups and downs than a game of Chutes and Ladders, many HVACR distributors fiercely focused on their internal metrics and navigated their way to exuberant success in 2017.
A Banner Year
Ferguson, a Newport News, Virginia-based wholesale distributor, ended the year with nearly $15 billion in sales, an increase of 10.4 percent.
Bill Brundage, CFO, Ferguson, said a number of external and internal factors played a role in the distributor’s success in fiscal year 2017.
“Externally, the growth in both the residential and nonresidential construction markets as well as the rebound in the industrial market helped drive up demand for the products and services we offer,” he said. “Our committed and knowledgeable associates allow us to provide the best service to our customers and continue to outperform within the markets we serve.”
Winsupply Inc., headquartered in Dayton, Ohio, operates nearly 600 locations in 45 states and boasts approximately $3 billion in revenue. 2017 was the first year under the guidance of president and CEO Roland Gordon, who replaced Jack Johnston on Jan. 31.
“For 62 years, Winsupply has been built on entrepreneurship, shared ownership, free enterprise, and capitalism,” Gordon said. “We have a good economy right now. The housing stock is in short supply, so there needs to be an investment in building new houses, and commercial construction is up. There’s a lot of demand in the marketplace right now.
“But, above all of that, our success depends on our local company presidents, their staffs, and how they take care of their customers,” Gordon continued. “We’re not a top-down organization. Our results are all based on the hard work occurring in the field.”
Stephen Torrice, second-generation owner of S.G. Torrice Co. Inc., a Wilmington, Massachusetts-based full-service distributor of heating and cooling equipment and parts, said his company took a giant leap forward in 2017.
“The biggest thing this year for us was the acquisition of the Trane line,” said Torrice, who’s been with the company for 44 years. “We’ve been an American Standard distributor for 28 years, since 1989. Adding Trane was momentous but challenging as well. We had a very short window to ramp up. It was already difficult to find qualified people, and we needed to hire 25 people in eight weeks because we didn’t want to let any existing Trane customers down. We did benefit from already knowing Ingersoll Rand and its internal systems, like ordering, warranty processing, and co-op ad plans. In the end, it was controlled chaos, though the whole thing was not as disruptive as I anticipated. We have good people in place, and we were lucky enough to find a few more.”
Scott Larson, president of Pewaukee, Wisconsin-based Gustave A. Larson Co., an HVAC and refrigeration products distributor serving the Midwest, Plains, and Mountain states, deems any year successful as long as the company continues to achieve its mission statement, which is to win together with its customers, suppliers, and employees.
“Yes, 2017 has been a success but not at the rate of 2016,” Larson said. “In many ways, 2016 was a record year for us. Since July, the fervent growth rate of last year that continued into the first half of 2017 slowed down considerably. This mirrors what HARDI’s TRENDS reports indicate.
“Our team has been busy for the last 12-15 months in system selection, design, and testing of a new ERP [enterprise resource planning] system,” Larson continued. “This will change our paradigm in how we serve our customers, daily operations, and back-office processing. We feel this is an investment in our company’s long-term success.”
American consumers are spending more than their time online; they’re spending their money there, too.
According to a study conducted by Statista, an estimated 1.61 billion people worldwide purchased goods online in 2016. Global e-retail sales amounted to $1.9 trillion, and projections show a growth of up to $4.06 trillion by 2020.
Many of the distributors charting success in 2017 have implemented, or are in the process of introducing, online storefronts.
Gustave A. Larson pioneered an online B2B sales portal in 2000 and now completes a significant amount of its business online.
“It truly makes everyone more efficient,” Larson said. “In 2018, we will continue our online momentum as we launch a new Larson B2B website called Larson ‘e-fficiency.’”
Torrice insists online selling continues to be a focus for S.G. Torrice.
“Establishing an online presence takes more time, effort, and money than it looks like it should take,” he said. “When the Trane situation arose, we had to modify our e-commerce system to accommodate this major line. Our implementation schedule had to be adjusted, and now we have a beta version ready to roll out on a limited basis this month with full operation by Jan. 1.
“The internet is unforgiving, and there’s a big downside if you get it wrong,” Torrice continued. “It’s like you get one chance, and if someone doesn’t immediately have a positive experience, they don’t hurry back. Instant gratification has its downside.”
Ferguson continues to diversify its business in every market it serves, such as expanding its HVAC repair parts inventory.
“We are also evolving to do business the way our customers do business, such as online through Ferguson.com and by utilizing punch-out catalogs,” Brundage said. “We have formal training programs in place for Ferguson Facilities Supply, HVAC, Waterworks, and our Industrial businesses to shorten the learning curve for our newest associates, so they can hit the ground running. Most of all, our associates are committed to delivering world-class customer service.
“Our customers need visibility to product options and inventory and quick access to their accounts,” continued Brundage. “We have always embraced the convergence of brick-and-mortar with online sales, and the relationship between e-commerce, our branches, and our distribution centers across the country continued to evolve in 2017.”
As millennials continue to take over the workforce, technology as a whole will continue to play a greater role across all industries, including HVACR distribution.
“Wholesale distribution seems to be a trailing adopter of trends that happen online,” said Steve Edwards, chief marketing officer, Winsupply. “We believe wholesale distribution tends to trail behind retail a few years. Ultimately, we recognize what our customers want and what their expectations are, and we’re making some significant investments to create the tools and services necessary to serve our customers’ needs.”
Ferguson was aggressive on the acquisition front as the distributor acquired nine companies in 2017, including P.V. Sullivan Supply, a commercial supplier in the Northeast region; Ramapo Wholesalers, a plumbing and HVAC supplier serving southeast New York and northern New Jersey; and others.
“We focus on identifying target acquisitions that fit into our overall strategic priorities, looking for opportunities to expand our capabilities, and provide better service to our customers,” Brundage said. “In general, we consider companies that are a good fit for Ferguson both culturally and strategically. We look for those whose talented associates share the same values and commitment to customer service that we do.”
Winsupply Inc. opened 10 new companies in 2017, including locations in Beltsville, Maryland; Boston; East Nashville, Tennessee; Presque Isle, Maine; and more. Additionally, the company also acquired Certified Plumbing and Electrical Supply Co. Inc. in Live Oak, Florida, and Electrical Sales Inc. in Vista, California.
“We don’t refer to locations as branches; they’re individual companies, and the people who run those locations are company presidents,” said Ward Allen, vice president of finance, Winsupply. “We’re interested in developing entrepreneurs at all of our new locations. When it comes to acquisitions, we’re typically looking for companies that fall into our electrical, plumbing, HVAC, industrial, waterworks, and irrigation verticals. The next question is how well is that marketplace being served currently. Generally, we’re looking for companies that are profitable and have good management teams in place. We’re interested in partnering with those types of companies, especially if their existing management teams have the passion to lead companies through an ownership position.”
Larson credits the company’s success to strategic execution of its key priorities and initiatives.
“We have many regions across the country that are performing at high levels,” he said. “Further, we continue to grow our gross margins and operate more efficiently, which make us a better company.”
Although the summer weather in the Midwest didn’t fully cooperate, Larson said the replacement market for residential as well as multifamily new construction remained very strong in 2017.
“The weather was our weakness, but, seriously, we can’t make excuses about the weather anymore,” he said. “We have to continue to build strength and grow our core markets of commercial refrigeration and residential and commercial HVAC, regardless of the weather.”
Torrice credited a strong New England economy when tallying his company’s growth factors.
“We have our new people up-to-speed, and they’re better at integrating Trane into operations,” he said. “Additionally, our e-commerce platform is nearing completion, and vendors seem to have gotten their respective acts together. Shorter lead times and fewer back orders mean happy customers and better inventory turns, although, by mentioning it, I’m sure I just jinxed it.”
As distributors zero in on what lies ahead, one major blip on the radar is tax reform.
“Tax reform is the ‘Holy Grail’ it seems in U.S. politics, since we haven’t seen any significant reform since the Reagan era,” Larson said. “On the topic, we would like to see a substantial simplification of the tax code as well as incentives for future investment in our businesses, especially by addressing the unfair burden put on S-corp. companies that pay much higher rates than C-corps.”
Gordon said, first and foremost, he is hopeful that President Donald Trump lowers the corporate tax rate.
“If they were able to pass something — and that if factor still exists — we would utilize that savings and invest and double-down on some of our infrastructure and technology to speed up our process,” he said.
Torrice joked that Washington is so divisive that it might be better if Congress simply closed for the season.
“Jon Melchi of HARDI does a great job of keeping us updated on what’s actually happening in Washington,” he said. “He cuts through the BS and makes it understandable even to someone like me. Regarding tax reform, I’d like to see lower corporate tax rates — or no corporate tax, period — and let’s bring all that cash back from overseas and incentivize companies to manufacture here.”
The wholesale market largely anticipates another booming year in 2018.
“The state of HVACR distribution is very healthy,” Larson said. “If it wasn’t, we would be seeing more acquisitions, roll-ups, and independent HVAC distribution owners getting out of the business. Eight years after the Great Recession, most distributors seem to have healthy balance sheets and are continuing to build strength for the long haul.”
Torrice believes the industry’s in good shape but warns there’s always a black cloud of some kind lingering.
“When times are good, rent is high, and you can’t find people,” he said. “When you don’t need either, rent is cheap, and people are plentiful. Take your pick. Choose any ‘golden age’ of distribution, and if you could go back in time and ask people if they were in good shape, they’d declare, ‘hell no,’ and give you a dozen reasons why not. It seems like when the future looks grim, the past always looks brighter.”
Winsupply will continue to be active on the acquisitions market in 2018.
“We have quite a few projects in the hopper on the acquisition side, and being able to continue to assimilate those companies in several major markets will bode well for us,” Gordon said. “We’re also focused on improving our technology, as we need to get better there. We’re in good shape, but there’s always that question mark when it comes to disruptors. As soon as you feel safe, something happens. We believe we’re in a good spot, but we know we have to be nimble, agile, and ready to react.”
Everything Ferguson does is based on attracting, training, and developing the best associates in the industry to take care of its customers, said Brundage.
“Our customers and their expectations are changing, and they want to transact with us faster than ever before,” he said. “We will continue to evolve to meet their needs by providing a seamless omni-channel experience no matter how our customers shop with us.
“We’re well positioned to partner with our customers and vendors to help them take full advantage of our ability to bring products to market,” Brundage continued. “We will continue to meet and exceed customer expectations, and we are constantly looking at new and innovative ways to handle the higher volume of orders faster and more efficiently.”
In addition to discussing their internal activities, the distributors interviewed for this article offered up one tip that new or up-and-coming distributors should consider. Here are their suggestions:
Scott Larson, president, Gustave A. Larson Co.: “Pay attention to cost to serve. Taking large volume at low margins is not always a great idea. If you understand how expensive it is to serve certain customers or business channels, then you’ll know if that is a profitable business or not. Too many wholesalers don’t understand this and lower the bar on profitability for everyone.”
Stephen Torrice, owner, S.G. Torrice Co. Inc.: “My advice would be that you’re going to make mistakes, just make sure you learn from them. If you don’t learn from them, you won’t be around long. Hire people smarter than you and listen to them. Don’t try to be the smartest person in the room. Don’t let your ego get in the way. My father told me something a long, long time ago. He said, ‘To be successful, you only need to be right six out of 10 times.’ And I’ve found that to be very true.”
Bill Brundage, CFO, Ferguson: “Product and service diversification allows HVAC distributors to provide customers with what they need. It’s essential to stay close to your customers to evolve with their ever-changing expectations.”
Steve Edwards, chief marketing officer, Winsupply Inc.: “In today’s business environment, customers have more power than ever before. You have to be as close to customers as possible and have a deep understanding of their expectations to capture their business. This means you must have a close, personal relationship with customers and make it as easy as possible for them to do business with you. That combination is the recipe for success.”
Ward Allen, vice president, finance, Winsupply Inc.: “If distributors are new and struggling, then find us. We provide capital, infrastructure, and everything they need to realize their dreams and effectively service their customers. We know you; we love you; and we want you. Give us a call.”