DAYTON, Ohio — There’s a new but familiar face in the residential HVACR contracting market, and it is banking on many years of management experience and name recognition. Residential Services Group (RSG), a former division of Encompass Services, was recently acquired by Wellspring Capital Management LLC, a New York-based private equity investment firm. RSG is based in Dayton and specializes in HVAC and plumbing services in new and existing residential homes. RSG will also operate in the light commercial market.

Eric Salzer, who headed Encompass’ residential operations, has been named CEO of RSG. Salzer has worked most of his professional life in the HVACR trade, beginning as a retrofit installer for a Cincinnati contractor and eventually moving into the president’s chair for Airtron, an HVAC company consisting of 14 operating units, whose markets included residential new construction. Airtron was acquired by GroupMAC, which eventually merged with Building One to form Encompass.

RSG currently operates from 27 locations in nine states, with historical annual revenues of approximately $300 million.

Residential Services Group

In March 2002, Encompass filed a reorganization plan, and the company filed for Chapter 11 reorganization in November of that same year. Since that time, some of the original commercial and residential Encompass business units have been sold — some back to the original owners.

“We were very concerned at the time with the future of the whole company,” said Salzer. “Frankly, the erosion of Encompass happened a lot faster than anticipated.

“But at no time were we worried that [RSG] would be in harm’s way. We were always profitable from the very beginning — the most profitable group within Encompass.”

Salzer said that during reorganization, some of the original underperforming residential units were sold, which proved to be a blessing for the current group.

“We got rid of the underperformers and retained the businesses with solid management, a solid customer base, and solid name recognition,” he said. “We ended up with a very healthy group of companies.”

One thing that Salzer emphasizes is the importance of name recognition — a factor that Salzer thinks contributed to the demise of Encompass and the problems of other consolidators.

“We think that a real error in Encompass’ business plan was walking away from popular names like Evans Services, which has been in business for 100 years in Birmingham, Ala.”

Encompass made other mistakes, according to Salzer. “Encompass did a lot of things that did not remain within its core competency,” he said. “They didn’t have the system to track the progress of labor and materials. They ramped up so quickly that they couldn’t get a system in place to tell them where they were on a day-to-day basis.”

Salzer said that one of the biggest challenges the HVACR industry faces is the demise of other consolidators.

“There are a number of consolidators who are in trouble,” he said. “They are over-leveraged, they have overpaid for the companies, and they have people at the top who are accounting-focused and not operations-focused.

“There is going to be a lot of turmoil in our industry, affecting vendors and customers. And it will be an opportunity for us to increase our market share.”

Another characteristic of early consolidation — growth by acquisition — will not be part of the RSG business model, according to Salzer.

“An acquisition would be an exception,” he said. “We are more focused on organic growth and opportunities for our existing companies. We are only in favor of exceptional acquisitions on a very small scale.”

Training And Education

One of the benefits of partnering with Wellspring Capital Management is the accessibility to one of the leading HVACR training institutions in the country. In January Wellspring acquired St. Louis-based Vatterott College, which has a highly respected HVACR school.

“We intend to partner with Vatterott and use them as a source for service technicians,” said Salzer. “We are very excited about this advantage. Vatterott is a high-quality organization.”

Salzer said that RSG is “no different from anyone else” when it comes to the problem of hiring and educating service technicians. But the company has programs in place to address the needs.

“We do quarterly sales and design training here in Dayton — bringing people in from different divisions,” stated Salzer. “We also have a recruiter who visits colleges campuses on a regular basis. We also capitalize on local vendor and in-house training.

“It is a very well-thought-out training program. We bring people with field experience to teach classes, which is far better than straight book learning.”

A big opportunity in the HVACR market is retail consumer growth, according to Salzer. “We have not done a very good job of retaining some of the new construction customers after they have made their initial purchases,” he said. “We have been new construction focused for a long time, and we intend to capitalize on our customer base of installed systems.”

Tim Johnston, RSG’s chief financial officer, pointed out that some of the units remain very strong in light commercial markets. “We also have dedicated, formalized light commercial work in select locations.”

What’s In A Name

Salzer said it may be difficult for an HVACR contractor to succeed with a brand image on a national scale, so RSG is focusing on supporting its local brand names.

“The predominant name on a company vehicle, for example, will be [the local name], a division of Residential Services Group Inc.,” he said.

“Our tag will just be a way to tie the family of companies together. We intend on sticking with the original brand.”

Johnston added, “The way we differentiate ourselves from other consolidators is that we look at the Dayton corporate office as a support function for our operations. We exist for our operations, which is a little different from the original consolidators.”

Salzer remains very optimistic about the HVACR trade, pointing out that “housing starts remain strong, and the economy typically gets a boost during an election year.” He also feels very good about RSG.

“Now that we are independent, we see more opportunities and fewer challenges.”

Publication date: 06/23/2003