US HVAC Demand Cycles & OEM / Distributor Relationships

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Alan, can you start by sharing a short introduction to your background, please?

I've been in the plumbing, heating, and air conditioning wholesale business for 30 years. I started in the warehouse, like many people in the industry do, or used to do in the old guard. I started in the warehouse moving boxes around, unloading trucks and whatever, and slowly working my way up to my first company Shelton Winair, doing inside sales, assisted purchasing. When I was working for Winair as part of WinWholesale, the idea was to encourage current employees to work towards having their own company. I was young, I was still trying to find what I wanted to do as a career, and the opportunity came for me to go out on the road outside sales, and develop a territory in the Stamford, CT area. So I took the plunge, and when my boss gave me the opportunity, he said, if I give you the opportunity, this is all in for you? And I was all in.

When I took the development territory over, I had about a $250,000 in the sales base, and in about a year, I got it up to $500,000. In about two years, I got it up to $750,000, by going along with the WinWholesale way of doing things then; it's probably changed now. It got to the point where there was only so much we could deliver into an area in one location in Shelton, geographically. So I was given the opportunity to open my own company, Stamford Winair in Stamford. That was in July 1997. I ran Stamford Winair until February 2009; I was company president. In my first full year, we did about $1.25 million. We peaked right before the recession at about $5 million, and then the recession hit. It got ugly from there as it did for a few people.

Was that at one branch?

Yes, that was one branch, that was my company. We did about $5 million and brought in a new equipment line. We had about 12 people at the time, two trucks, a 20,000 square foot warehouse, and about $1 million in inventory in receivables. The recession hit, we started downsizing. I'll spare you the ugly details, but it was time for me to move along.

From there, I went to work for Torrco the first time. I was hired as the HVAC product sales leader. They were trying to build an HVAC division; they didn't have anybody with that background, they’d only dabbled in it. They were primarily a plumbing and heating company at the time. I worked for them for three years. They are an excellent company, and I enjoyed working for them. But because of the recession, they couldn't give me the resources I needed to take off and get the HVAC division running, so they used my experience of running branches. We had made an acquisition and I ran a branch of that acquisition and got them more in sync with the Torrco way of doing things.

And I wasn’t happy. I needed to try to get out and move on. That’s when I went to the other side of the counter and I was the HVAC division manager. I learned what it was like to be a contractor to deal with wholesalers. That gives me a unique perspective. Not a lot of my customers have somebody that has been where they are doing both. I was there for about a year, and it was pretty volatile. I needed a steadier influence in my life, and that's when I went to work for Dasco Supply. Ironically, I interviewed for it in my old building, in my old offices. They had just opened that branch about a year before, and they were struggling. They didn't have any good leadership, and they couldn't get it off the ground to where they wanted it, so I dealt with sales in the first year there. Again, it was a good, family-owned company. I enjoyed working for them, but I missed something. I wanted to get closer to home, I wanted more of a work-home balance, and Torrco came knocking on my door again.

In fall of 2014, I went back to Torrco and started back as assistant branch manager, which is what I wanted. I wanted to be a second in command and learn how to follow again, before I could take on an evolution in being a better leader. So I've been back with them ever since. I'd been branch manager for the last three years. Torrco made another acquisition, and the branch I was working in was right around the corner from the branch that we had acquired, so we merged into that company known as Commercial Heating Supply. They primarily focused on large commercial boilers, multimillion BTUs with power flame burners, very specialized engineered stuff. We have a unique branch. In the branch that I run now, we have about seven people who do about $9.5 to $10 million a year. You can get everything from a set of Johnny bolts for a toilet all the way up to a multimillion BTU dual-fuel power flame burner.

How much HVAC do you do today?

We’re going to do about $500,000 in HVAC. Unfortunately for me, while that is my true background, we're also in the midst of four or five other major HVAC wholesalers. We're slowly getting better as a company at having everything that an HVAC contractor needs, and we're trying to develop new habits for them because they were very accustomed to going to their usual place. So we're going to do things a little bit differently, and we have a smaller footprint, and we use our hub to get things down to us the next day. Well, in HVAC, they can't necessarily wait for that. When they want plumbing and heating, yes, we have it all. But when it comes to the HVAC, we’re trying to break those habits. I'm hoping that we get a bigger building so I can bring that stuff in and be the source for the customers in our area to really increase our business in HVAC.

Can you give us a sense of the HVAC wholesale market in the northeast? Take it back to the 90s when you were running your Winair business; what was the market structure?

Back then, it was all about new construction in our area. Houses were going up right before the dot-com bubble burst. The area that we were in is a very high-end area. Fairfield County is one of the richest counties in the country. It's Greenwich, Stamford, Norwalk, Darrien, New Canaan; a lot of money. They were throwing up the McMansions that you hear about all over the place. Nobody paid much attention to add-on or replacement because it wasn't a focus of the contractors. It was easy money to go in and build new systems.

It started to become more prevalent to have air conditioning in a home. In the northeast we only have summer for three months. What do we need air conditioning for? Just because it was more humid than just about anywhere else in the country didn't mean anything then. But then those ideas started to go and there was a shift, right around that time I got a new equipment line, American Standard heating and air conditioning, and I focused more on the add-on and replacements, and tried to educate my customers.Look, this is where the money is for you guys. You can do two or three replacements in a day and get more money than going to work for a General Contractor, and they don't pay you for 90 days, whereas you’re installing, you’re making that change right then and there. You're getting paid.

So now the evolution is to the ductless mini or the DFS systems, the inverter systems that we’ve seen in the LGs, the Fujistus and the Mistubishis of the world. They are so much more efficient and they're even easier to install if you have no ductwork or any of that stuff. Again, there was that evolution. Even with new construction, we're seeing LG systems being put in. The rebates available for LG from the utilities are just tremendous. It's $250 a ton rebates coming back from the utility company. So that's a shift because those are all primarily heat pumps. In the northeast, people think it’s too cold for a heat pump. That's something for the southeast or the southwest. But in all honesty, during the day, the average annual temperature in January or February is the mid-40s. That's perfect for a heat pump. Yes, we get our 10-degree nights, but it's at night. That’s another shift that I see in the industry. People are getting used to and are becoming more comfortable talking about heat pumps, and using heat pumps as a heat source and for air conditioning. Does fossil fuel still dominate? Yes, absolutely, but they are starting to become more prevalent.

Those new LG systems, how does the rebate work for the contractor?

It's actually very easy. It's all point of sale and we enter it ourselves. All we have to do is get the homeowner's information, and the price for the rebate comes right off the price of the sale. We submit it to the state every month, and we get paid the rebate, so the contractor doesn't have to do anything. The homeowner doesn't have to do anything; it's a home run.

How do you look at the replacement cycle for these new HVAC systems?

We're just starting to see how that's going to evolve because most of the original ones have six-year warranties, so we're going to start seeing those start to fail. The short answer to that is, I'm not quite sure. I don't know how that’s going to evolve. I believe that the inverter technology will last longer than the said warranty. You know the joke is, appliances are made to last just as long enough for warranty, and then it's time to replace them, right? Disposable appliances. I don't necessarily believe that, particularly here because they don't work as hard here as they would in the southeast or out west, so I think it's going to be a longer cycle. I think end-users are much more comfortable with that technology now and they realize there's a lot more flexibility. It's quiet, it’s efficient, they can use it as a secondary heat source, or in some cases a primary heat source. In inverter technology now, LG has systems that go all the way down to –13 and still get 100% heat. That's right in line with what any fossil fuel system is designed at.

I was speaking to a contractor in Florida, and he said that they have an eight to 10-year replacement cycle on the HVACs because they get the salty air. Do you see a material difference in replacement cycles between the northeast and south?