Specialist background
- Around 33 years’ experience in the HVAC space, responsible for selling commercial product and managing a half billion dollar budget during his time at Johnson Controls, Carrier and Trane
- In-depth knowledge of Nortek, Carrier, Trane, Johnson Controls and York around trends in the air management and data centre cooling markets and commercial systems, including the impact of the coronavirus on the industry and its end markets.
- Well-placed to breakdown the competitive landscape, companies that focus on lower end contracts and companies that only specialise in component parts, new market trends and the big transition from VAV to VRF globally
Questions
1.
Just give me some perspective on how you viewed the Trane product portfolio and their positioning over the course of the decade. I know it's a long time and things must have changed a lot, but I just want to get some flavour on how you saw the positioning and the market change over the years because of 2010.
2.
Staying on the topic of the market landscape, I'm sure yourself in the course of your career have ran up against the likes of Johnson Controls and Lennox, maybe to a lesser extent on the commercial side, and definitely Carrier as well. Would you just like to go through each of those main competitors, and I guess you could put in Daikin equipment as well, just to understand how the market perceives each company, the positioning, what they're good at, what they're strong at, and which part of the market they currently focus on?
3.
I want to circle back on that distribution point that you made earlier with Carrier stores. My understanding was that Carrier primarily utilises third-party distribution. I don't know if that's different on the residential side vs the commercial HVAC side for Carrier. I'm wondering if you could just describe the distribution approach towards some of the other players as well, because I think on the commercial side people go a bit more direct, but I may be wrong there.
4.
What about for Trane? When you were there for years, did the approach change at all? Were you guys mostly using third-party distribution or was it a pretty even mix, just depending on geography?
5.
When you talk about commercial HVAC market, I'm just wondering if you could break down the respective end market a little more for me? I'm just wondering how much of it tends to be warehouses vs how much of it tends to be, call it, public institutions or schools vs manufacturing facilities. Obviously, it's going to vary by geography, but if you could zoom out at the highest level, just trying to understand the install base, what the mix would look like?
6.
Just going back to the 2022 mix again, just curious to get a rough sense of what percentage of your commercial business was healthcare, was schools, was office building vs data centres. I'm not sure if you think about industrial manufacturers as a different, separate bucket. I'd just love to get a very rough mix off the contribution in terms of the pie, how it's split out.
7.
I'm not sure if this was involved directly in the market, but I'm just wondering if you could talk a little bit about how demand may have evolved in the last couple of months? Everyone has been pointing to especially adding the data centres, to your point, as a really hot area of growth. People are talking about onshoring of manufacturing facilities, all that kind of stuff. Have you seen that playing out in the last couple of months, or, given some of the broader macro considerations like interest rates, things like that, has that not materialised or has that reversed somewhat?
8.
Staying on this topic of the supply chain issues, walk me through what happened when COVID first hit. It feels like the end market you probably say some weakness in the immediate aftermath of the pandemic breaking out. How long did it take before you saw demand returning, whether that's a replacement activity, that's for a new project construction, in terms of the normalisation path to where you were pre-COVID, how would you describe the state of the commercial markets today? Are we above trend, below trend, getting back on trend?
9.
If I could press you on the trend, on trend, above trend response, let's say, 2019, trying to use a benchmark, what size above trend we are, if 2019 was, let's say I price it at 100%, what was commercial demand like? I guess you could answer it both in terms of units vs dollars, because it's a good point that you make, inflation skewed the picture. If 2019 was 100%, what was the commercial market like in 2020 and then in 2021 and then in 2022? Was it 100% and then 90%, or 100% and 110%, and then how did it evolve in the ensuing two years, what's the magnitude (ph)?
10.
Historically, before the pandemic, what was the average growth that you would see in industry? Was it a GDP level of growth? I'm just trying to establish what the trend was.
11.
Help me understand what the sales cycle typically is like. I know the coronavirus has distorted that lead time number quite a bit, but, historically, before COVID, if I was a commercial customer, I wanted to get an AC replaced, what's the process like? I put in an order, how long does it take to arrive, what's the process working of the manufacturer or the distributor? Help me understand that process a little better.
12.
This 80/20 split you're referring to is just on the commercial equipment side? I may not be fully understanding this, but there's also a servicing component to it? I know that, every year, a commercial building has to get an HVAC company to come in and service the AC just to make sure that it's working. Is that a business to the aftermarket?
13.
In terms of the sale cycle, new construction, if I'm going to build a new building or a new facility that requires HVAC system to be installed, how far in advance do I have to contact the manufacturer to put an order in? How long will it take for it to arrive? I'm just wondering, do I need the building to be fully constructed, do I do it a month in advance? When people are designing the building, when people are constructing the building, what's the time frame in which someone would put in an order and expect it to get delivered?
14.
In terms of the supply chain issues that we touched on earlier, it feels like the biggest bottleneck was around some of the chips and electrical components that go into the HVAC system. When was the worst period where this was taking place? Was this 2021 or 2022? Have things gotten better since then? In terms of the path to normalisation, how far away do you think we are from getting back to more regular lead times?
15.
Can you help me understand what's going on at the distributor level? I think across the entire industrial space, given the long lead times that you talked about, delays in getting product to the end customer, people are trying to build out more inventory in their supply chains. Can you see that happen at the distributors that you work with or are familiar with? Yes, that would be a good starting point.
16.
How much value do you place in the idea of a backlog, because, before the pandemic, lead times were a lot shorter. It feels like the backlog coverage that companies had would have allowed them to fully convert almost all of the backlog within the year itself. Obviously, today, backlogs are at very, very elevated levels. I'm just trying to figure out if that's related to supply chain issues or have we reached a new level, where there are so many orders and so much demand that the backlog eventually never gets exhausted, or should we expect orders to normalise in the coming year, because other people order in advance, or we're thinking further out, towards the buildings they need to construct? How do you perceive the path forward for the industry?
17.
Going back to the topic on how recessionary scenarios play out, and you've clearly seen a couple yourself, I think you mentioned five, would you mind just walking me through when those five recessionary periods occurred over the course of your career, and how they unravelled? I'm guessing each of them was probably slightly different. I'm particularly curious about the speed at which things evolved, what markets got hit first and what the cost of recovery looked like. That was a lot to unpack.
18.
I’m just wondering, in those project downturns that you saw, for the economically sensitive exposed air markets, what the drop off was like? Obviously, I think the GFC was obviously the biggest, most pronounced, but maybe different episodes have different extents at which they fell off, but that sensitive 40% of the commercial business, your point was things decline single digits, double digits, and I guess you'd have to separate between the resilient institutional pot vs the more sensitive commercial pot in thinking about how the two pieces move?
19.
Was that just broadly similar across different episodes? You've been through a lot over the course of your career, I'm guessing it was probably more pronounced in 2008. I'm not sure what the other episodes were, but I'm guessing those were a lot shallower. Just wondering, in a rough sense, what those looked like in terms of how bad it got?
20.
At the end of last year, what was your general outlook like for 2023? Were you expecting mid-single digit growth in the commercial market, high single digit, double digit growth? That's part A of the question. Part B would be, three months on, now that we are early April, has that outlook shifted in any way?
21.
That's just based on orders that you received over the course of the end of last year?
22.
Just to go back to your background again, your current employer, you are a distributor or a contractor or a manufacturer?
23.
Order rates have picked up since then, in this year. In your conversations with your end customers or the contractors that you work with, is there any sense that the environment around interest rates or just a weakening economy hitting, possibly into a recession, do they still expect commercial demand to be as robust?
24.
In prior recessionary downturns that you lived through, it feels like things were pretty resilient, so I don't expect that you saw pricing being given back. How would specific raw materials actually come down, if you actually saw margin expansion in your prior roles?
25.
You mentioned you have seen five recessions before, I don't which five they may have been?
26.
Yes, the replacement side, on the other side, picks up, so there is some offsetting balance there. I guess we should expect the replacement side to be up double digits in a downturn?
27.
In terms of this dollar amount, my response to that would be we cannot expect the new units, or in the case of a replacement unit, to be way more in terms of ticket price compared to a repair, so even if your service component is up a fair amount, does it compensate for the loss of a new unit being installed, because I'm guessing that's where you actually make the most money.
28.
Any other topic that you feel that I should be asking you about but haven't asked you yet or that I should be aware of?
29.
Has there been a deadline for this yet? Is this 2025, or would that kick in ahead of time? Is your point that people are getting ahead of that?
30.
When these regulatory changes take place, what's the reaction or behaviour across the entire value chain? Do people pre-order in advance? I'm just trying to understand how that would flow through the entire value chain from the manufacturers to the distributors, and ultimately the contractors, who are more closest to the end customer?
31.
In your commercial end markets, are you seeing people react to IRA incentives around building efficiency? I think there's a bump in tax deductibility per square feet. Are people reacting to that, or are those just policies that are not going to necessarily sway decisions?
Gain access to Premium Content
Submit your details to access up to 5 Forum Transcripts or to request a complimentary one week trial.
The information, material and content contained in this transcript (“Content”) is for information purposes only and does not constitute advice of any type or a trade recommendation and should not form the basis of any investment decision.This transcript has been edited by Third Bridge for ease of reading. Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability for the Contentor for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge. Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification, reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from, transferring or selling any Content is strictly prohibited
