Specialist background
- Over 25 years’ experience in the HVAC industry, working closely with distributors to help support and enable that business
- Oversaw manufacturing, product development and internal work across the organisation to improve sales and profit analysis, pricing and compensation performance, product launch and life cycle, and supply chain and inventory management
- Knowledgeable on merchandising and displays, national accounts support, and reporting and data analytics
- Well-placed to discuss Ferguson in terms of residential HVAC, including growth outlook, price increases, supply chain issues, cost of fuel, costs for payroll and benefits, and costs due to regulation
Questions
1.
Let me just start off with a couple of very high-level questions just to get a better understanding of the market, if you could help me break it down. Just wondering if you have a sense of how big the total HVAC market might be in the US, and how much of that is driven by new construction activity vs your usual repair and replacement aftermarket revenue streams?
2.
Yes, a rough guestimate or, based on your business, what you understand from the industry, rough high-level perspective on what you've seen over the years in this space.
3.
Is there a reason for that? I would have thought, just very broadly, that if the economy is doing well, generally both markets should be rising together. Is there a reason why they balance each other out?
4.
In your experience and maybe for your business, how much of the business actually skews more toward new construction activity vs how much of it comes from aftermarket revenue streams?
5.
Given those long lead times, it sounds like a large part of revenues are still driven by new construction activity, given, in any one year, you have one-tenth or one-fifteenth of your installed base replacing? Is most of it still new builds on the HVAC side?
6.
Is that replacement cycle different on the commercial side? Do you think it's at 10-15, you have more servicing in residential (talking over each other) more replacement? Commercial, is it different?
7.
How frequent would that cycle be for large commercial customers, every couple of years or is it almost an annual affair?
8.
Putting aside what has happened over the last couple of years with the coronavirus and the subsequent recovery, just wondering what are normalised growth rates for the industry on an annual basis over the past decade or so, just to help me level set?
9.
What about on the volume side? I know the markets are inherently cyclical, especially in construction, but over the course of a cycle, what would the bookends be in terms of where you would see growth rates? Putting aside huge cycles like the GFC, in a normal cycle how would volumes trend on top of that +5% pricing?
10.
We're trying to disaggregate revenue into volume and price. You've given me the price component.
11.
Shifting gears, would love to understand the role that regulation and policy might play in driving demand? Just wondering if you could describe some of the key changes in some of the more recent federal bills and infrastructure packages that have been passed. How do you think those might potentially affect the industry? I guess on a slightly related note as well, I've heard a lot about these SEER changes for 2023. Just help me unpack that a little bit, coming from the outside.
12.
Have there been any recently that come to mind that you think will be massively important for the industry?
13.
Could you just tell me a little bit more about heat pumps? I'm not entirely sure if that's a whole new phenomenon to the industry, but I've heard people talk it up a little bit more as a new growth area. Any thoughts on adoption levels, how much growth that might contribute beyond and above normalised levels? Just curious to get your thoughts there.
14.
The south has less gas, is what you're saying?
15.
Just one thing, just still on heat pumps, have they been growing at a much faster rate than normal HVAC systems or it's in line with the market? Just wondering if it's a boost of growth.
16.
Electricity is going to cost more than gas if you have gas readily available.
17.
Shifting gears to the market landscape a little bit, could you just go through who the biggest players would be in the HVAC industry, whether that's both on the residential side and the commercial side, from the manufacturing standpoint?
18.
So that's the general model, both on the residential and commercial side, going through wholesale distributors and then a network of installers that touch the end consumers.
19.
Let's go back to the biggest players in the industry again. You mentioned Trane. Some others that come to mind would be, I guess, Carrier.
20.
Carrier is a tier 1, Bryant was a tier 2, and then Day & Night is tier 3?
21.
How big of a market share would you put Trane and Carrier at? I know they have different brands, but if you aggregate the market. I'm just trying to get a sense of how fragmented or consolidated the space might be. Is this one of those industries where you have, I don't know, 50-100 different manufacturers out there or you have maybe, I don't know, 5-10 that have multiple brands? Just trying to understand how the structure actually works within this industry.
22.
How has the market shifted over the last 10 years? Is the penetration of Mitsubishi, Daikin, something that happened only over the last 10 years, or have they always been in the market since the 2000s? Just wondering how the market landscape might have evolved over the past couple of decades.
23.
This is going to be a very rudimentary question, but just wondering, because I live in a city and have never owned a single-family house out in the suburbs, how much would it typically cost to install a HVAC system? I know you talk about heating, you talk about cooling, just wondering if you could give me a rough idea of pricing, the different ends of the (talking over each other) range.
24.
Of that USD 10,000, how much of that do you think stays with the distributor vs how much of it goes back to the manufacturer? In terms of, I guess, the wholesale price. Trying to understand the profit pool.
25.
Who sets the price that the end consumer gets? Does the manufacturer have a recommended price that gets marked up along the entire value chain or, at each stage of the value chain, you have a lot of leeway to determine what to charge?
26.
What you're trying to get at is I get quoted a combined fee between the equipment and the installation when it comes to HVAC systems.
27.
The profit pool, I'm guessing, for the dealer, when you talked about the dealer is getting the biggest profit pool, that includes your installation fee as well?
28.
If I'm a consumer, whether that's residential or commercial, and this goes to the topic of key purchasing criteria, what am I looking out for? I think you mentioned that innovation was a big factor. I know you can't really shop it, but between two competing options that I have, how much would someone lean towards the cheaper option just because it's cheaper?
29.
Let's rewind the clock to early 2020, when COVID was just an emerging phenomenon, just help me understand what happened to the entire HVAC industry when the pandemic first hit. Obviously, we saw a pretty quick rebound when it came to construction work. How did the situation evolve over the next couple of years? I know there were supply chain issues. If you could talk through some of that. Inflation, price increases, all of that would be helpful and would be of interest.
30.
You mentioned five price increases in '21, I'm guessing a similar number in '22 as well. If you could just help me benchmark how much prices have gone up. Let's say price was USD 100 at the beginning of 2020, before the pandemic happened, where would price be today, relative to that USD 100 at the beginning of 2020?
31.
Interesting. I would've thought the whole situation in Russia, Ukraine, and we saw even more inflation in '22 than we saw in '21, but you're saying that, for your industry, '21 was actually worse.
32.
How far along are we on that normalisation process? I know you mentioned that we're still facing some issues, but relative to the worst of it, I think, in late 2021, how back to normal is the supply chain? If you wanted to get a component now, could you get it?
33.
I think we didn't fully answer the question of how much prices went up relative to the beginning of 2020.
34.
Trying to tie this to margins, given that you also saw a lot of price increases, was the net effect on price/cost neutral, positive or negative for you guys in '22? Obviously, you're raising prices in line with raw material increases and labour increases, labour wage increases.
35.
I want to spend the last couple of minutes just on your view on the market outlook for the remainder of '23 and maybe looking forward into '24 as well. I think, at the beginning of our conversation, you mentioned that the markets didn't look as strong as they did maybe a year ago. Could you just double-click on that? Would love to understand the state of the residential and commercial HVAC markets a little better, where we are today.
36.
At the end of 2022, what was your general outlook like for 2023? What were your expectations for top-line growth? If you could disaggregate it between what you expected price to do vs what volumes would do, what did that look like?
37.
When you say price stable and then volumes, some up, some down, I guess to make it work out mathematically, to get a flat top line if price is flattish, I guess your different end markets would also net out to also be relatively flattish. For volumes up vs volumes down, which end markets were you anticipating being up vs down on a volume basis?
38.
Were all these comments mostly as it relates to the residential end market? I'm just wondering if any of those also apply to the commercial side of things and if you expected volumes to be flat, up or down. If it's just mostly residential, that's fine, and you don't have a view, that's also fine.
39.
Does your business also sell into the commercial end markets, or do you guys mostly do residential at Rheem?
40.
Distributors would know better, or installers would know better.
41.
The expectations that you referenced earlier, have those changed based on what you've seen in Q1 of this year? I'm just wondering if your outlook has evolved based on events that we have seen unfold over the last couple of weeks or months, or is your general sense, looking at your business, still as it was at the end of 2022?
42.
Have you seen pricing get given back in a downturn? I'm just wondering because, obviously, to our discussion earlier, industry has taken a lot of price over the last couple of years. Would you expect that to go the opposite direction? Obviously, with costs and raw materials going down, maybe labour stays where it is or keeps going up, but I'm just wondering if we were to hit a snag in the economy, would price have to give way or do you think most manufacturers, ultimately, end up holding onto the pricing that they've taken over the last couple of years?
43.
How much do you compare your prices vs that of your competitors? I don't know if you have a good market intel. Are you guys trying to match them or you set prices based on your own bill of materials? Is there pressure to follow everyone else? It's easy when prices are going up. I don't know how it trends the other way round, if that has ever played out before.
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