Specialist
Executive at plumbing and heating company
Agenda
- Key demand drivers in the HVAC (heating, ventilation and air conditioning) services sector
- Margin analysis and potential growth opportunities
- Competitive assessment of local players vs national corporations
- M&A activity and PE consolidation strategies
Questions
1.
Are there any trends in the HVAC [heating, ventilation and air conditioning] services industry that you’re following? Is there anything we should monitor that will affect the HVAC services market in 2023?
2.
Is there anything that would differentiate any trends from the plumbing services market? Are those trends similar to the HVAC services ones, such as decarbonisation and electrification?
3.
What do you think differentiates the HVAC services market from the plumbing services market? Can you speak to price or margin differences, or is it a different type of labour?
4.
Could you estimate the typical margins that we would find in the plumbing services or HVAC services industries? What amount of the actual contract or service work done is installation vs maintenance vs other services?
5.
For the high-margin install work, what type of install demand are we seeing in 2023? Do you expect it to be any different to the type of demand that we saw for 2022?
6.
What’s the difference between a down or soft year and a tight or peak-cycle year, when it comes to different volumes and service revenues?
7.
Were the price increases you mentioned largely passed on to the customer? Did we see any customer flight or demand destruction because of the price increases? Could you estimate the number of price increases that it took to get to SEER2 [Seasonal Energy Efficiency Ratio 2] for the equipment we’re discussing?
8.
Will we continue to see price increases in 2023 or, now that the new equipment is SEER2 qualified and we should have already bought that new equipment, will price increases remain static?
9.
We’ve talked a lot about the current demand levels for different HVAC units in both services. How will recessionary pressure affect demand for HVAC services and units? What might demand look like if we move into a recession?
10.
Does the tight parts market drive up pricing as well? We’ve seen several OEMs, such as Carrier, boast about aftermarket revenues that are beating lots of previous years.
11.
As you noted, we’ve seen a large increase in demand for heat pumps in 2023, and also in 2022. Are heat pump installations more costly or do they have better margins relative to a traditional HVAC unit?
12.
Which OEMs are leading the market for commercial and residential heat pumps?
13.
In April 2023, Carrier announced a proposed acquisition of Viessmann, the German heat pump technology equipment maker, which is a large deal that would boost Carrier even further. If you are one of the OEMs that is lower-tier or lower on your list, should you be thinking about acquiring to get into heat pump technology? Can it be developed organically? We’ve been talking about the heightened demand, so is it a must-have for an OEM?
14.
What is the typical replacement cycle for traditional HVAC units and heat pumps? How often will heat pumps need to be serviced or undergo maintenance?
15.
How much of the current install base in North America is heat pumps vs traditional? How much do you expect that to grow in the next 2-3 years?
16.
Could you outline which rebates are currently available state- or even federal-wide? Do you see any other rebates coming through the pipeline in the future? You mentioned that they’re not so great right now.
17.
If one of the rebates were to increase demand for heat pumps, when would we start to feel that? When would HVAC OEMs actually have to start building those? When would they see an increased heat pump backlog because of the heightened demand for heat pumps?
18.
We talked about the high-margin vs relatively lower-margin service work in the industry, but what would lead to potentially expanded margins in residential HVAC?
19.
Is it safe to say that accessorising is an opportunity to expand margins for a lot of the service companies, so it’s unlockable but just hasn’t really been taken advantage of?
20.
What would have to happen for us to see margins soften in the residential HVAC services industry?
21.
Are there any leading indicators that we can use to monitor if we’ll see heightened demand in summer 2023, in the peak year, and even into the winter as well?
22.
Are there any key differences between the residential and commercial services industries?
23.
Are there any service companies that are able to have both residential and commercial under their umbrella? Alternatively, do they have to be so specified that you have typical service companies going after residential and others going after commercial?
24.
Across the large HVAC OEMs we’ve talked about – Carrier, Lennox, Trane, Daikin and Mitsubishi – who do you think has the best service offering?
25.
Are there other opportunities, aside from blending hydrogen and natural gas, to make HVAC units more efficient? Are there any nascent players in the space that are interesting in terms of developing new technology? Do you see any specific companies working on hydrogen blending? Why might that be of interest?
26.
How large do you expect hydrogen and natural gas blending to grow in the next couple of years? As you said, it’s emerging and there’s not a ton of information out there about it, but is there any way for us to assess that?
27.
In the HVAC services space as a whole, how do local or regional companies compete with larger national service providers? What’s the go-to-market strategy? If we’re seeing consolidation, how do locals compete with bigger players?
28.
Could you estimate the margin and cost differential between a local company and a larger player?
29.
Are there any national or consolidated service providers that you’re following? We’re seeing a lot of consolidation in the industry, so are you looking at any specific companies that are doing good work or consolidating in the field?
30.
Is the key difference between local and regional services providers primarily geographic reach? If we’re looking at the northeast vs southeast vs southwest US, are we seeing different material costs and buying power from different companies and providers?
31.
We have seen increased consolidation in the HVAC services industry over the past several years as larger companies or PE consolidators buy independents and local mom-and-pops. Do you have any insight into what’s driving this acquisition strategy? Why is it happening now, given the current market conditions?
32.
Is the residential services industry as fast-paced as how you described commercial services, where it’s whoever can get there the fastest will get the job? Do we see brand reputation and recognition in residential services, or is it similar?
33.
What characteristics would make a service company attractive for an acquisition?
34.
Are there any geographic areas with more fragmented HVAC services or a larger number of independents?
35.
How difficult or costly is it to get a license in the US states that require it?
36.
Specialists in previous Forum Interviews have noted that the larger PE consolidators that are interested in rolling up the HVAC service companies, and also some of the larger national brands, are able to drive EBITDA of 20-30%. Do you think that type of EBITDA is sustainable long term? Is that what we should be looking to as the industry standard?
37.
Is there anything about the HVAC services sector that we haven’t talked about that’s worth monitoring for the future? Do you have any closing thoughts?
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