HVACR Services Providers Continue to Experience Heightened Demand & Market Consolidation
The rapid consolidation of the HVAC Services market continued throughout the height of the pandemic and is expected to continue for years to come.
At the height of the pandemic, many Heating, Ventilation, Air Conditioning, and Refrigeration (HVACR) services providers suffered as routine maintenance and installations were put on hold due to the government-imposed lockdowns. As social distancing restrictions have been lifted, HVACR services providers have rapidly resumed operations while attentively utilizing best practices to ensure customer safety. Although the pandemic challenged HVACR services providers in the short-run, heightened consumer awareness regarding air purity, an increased focus on comfort due to remote work, and energy efficiency concerns are expected to drive service demand for the foreseeable future for HVACR upgrades, installations, and maintenance.
As consumers spent more time at home during the pandemic, demand for residential HVAC systems upgrades increased significantly. Upgrades incorporate product improvements that meet rising demand for climate comfort, producing Internet of Things (IoT)-enabled systems that allow the homeowner to control indoor temperatures while providing real-time monitoring of system functionality and performance. Additionally, new residential construction has aided the growth of the industry as HVACR services providers get to install systems in these new homes. Although privately-owned housing starts decreased ~9.5% in April from the previous month, the seasonally adjusted annual rate of 1,569,000 units is 67.3% larger year-over-year (YOY), according to U.S. Census Bureau Data.1 Notably, HomeServe plc (LSE:HSV), which provides residential home repair and improvement services through its subsidiaries, reported 43% growth from installs in its North American HVAC business in 2020, according to its Q4 2020 earnings call.2
M&A Volume Surges in 2021
M&A activity in the HVACR Services industry has accelerated in 2021, reaching 90 transactions to date (through May 31), an 87.5% year-over-year (YOY) increase. Of note, financial add-on acquisitions have accounted for 36.7% of deals announced or completed as private equity (PE) firms see attractive consolidation opportunities in the HVACR Services space as many independent companies are now experiencing strong growth despite the pandemic-induced economic downturn. Largely backed by private equity funding, HVACR contractors have acquired competitors to bolster the service offerings and regional presence of platform companies. This is evidenced by Rogers Mechanical Contractors’ (a platform company of Craft Work Capital Partners) acquisition of R&D Mechanical Services. Headquartered in Cherokee Country, Georgia, R&D Mechanical Services provides commercial HVAC preventive maintenance, repair, and retrofitting (March 2021, undisclosed). Through the transaction, Rogers Mechanical Contractors, a leading provider of HVAC mechanical contracting and plumbing services for distribution centers, has expanded its preventive maintenance offerings and enhanced its retrofit and new-build core services, according to a press release.3
Strategic buyers comprised ~55.6% of acquisitions with both public and private companies consolidating to enhance their service portfolios, expand geographic reach, and capture a larger market share. For example, Watsco (NYSE:WSO), the largest distributor of HVACR products in the world, acquired Acme Refrigeration, a Baton Rouge, Louisiana-based distributor of HVACR products (May 2021). Terms of the deal were not disclosed. With the addition of Acme, Watsco has added 18 locations throughout Louisiana and Mississippi. Notably, Acme generated revenues of $60 million in 2020, according to the transaction press release.4 Watsco has relied heavily on M&A to promote inorganic growth and has completed 64 acquisitions since 1989. Earlier this year, Watsco also announced the acquisition of Temperature Equipment Corporation, a $291 million distribution company with 32 U.S. locations.
HVACR Providers Prioritizing Client Relationships and Expansion of Service Offerings
HVACR services providers have increasingly prioritized client safety and customer service throughout the past year. Even as the pandemic subsides, companies will need to augment safety protocols and establish a positive reputation with clients to expand their customer-base. In addition, HVACR services providers with strong client-retention can benefit from diversified service offerings, acting as a one-stop-shop for the maintenance of a variety of equipment in the Home Services industry. For example, companies that are able to serve client's HVACR needs, along with plumbing, like Advanced Heating & Cooling (interviewed below), are positioned to capture a larger market share than companies that only provide HVACR repair and installation. Many service providers find that consumers prefer to have all of their equipment serviced by one trusted supplier. To do so, service providers are expanding their offerings both organically; by investing in the development of services in complementary spaces; and inorganically, by acquiring businesses that offer additional services. For example, SkyKnight Capital-backed NearU Services, a provider of residential and light commercial HVAC installation and maintenance acquired Happy Home Services in April (undisclosed). Happy Home Services provides HVAC, plumbing, and electrical services in North Carolina. The acquisition expanded NearU's service offerings into the plumbing segment, according to a press release.5
Company Q&A: Advanced Heating & Cooling
David Seman, President and Owner
Capstone recently spoke with David Seman, President and Owner of Advanced Heating & Cooling to discuss current trends and challenges in the HVACR Services Industry.
Advanced Heating & Cooling is a family-owned residential and commercial HVACR contractor with locations in West Virginia and Maryland. Mr. Seman founded the company in 2000, after spending more than 30 years as an executive in the Hospitality Industry. Originally Advanced Refrigeration, the company today provides service on all HVACR makes and models, water heater repair and replacement, refrigeration service, and heating and cooling system installation and replacement.
Can you speak about the founding of Advanced Heating & Cooling and what led you to the HVACR Services space?
That's kind of an interesting story. I'm mainly a restaurant guy. I started in the restaurant industry when I was 16 and my interest in HVAC began gradually. While attending WVU for an engineering degree, McDonald’s recruited me into salary management in the Pittsburgh region. I went on to spend eight years with McDonald's and participated in a lot of their training programs. A lot of the courses that I took were HVAC equipment-related classes. I learned about basic refrigeration. I learned about rooftop units and how to clean condensers. I also had to learn scratch calibrations and how to work on the Multiplex system for drinks, which is a chiller system. So, I gained a lot of experience with physical plants and furthered that knowledge while working for a small local chain of restaurants where I spent the next 24 years.
My experiences enabled me to know when I was getting bad service. I distinctly recall a technician telling me "hey, we had to fix your beer cooler and needed to add 15 pounds of refrigerant to it," and I said, "really? It only takes two, how could you do that?"
At that point, I decided in 2000 to start a company just to service our restaurants. I called the company Advanced Refrigeration because I thought we'd just be fixing beer coolers and taps. I ran it out of my house for the first several years and then when we started strongly growing, I determined that I had found a better opportunity and left the restaurant industry completely to focus on HVAC. Today, we're a 21-year-old success story and I'm referred to as the 'restaurant guy' by my competitors.
What were some of the challenges you encountered in the early stages of the business and how did you navigate those challenges?
Most of my competitors in the HVAC business started out as contractors and grew up in the business. I wasn't an operations guy in HVAC; I was more of a business guy, so my challenges were a bit different. Working in the Hospitality industry, you have to be on your toes with customer service and employees. I think this gave me an edge on a lot of the contractors because I knew how to take care of employees, I knew how to take care of customers, and I knew how to do marketing.
In contrast to working for a large company, like McDonald's, that has a training program for everything you do, I found that the HVAC industry really doesn't have anything formal that teaches best practices. I had to figure it all out by myself. I had to learn that you don't take your van and park it in the customer's driveway and get oil stains on the pavement. Likewise, I had to learn that you don't ring the doorbell. Salesmen ring doorbells, friends knock. I also had to figure out where to start in a home, how to properly uninstall the duct work, how to review issues with the customer, how to ask for surveys and how to ask for the money. There's just a bunch of stuff you have to figure out on your own to become good and there's not a lot of training for it or to figure out the systems you will need and how to create and control your growth.
In 2007, I became a Carrier dealer, which allows me to work with a great brand with a great network of distributors. We collaborate with the other dealers and we learn a lot from each other. The shared knowledge helps each of us overcome challenges and as does our constant willingness to study and learn. Even right now, after 21 years in the business, we just contracted with a very large consulting firm that's coaching us monthly on how best to keep growing from one level to the next.
With more than 20 years in HVACR services, what are some of the biggest changes that you’ve noticed and where is the industry headed?
Change has really occurred with respect to technology. Twenty years ago, we were still using basic equipment. When the standards for efficiency started changing, the technology started changing immensely. This forced our industry to get better. The newer equipment is not just more efficient, it's also more effective. We're selling higher-end equipment because we can make your heating more even in your house; we can not only cool your house, but we can dehumidify your house. Look at what's going on today with COVID, indoor air quality is a huge issue. If you don't keep up with the technology, you're going to be left behind.
We think our knowledge and expertise remain a differentiator, particularly as companies like Amazon potentially enter our marketplace with aggressive pricing. HVAC products can already be ordered online in Canada and furnaces and air conditioners can be shipped directly to one's home along with recommendations regarding installers.
Fortunately, we operate a very technical business and our product knowledge should protect us. We can make sure that our customers have the most efficient, comfortable systems for their residences and that they are installed safely.
As the technology evolves, do you have to adapt your training methods?
Absolutely. In some cases, the technology makes the equipment easier to install. However, one of the biggest challenges any of us have in the trades is trying to find good, skilled labor. We have a very large percentage of the workforce retiring in the trades and all of the younger kids think they need to go to college. If I hire someone that just graduated with a two-year degree from an HVAC school, they can't immediately be put in a truck or do installations. They need on the job training too.
With that, we have to figure out ways to bring in qualified candidates and train them and we have to make our processes simpler. For instance, brazing was always a tough thing and if you don't do it properly, you damage the equipment, or it results in a leak and we have to come back and make repairs. So, we're starting to use ZoomLock fittings and we're using technology that costs us a little bit more in materials, but once you learn how to do it, it's quicker. We also have to continue to streamline our systems because of the challenges of finding quality people to enter this industry. We have to make it simple and technology is solving a lot of those problems.
How does Advanced Heating & Cooling differentiate itself from other companies in the HVAC Services space?
We are different because of our passion, our commitment to service, our commitment to reinvesting in our company, and our commitment to having the best technology. If you book a service call with us, your information appears on our screens as soon as your call comes in. I know how long you've been a customer, can see every invoice, and a list of every visit we've ever made to your house. You're also going to get a text message with a picture and biography of the Service Tech who is coming to your house. With everybody being so busy, if you don't keep up with the technology and make it seamless to do business with customers, once again, I think you're losing out.
How has the pandemic impacted your business? What have you done to resolve those challenges?
When the pandemic first hit it affected everybody, certainly we had people afraid to let us into their house. Thankfully, here in West Virginia, we were allowed to operate at commercial job sites. So, at the time when people were still afraid to let you into their house, I was able to convince people to let us go to their commercial property and have my employees work there. The initial couple of months of the pandemic were really devastating and we saw a 50% decrease in sales. There was a lot of uncertainty, then all of a sudden, we started getting very busy because people were at home and they noticed, "this never bothered me before, but I hear that furnace now, I don't like the way it sounds," or "it’s really cold in my office." I think most people in our industry, by around May, started seeing an uptick and we've been hammered with new work ever since.
For long-term impact, a lot of people may never go back to an office. So, people are improving their homes or buying bigger homes. We're selling tons of air purification systems, and the housing market is booming along with new construction. So, that's a very positive outlook moving forward.
However, I'm very concerned about whenever the bill comes due for this lockdown. The government is passing out money like crazy right now and I'm just worried about what's happening in the construction business with lumber prices and of all my materials in plumbing and HVAC. We've had probably four price increases since October. At some point, I think we're going to see a big downturn because of these issues.
How do you see your business growing in the future and what will drive that growth?
Ray Kroc said, “when you're green, you're growing; when you're ripe, you start to rot." We're always going to look ahead, but I think growing in a controlled manner is important. I am only limited in growing by the number of employees I can bring into this company. People are begging me to do plumbing. I only have X number of plumbers, so I'm going to maximize my margin with the contractor that wants me to sell him everything. I'm projecting a 5-8% increase each year. I am excited to have found a business where growing sales is the easiest part of my job. Controlling the growth is the harder part because it's tied to finding the right people.
U.S. Census Bureau, “Monthly New Residential Construction, April 2021,” https://www.census.gov/construction/nrc/pdf/newresconst.pdf., accessed May 20, 2021
HomeServe, “HomeServe plc Preliminary Results 18 May 2021 Transcript,” https://www.homeserveplc.com/~/media/Files/H/Homeserve-PLC-V2/documents/results/2021/full-year-210518-transcript.pdf, accessed May 24, 2021
PR Newswire, “Rogers Mechanical Contractors Acquires R&D Mechanical Services to Enhance Its Platform and Growth Initiatives,” https://www.prnewswire.com/news-releases/rogers-mechanical-contractors-acquires-rd-mechanical-services-to-enhance-its-platform-and-growth-initiatives-301241530.html#:~:text=(Rogers)%20today%20announced%20its%20acquisition,on%20the%20distribution%20center%20market., accessed May 20, 2021
Watsco, “Watsco Completes Acquisition of Acme Refrigeration,” https://www.watsco.com/newsitem/watsco-completes-acquisition-of-acme-refrigeration/#:~:text=MIAMI%2C%20FLORIDA%20%E2%80%93% 20May%2011%2C,based%20in%20Baton%20Rouge%2C%20Louisiana.&text=Acme%20generated%20revenues%20of%20%2460%20million%20in%202020., accessed May 20, 2021
PR Newswire, "NearU Services Acquires Durham-based, Happy Home Services, Enhancing Customer Service And Plumbing Capabilities," https://www.prnewswire.com/news-releases/nearu-services-acquires-durham-based-happy-home-services-enhancing-customer-service-and-plumbing-capabilities-301274630.html#:~:text=CHARLOTTE%2C%20N.C.%2C%20April%2022%2C,provider%20in%20Durham%2C%20North%20Carolina., accessed May 26, 2021
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