30•


2011Forecast—HVACR


Can’t look back at 2010 to plan for 2011 M


y 2010 forecast for the HVACR wholesaler market ended up being fairly accu-


rate, however not entirely for the rea- sons I predicted. Federal and utility support of energy efficiency improve- ments were unprecedented and the market’s financial footing was surely better than 2009, but to classify 2010 as a recovery year is somewhat mis- leading when looking at the data. AHRI’s central air-conditioner and


heat pump shipments through October 2010 were essentially flat compared to 2009 despite an exceptionally hot summer in most parts of the country, and the amazing amounts of incen- tives for high-efficiency system instal- lations. JP Morgan Equity Research forecasted 15% growth in 2010 uni- tary shipments, which considering their compelling data showing seven million legacy systems due for re- placement and the positive economic, weather, and incentive drivers, proba- bly should have been within reach. Through October


HARDI distributors in his final quar- terly forecast of 2010 issued in Octo- ber: “Subscribers to the full edition of this report will see that HARDI member sales have been rising in similar rate-of-change fashion to overall activity in housing permits and the U.S. economy in 2010. This fact, coupled with seasonably warm weather and other stabilizing eco- nomic factors, has resulted in remark- able improvements in sales over 2009. However, linear thinking is not advisable as we approach 2011. “Many regions will experience a


though,


HARDI’s Monthly Sales trends were showing average running 12-month distributor growth of 8%, seemingly supporting the empirical data show- ing 12% more repairs done than con- densing units shipped. The parts business is a good one for HARDI distributors, however when looking forward to 2011 one must not forget that residential equipment sales re- main the long-term driver of industry growth. The unitary sales experience of 2010 does not provide a positive leading indicator for 2011. Next year’s performance will likely be in- fluenced by three major equipment- related trends: 1. How much 2011 demand was


pulled into 2010 by the $1,500 tax credits? 2. How much will the sales mix of


high-efficiency systems suffer with- out the $1,500 tax credit incentive? 3. What is the volume and margin


impact of the reintroduction of newly-produced R-22 condensing units? Before making any 2011 determi-


nations, let’s evaluate macroeco- nomic factors that may provide a market boost absent in 2010. HARDI’s chief economist, Alan


Beaulieu of the Institute for Trend Research (ITR) had this to say to


period of flattening housing activity in late 2010 and early 2011. Unem- ployment and subsequently foreclo- sures are still very high, home prices are still low (though stabilizing) and credit is still tight. These factors will keep general economic recovery tem- pered and we have built that into our forecasts for the housing and com- mercial markets. Know that the worst is over, conditions are improving, but 2011 growth will be mild for most.” With two additional months in


2010 considered, Beaulieu added in late December: “The wholesale trade industry is doing well with durable goods posting a solid 11.4% year- over-year gain. This activity is being driven by both business and con- sumer-based demand. However, the leading indicators most important to HARDI members are showing that activity in the HVACR market will be slowing in terms of the rate of rise. For instance, companies that experi- enced a 10% year-over-year growth rate in 2010 should not expect an- other 10% increase in 2011. Firms tied to new home construc-


tion will not fare as well in 2011 as their more industrial brethren. There will not be a quick rebound in the housing new construction market in 2011. Wholesalers should plan on a re- peat of the 2010 level of activity. Wholesalers who work to key in on the remodeling market will fare better. The remodeling index for projects under $25,000 in value is encouraging and it should remain a good source of business for many distributors. The nonresidential construction


market is still two quarters away from beginning a recovery that will be painfully slow in terms of the rate of rise. Employment will need to drive


• Parts, repairs still a good business for dealers. • Housing to flatten but growth will slowly continue. • Home improvement looking stronger. • Dry-shipped R-22 units still being manufactured. • HARDI to work for full tax credits for efficiency.


• Be sure to visit www.thewholesaler.com for web exclusive articles and videos! • Remodeling upswing To this point, the improving re-


modeling index is one HARDI will be watching very closely in 2011. This is encouraging since our indus- try has seemingly suffered in recent years by homeowners’ unwillingness to make major investments in homes for which they had little commitment. Keep a close eye on Home Depot


and Lowe’s reports and SEC filings to see if homeowners maintain their appetite for home improvements next year. While I do not expect either re- tailer to be a significant player in the HVAC business, it is hard to imagine


prevent or at least mitigate margin slippage that appears to be facing all of us next year.


January and February are looking like great months for sales, new product, and profitability training for distributor personnel to


homeowners investing in a several thousand dollar HVAC replacement (especially in the absence of a robust tax credit) if they aren’t willing to spend money on other, less expensive home projects.


New Congress a wild card Potentially pouring salt on an al-


ready wounded commercial market, it is possible the new Congress — feeling mandated to rein in federal spending — may raid and reclaim un- spent stimulus funds; a large portion of which is earmarked for commer- cial, government, and institutional building upgrades and energy effi- ciency retrofits. Most of 2010’s com- mercial projects were tied in some way to stimulus-funded energy effi- ciency improvements in government buildings, universities, and schools. To count on those stimulus dollars


being there in 2011 if they’ve not yet left the Department of Energy, GSA, Department of Defense, or the Office of Management and Budget would not be a sound basis for commercial growth strategies or predictions next year. That being said, 2010 featured a surprisingly strong supermarket and commercial refrigeration market with several large chains hitting their five year retrofit cycle or pulling the trig-


occupancy rates up before a lot of ac- tivity will be evident in this market place. The economy will not be cre- ating many jobs in the industrial/of- fice/commercial realm in the next year. Industry participants should stay lean, efficient and look for op- portunities in new, previously unex- plored markets.”


•THE WHOLESALER® — JANUARY 2011


BY TALBOT H. GEE Special to TheWholeSaler


ger on energy and refrigerant reduc- tion retrofits. Considering the generally weak consumer and retail spending figures throughout 2010, this is encouraging and should indicate further opportu- nities in a more retailer-friendly 2011. Finally, regarding commercial busi- ness, while it may be unlikely to see significant new construction or major equipment retrofitting, 2011 could be a good year for the controls/building automation industry as facility own- ers and managers seek additional ways to lower maintenance and util- ity overhead without spending the big dollars on new mechanicals.


R-22 uncertainty Focusing again on residential mar-


kets — specifically the outlook for unitary equipment sales in 2011 — it seems like an annual event to declare the next year as the most uncertain and unique one ever. This time last year it was uncertainty not only about the shaky economy, but how the next stage in the R-22 phase-out would go. It wasn’t until the 23rd of December 2009 when U.S. EPA finally released the two phase-out regulations affirm- ing our hard work and advocacy by ensuring the continued repair and component replacement of existing R-22 systems. However the EPA chose to reject one major HARDI recommendation and decided to allow the continued manufacture and sale of “dry-shipped” R-22 condens- ing units; at the time choosing not to disrupt the long-standing precedent in refrigeration applications. It was in August 2010 when we first heard of a few residential “dry-shipped” units being sold to wholesalers and just four months later all major OEMs are offering them. These products now arguably represent the greatest level of uncertainty for 2011, which is say- ing something these days. JP Morgan Equity Research views


these units as a net positive for OEMs and the industry, potentially reviving perennially sluggish unitary sales by providing a low-cost equipment op- tion to home and multi-unit building owners who have resisted equipment (Turn to hVaC 2011... page 32.)


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