2021 HVAC Outlook – Interview with Chuck Campbell, CEO of Friedrich

Friedrich is a designer, manufacturer, and distributor of premium branded air-conditioning products for a variety of retail, commercial, lodging and multi-unit property settings. Products include window and thru-the-wall a/c units, packaged terminal units, vertical packaged units, ductless split systems (DSS), variable refrigerant packaged (VRP) units, dehumidifiers, and portable air conditioners.

How has Friedrich rebounded from the impact of COVID-19, and how has the business performed in the first half of 2021?

Like many manufacturing businesses, we saw a significant slowdown in the second quarter of 2020 due to the pandemic as our dealers and distributors closed, construction sites experienced delays and uncertainty reigned. Since the start of Q3 2020, our customer demand has risen steadily, confirming that air conditioning manufacturing is truly an essential business. Once people are accustomed to air conditioning, they do not want to go without it. From the second half of 2020 through today, our business, including financials, has performed exceptionally well. Through the first half of 2021, our sales are up about 25% compared to last year, and we’ve maintained some of the cost containment practices enacted during the depths of the pandemic.

Coming out of COVID, are there any lasting trends that will impact the HVAC market going forward?

Absolutely. The focus on IAQ (Indoor Air Quality) is here to stay. Two integral aspects that Friedrich delivers to its customers are to bring fresh air into rooms to provide a healthy environment and to increase the use of specialized filtration to contain contaminants from recirculating through the space. Thankfully, IAQ was already a top priority for Friedrich well before COVID. With awards in the IAQ category and a patented method for integrating IAQ into our air conditioners, we were in a prime position to address the new challenges and heightened needs of residential and commercial customers.

What were some of the operational improvements you made during COVID to mitigate any impact? 

Our office workers spent over a year working from home. Who would have believed how quickly we could all adapt to this new norm? As we move beyond the shutdowns, we have adopted a hybrid work model allowing team members to work in the office and remote to provide flexibility, while retaining the benefits of working together.

Our factory is focused on cross-training workers across multiple processes. At first, we did this to reduce shutdowns if employees got sick, but we have continued this initiative to improve flexibility. This new flexibility has allowed us to adapt to schedule changes due to both customer requests and supply chain disruptions.

Speaking of supply chain disruptions, like many others, we have seen the costs of container freight skyrocket and the costs of commodities such as metals soar. Some components, like certain computer chips, are not available at almost any price. Our engineering and production teams adapted by finding alternatives such as redesigning and testing printed circuit boards in record time to use more readily available chips to avoid delivery disruptions.

At the height of the pandemic, we were ultra-focused on the health and safety of our employee base and protecting our enterprise, which included closely monitoring liquidity and containing costs. While some of those actions were temporary, we retained certain processes that allow us to operate with a leaner level of resources today than pre-pandemic.

Can you discuss the end markets you supply into and how those markets have changed since COVID? 

Fortunately for Friedrich, we sell into diversified end markets, the largest being the lodging market, where Friedrich provides both new construction and replacement products to hotels. The new construction side was impacted during the initial stages of the pandemic, but the business quickly rebounded and has remained strong since. The replacement side was impacted more significantly. As hotel occupancy rates plunged and travel declined, replacement product sales slowed dramatically. Over the past few months, we have seen this part of the business rebound faster and stronger than anticipated as travel has resumed and the pent-up demand caused by delayed purchases has rebounded.

Friedrich also serves both multi-family and single-family residential markets. Both have held up quite well as many people worked from home and needed to ensure comfort and efficiency.

Light commercial and industrial markets (including strip malls and general retail) are a smaller part of Friedrich’s overall business mix. Given these segments were hit hardest by the pandemic slow down, we were not impacted as much given that demand from our other segments remained strong. Lastly, we have almost no exposure to urban office buildings, so we avoided the steep declines this market experienced.

Our wholesale distributor channel has remained strong as the need for professionally installed products continues to grow.

Which end market do you see the most growth out of over the next 12-24 months? 

It is tough to pick just one. We expect to see continued strong demand in the distribution and residential markets, and we anticipate the lodging replacement market to rebound quicker than we initially forecasted. Because of our continued investments in new product development and our focus on broadening our commercial reach, we are positioned for growth across all of our end markets. We can take share not only from existing suppliers, but also existing technologies in select cases.

What are the broader challenges that HVAC businesses face today, and how are you mitigating those challenges at Friedrich? 

The first thing that comes to mind is both a challenge and an opportunity. There is global recognition that air conditioning refrigerants need to switch to lower global warming potential (GWP) alternatives, and we are working hard to make these changes in many of our products over the next two years. This type of mandate is not new to the HVAC industry but does come up every once in a while and always creates new challenges as we rework our product suite to meet new standards.

Another societal challenge is to reduce the use of fossil fuels in heating equipment such as oil or natural gas (also known as Decarbonization) and to offer electric-powered solutions. For several years we have taken this direction and now have several product lines that offer efficient heat-pump operation even when it is very cold outside. We are continuing this focus in future R&D.

Have you seen a shift in product mix, given the heightened demand for indoor air quality? 

The market demand for improved indoor air quality was on the rise before COVID, so establishing ourselves as an industry leader for IAQ-integrated HVAC solutions certainly paid off. Expanding our portfolio to include enhanced air filtration and air cleansing technologies was already on our product roadmap. As such, we were able to react quickly to deliver these options to customers during a critical time while also outpacing our competition. We have seen strong interest in these solutions that meet rigorous standards for delivering safer, healthier indoor air quality, and have sold hundreds of thousands of these types of products in the past few months.

Discuss some of the new product and technology innovations Friedrich is working on. 

We are always working on the next generation of products to continue our industry-leading technical offerings. Currently, our main focus is on designing higher-efficiency products that use low GWP refrigerants while incorporating IAQ features. Our team of engineers at our design and development center in San Antonio, coupled with our UL-approved lab, allows us to test and roll out new products quickly with full control over the design and production process.

Most recently, we’ve expanded our range of VRP capacities both on the smaller and larger ends to offer customers a complete suite that allows us to serve the entire market.

What does your backlog look like over the next 12 months? 

I am excited to say that demand has remained strong. Our year-to-date sales-plus-backlog is up about 20% versus 2020, which once again shows how essential HVAC manufacturing is and how rapidly the market is recovering from the COVID impact.

What are you most excited about for the future of Friedrich? 

Specialization that we are already known for has been receiving increased interest. IAQ is near and dear to our hearts. The chance to help people create a cleaner environment, whether it’s in their home, place of work or school is a great opportunity where we appreciate the chance to make an impact.

The flexibility of our employees and suppliers to adapt quickly to all the hurdles we have faced over the past year and the commitment from our customers has been an exciting outcome from a bad situation that we have all faced.

Monomoy Capital Partners is a private investment firm with $2.7 billion in committed capital across a family of five investment funds. Monomoy invests in the debt and equity of middle market businesses that can benefit from operational and financial improvement with a focus on manufacturing, distribution and consumer product businesses in North America and Europe.
To see the rest of the Monomoy portfolio, please click here.