HVAC Outlook: Interview with Chuck Campbell, CEO of Friedrich Air Conditioning

Industry Outlook:

What are some of the broader trends you are seeing in the HVAC market?
We are seeing an increasing amount of investment being put towards new technology to provide more energy efficient and environmentally friendly products. New technologies are allowing for more connectivity between products and the users, which allows for greater control, HVAC system management and increased energy efficiency. Over the past couple of years, we have also seen a good amount of consolidation and partnerships within the HVAC industry that are causing customers to reshuffle their supplier base in some cases. Generally speaking, the HVAC industry has experienced good growth, and we expect that to continue at least in the near-term

What are some of the tailwinds you see coming in the industry?
There is a large installed base of older, less energy-efficient products that will need to be replaced in the next few years. Lodging and multi-family new construction remain at high levels. As smart connectivity and compatibility is becoming the standard in many consumer white goods, this technology is making its way into air conditioning controls and opening the door for completely integrated building management and smart home solutions.

What are some of the headwinds you see coming in the industry?
A future economic downturn will reduce new construction starts, although we anticipate it to be much less severe than in 2008 and, if tariffs are increased to 25%, it will put pressure on market demand. In addition, we continue to face challenges across labor, raw material costs and freight, which are putting pressure on margins industry-wide.

What new technologies have impacted the industry?
Variable speed compressors and motors are making products more energy efficient and provide improved dehumidification capabilities. On top of that, advanced controls, connectivity and IoT (Internet of Things) are changing the ways units are operated.

Company Outlook:

What are your goals for the company this year?
We will continue to improve our customer-first focus through product innovation and exceptional service. We need to always remember that the customers pay the bills, and we will strive to find new ways to add value for them. Our recent investments in new state-of-the-art IT systems will be instrumental in making this happen. In addition, we pride ourselves in our talented employee base. We are always looking for the best talent and as we’ve continued to grow, we have been fortunate enough to be able to grow our employee base along with our top line in order to continue to provide quality, innovation and service to our customers. Lastly, we always strive for operational excellence, ensuring that our manufacturing and product development capabilities are meeting our customers’ standards at every checkpoint.

What new strategies are you implementing this year?
We are targeting growth in two areas:

• Gain market share within our existing customer base, such as dealers and distributors, by serving them better and offering a greatly improved product lineup;
• Expand into new commercial segments to continue the shift from being a retail/consumer goods company and more towards becoming an HVAC manufacturer focused on diversified, less-competitive market segments.

What are the biggest opportunities for 2019?
All three of our business segments (specialty retail, lodging and light commercial) grew in 2018 and we expect that to continue in 2019. We expect our differentiated lodging products to continue gaining market share. To support this growth, we are putting a lot of effort into strengthening our service capabilities alongside launching a record number of new products this year, where we have already received great initial feedback from our customer base.

What were the biggest challenges over the past year?
The biggest challenges that we encountered were around commodity price pressure, freight rate increases and reduced availability of trucks. Additionally, the tariff environment has kept us all on our toes and we are prepared to flex with whatever happens in the next round (if there is another round).

Within the product portfolio, where are you seeing the most growth?
We are seeing the most growth in two categories:

• Lodging and commercial products and,
• Smart/connected products for both residential and commercial market segments.

Our lodging and commercial customers are always looking to improve the value proposition they offer to their end customers, and our end users are seeking more connectivity and smart applications which have become more and more pervasive across any consumer product.

Which end markets in your business are seeing the most growth?
We’ve been fortunate enough to see growth across all of our end markets. That said, the markets with the most growth for us are in lodging and commercial (including the multi-family market). We are also seeing increased demand for residential options, such as ductless systems, room-by-room and Wi-Fi enabled HVAC solutions. As we continue to come out with new products, including products that serve as the first and only to market, we are able to offer our customers a wider product portfolio and a total solution for their needs, so that we can grow alongside our customers.

Where do you see sales trending in the next 12 months?
We expect to continue to see strength across each of our market segments, well north of GDP. Most of our customers are forecasting continued growth this year and we are excited to be a part of that.

How are tariffs impacting the business?
The uncertainty involved with the tariffs on Chinese-built products has been challenging, but since many of our products are built in North America, there has been less stress on us as opposed to some of our competitors. Tariffs are affecting the entire industry and I’m sure all of us are thinking through various ways to respond to such macroeconomic changes.

What is the current pricing environment with your business?
With the first round of tariffs, HVAC suppliers have generally been able to pass through any increases to the end consumer. However, if the second round comes through at the level that has been communicated previously, there may be change in consumer behavior across certain products that may cause suppliers to rethink their offering and accompanying prices. For us, because we offer some unique products in the marketplace that require substantial product development and engineering capabilities, we are able to price such work accordingly as our customers see the value that we offer.

What do you see as the most challenging part of the business?
The increasing number of competitors disrupting the market has been and always will be a challenge, particularly if certain competitors are behaving in an unprofitable way to gain share or entry into a new market. Furthermore, due to the M&A activity in our industry, we must keep track of the strategic initiatives of the larger players in the space as well as our competitor set, as they can change with M&A pursuits, and this can impact our competitive landscape and also drive changes in customer preferences or consumer focus.

What have you found to be the hardest positions to hire for?
Experienced engineers: our products require significant engineering expertise due to their complex features, our efficiency standards, our desired aesthetic and the various applications for our customers and end users. Our product innovation is a key differentiator for us and a driver of growth, and we make sure to invest in this capability.