HVAC Outlook COVID-19 Edition – Interview with Chuck Campbell, CEO of Friedrich Air conditioning

How have you seen COVID affect your supply chain?
In early February, all of the Chinese suppliers had significant production disruptions as their workers didn’t return from the annual Lunar holiday. This took a month or so to return to normal production capacity, but since this was early in our season, we were able to navigate through these disruptions without impacting our customers.
In April and May, we made successful appeals that allowed e our factory in Mexico to remain open as an essential business. However, a key supplier of ours was shut down for two weeks by the Mexican state government, which reduced our production output and caused a one- to two-week delay. We worked with our customers to minimize any impact to them.

What was the low point for sales over the last two months (% down YoY)? What were sales last week (% YoY)? What does next month’s sales picture look like (% YoY)?

Q1 sales were flat to prior year, while April and May declined 34%. The second week of May was the lowest, which was down 50%, but the last two weeks of May were back to the prior two-month trend, down 34% and 36% respectively. Despite a tough April and May, June backlog and sales outlook appear to be rebounding with sales vs. prior year being flat to down 10%.

How have you seen COVID affect your customers/end markets?
As a diversified business, we have seen the impact of the COVID crisis to be more severe in some segments over others. The two segments that we supply into that were hit the hardest are the lodging segment for replacements units, and the metro-NYC specialty retailers who have closed their showrooms for two months and have been limited to phone and online sales.
On the positive side, we are seeing an uptick in higher volume project work in NYC, Los Angeles and other metro areas for schools and government buildings. We are also seeing interest from hotels and senior living new construction projects to add special air filtration. This will give us another differentiating feature that some competitors don’t offer.

What is the operating status of your facilities? How much of the workforce have you brought back?
In March, our office workers shifted to working remotely, and we have not yet returned to the office. Our ability to make this shift effectively and quickly was very encouraging. Our two U.S. warehouses in Texas and New Jersey have been deemed essential and have not been closed by the government. Each warehouse had one person who caught the virus in April and has since recovered. Both warehouses were shut down for deep cleaning for two days and then reopened. Our factory in Mexico has had some brief disruptions but is currently operating at a level very close to plan. As our suppliers’ output rebounds, Friedrich’s output will increase. As our sales outlook declined, we furloughed about 20% of our employees; as of now, we have not called back any of these employees but hope to bring them back soon.

Given your lodging channel (comprised of hospitality and multi-family housing) makes up a significant portion of Friedrich’s commercial division, how do you think changes in consumer behavior, as a result of COVID-19, will impact the lodging sector in the near-term?
Hotel guests want confidence that they won’t catch the virus from the previous occupant in the room. Hotel operators are looking into several approaches to minimize this risk and provide assurance to their customers. One item that we can help with is specialized filtration through our vertical products. This is an immediate concern that we expect will continue long-term.

Given that specialty retail is a large channel for Friedrich, how do you think changes in consumer behavior, as a result of COVID-19, will impact the specialty retail sector in the near-term?
Specialty retailers have an opportunity to provide more customer-specific services that may be harder for national big box stores to match, including product drop-off at job sites, assistance selecting products from remote shoppers, and product variety. If the trend for consumers to shop remotely continues and foot traffic in showrooms remains down, stores with higher levels of service will benefit while DIY / self-service stores may be hurt.

In the current market environment, do you think your premium branded A/C products will cause end consumers to remain loyal to a tried and true brand, or reconsider a lower price point for their next purchase?
I can see some of both. For those shoppers most impacted financially, they may have no choice but to buy the cheapest product across categories, including air conditioning. On the other hand, as dealers and competitors have reduced marketing and advertising expenses, strong, long-term brands will continue to benefit from their leading brand recognition.
In some cases, our largest competitors have been impacted more by supply chain disruptions than we have. This may lead to availability-based brand shifts. While we were very conservative in the early stages of the pandemic, we are nimble enough to ramp up quickly to reestablish ourselves and take advantage of opportunities as they arise.

What does the demand picture look like going forward and how are you modeling that? When do you think demand in your business will return to pre-COVID levels?
Short-term, our current backlog is above prior year and our June and July sales outlooks are stronger than April and May. Mid-term, we will continue to look for new opportunities in project work, special filtration, new accounts and growing segments. For next year, we will continue to work closely with our customers in each of our segments to understand how their businesses have changed, and from those insights, we will continue to develop new products and product upgrades that should continue to generate exciting growth opportunities. Lastly, we will continue to diversify our risk away from new construction lodging projects and continue our focus on growing within multi-family housing.

How will the business operate differently going forward?
We have focused more than ever on employee safety and the work environment in our factory, warehouses and offices. We are also learning how to operate with a leaner level of resources, which will continue even as the business rebounds.

What were some lessons or insights you gathered over the past few months that will stay with you going forward?
Heading into the COVID-19 pandemic, we knew we had to act quickly but not hastily. Of the utmost importance is preserving the health and safety of our employees, maintaining the long-term enterprise of Friedrich, and being proactive rather than reactive to ensure we come out of this a stronger, more nimble business. As we started to identify and pull levers within our control, one of the less obvious or cost-centric levers that we found was prioritizing customer communication beyond anything we’ve done in the past. While we constantly work to get closer to our customers and improve our communication with them, COVID has challenged us to adapt to different methods of doing so. Since we cannot rely on our traditional in-person meetings, we have created new forms of contact. One that has been very effective has been conducting training and informational webinars multiple times per week. These value-add programs have had great participation and have helped us bring together our sales team, channel partners and even end-consumers. The feedback from our customers has been tremendous and we are adding more programs like these going forward

Another lesson that’s been reinforced in the past few months is understanding what strengths we have relative to our peers in the industry, as we try to identify ways to maintain or grow market share in a challenging environment. We have traditionally considered our company as more flexible than many of our competitors, given their larger scale and lack of channel focus. Our entrenched relationships with our customers, product innovation capabilities and ability to be nimble has allowed us to take advantage of some big opportunities that were presented in part due to COVID.

By staying more connected to our customers, focusing closely on controlling costs, and continuing to find new opportunities, we will emerge from this crisis even better positioned for long-term profitable growth.

To learn more about Friedrich, please click here.