ACR Group, Inc | AMEX: BRR
ACR Group, Inc | AMEX: BRR
Investor Presentation
February 2007
Disclaimer | Forward-Looking Statements
This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, please see ACR Group’s (AMEX: BRR) publicly available filings with the Securities and Exchange Commission. BRR disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ACR Group | Company Overview
ACR Group (AMEX: BRR) is one of the largest independently owned
HVAC distribution companies in the United States
Founded: 1978; Began HVAC distribution operations in 1990 Headquartered: Houston, Texas
Company Profile: Distribution of heating ventilation and air conditioning equipment,
parts & supplies
Geographic Presence: 54 branch operations located in 10 states, primarily throughout
the Sunbelt region, including three (new) branches in Arizona
Principal Equipment Suppliers: International Comfort Products (a division of Carrier)
and Haier USA
Target Market: Residential & light commercial installation/service contractors Sales Mix: 70% replacement; 30% new construction
ACR Group | The Supply Chain
OEM
ACR Group
Contractors
ACR Group | Management Overview
Alex Trevino - President, Chairman & CEO
o Owned and managed wholesale businesses in the HVAC industry for over 40 years o President and Chief Executive Officer of the Company since 1990
o Member of the Board since 1982, serving as Chairman since 1988
o Earned a BA from Rice University in 1958, and a BS in Mechanical Engineering in 1959
Anthony “Tony” Maresca - Chief Financial Officer
o Employed by the Company since 1985, member of the Board since 1986 o Senior Vice President, Chief Financial Officer and Treasurer since 1985 o Certified Public Accountant – 6 years in Public Accounting
o Earned a BA from Rice University in 1972
Steve Trevino - General Counsel
o Employed as General Counsel since March 1999, member of the Board since 1997
o Elected Senior Vice President in 2003 while managing the Company’s largest business unit o Earned a BBA from The University of Texas (UT) in 1984; JD from UT School of Law in 1987
Overview | The HVAC Distribution Industry
ACR Group is the second largest publicly traded independent distributor
in the HVAC marketplace
HVAC distribution market: $25-30 billion opportunity (annually)
Highly fragmented industry: 1,000-1,300 wholesale distributors of HVAC products The industry is a blend of manufacturer-owned and independent distribution
o Manufacturer-owned distribution: 30-40%* o Independent distribution 60-70%*
Conditions remain favorable for industry consolidation, paving the way for larger distributors
like ACR Group to penetrate new geographies and market segments
Key Trends | HVAC Industry Trends Entering CY07
13 SEER transition largely complete; focus remains on upgrading the (substantial) installed
base of lower-efficiency units, allowing for higher-revenue per unit sold
Demand for remaining inventory of lower efficiency HVAC equipment continues within
niche multi-family and replacement markets
Year-on-year comparisons a challenge for the industry toward the end of CY06 due to
“pre-buy” of lower efficiency HVAC equipment in the year-ago (CY05) period
Moderate weather conditions in late CY06 have dampened early season demand for heating
products
Industry-wide prices have stabilized for the time being
Some commodity costs have declined in recent months, but most recent trend exhibits
stabilization
Industry demand trends have appeared relatively strong, particularly within key markets such
as Texas, while in regions such as California and Florida year-on-year declines in residential new construction have impacted rates of growth
In several markets where residential new construction is in decline, light commercial
construction appears to have grown stronger, in line with previous construction cycles
Slowdown in residential new construction is net-negative for HVAC distributors, however,
the seasonal strength of the replacement market during the summer months, combined with sustained demand in the light commercial market have typically served to offset weakness in residential new construction
Upcoming Catalyst For Growth | The Phase-out of R-22
Phase-out of R-22. An HCFC (hydrochlorofluorocarbon) known as R-22 has been the refrigerant
of choice for residential heat pump and air-conditioning systems for more than four decades. Over the coming years, the EPA (by order of the Clean Air Act) has mandated that HCFC’s be phased-out of production. Consequently, manufacturers of residential air conditioning systems are beginning to offer equipment that use ozone-friendly refrigerants.
Deadline! January 1, 2010. After 2010, chemical manufacturers may still produce R-22 to
service existing equipment, but not for use in new equipment. As a result, heating, ventilation and air-conditioning (HVAC) system manufacturers will only be able to use pre-existing supplies of R-22 to produce new air conditioners and heat pumps.
What are the alternatives to R-22? R-410A is one EPA approved substitute for R-22,
manufactured and sold under various trade names, including GENETRON AZ-20®, SUVA 410A® and Puron®.
Refrigerant transition is a net-positive for the HVAC industry. The transition away from
ozone-depleting R-22 to systems that rely on replacement refrigerants like R-410A has required redesign of heat pump and air conditioning systems, resulting in the development of
next-generation HVAC units that align with federal guidelines. Importantly, the cost of R-22 will increase as the transition to R-410A accelerates, given that R-22 will face further manufacturing restrictions beginning in 2010 (limiting supply in the market).
Conclusion: Phase-out of R-22 will result in an HVAC product cycle transition. The
increasing cost of R-22 will drive the market to adopt next-generation, higher-margin units which utilize R-410A refrigerant.
ACR Group | The Installed Base Continues To Increase
Source: US Census Bureau; Energy Information Administration (EIA)
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000
1975 1985 1995 2000 2001 2002 2003 2004 2005
# o f N ew On e-Fa mi ly H ome s W it h A C 0% 20% 40% 60% 80% 100% AC P en et ra ti on
ACR Group | Understanding Our Business Model
54 Branches Located Across the United States
o Branches are organized into 5 business units with 7 to 16 branch locations each, assembled by geographic proximity
o Exposure to regional economic anomalies is limited
Decentralized, “Large Branch” Strategy
o Within limitations, each business unit operates autonomously and each branch is a separate profit center
o Significant performance-based incentives motivate business unit and branch managers to operate profitably
o Focus on developing large volume branches minimizes inventory redistribution and leverages fixed operating costs
o Company-wide ERP software facilitates consistent technology deployment and central oversight of business unit operations
ACR Group | Understanding Our Business Model (Con’t)
The “One-Stop-Shop” approach
o We are committed to providing a high quality, competitively priced line of products to our customers, with a focus on breadth and availability of parts, supplies and equipment
The “Buy and Build” strategy
o Disciplined acquirer of independent distributors in key regional geographies for the right price
o Each acquisition provides us an additional regional platform capable of sustained organic growth
The Value of Experience
o Our employees are regarded as among the most experienced in the HVAC industry o Average experience of branch managers: 24 Years HVAC industry experience; 24 Years 13 years13 years
as a branch manager
o Streamlined corporate structure allows us to make informed operational decisions quickly and decisively
ACR Group | A Growing Geographic Presence
Region with promise for sustained economic growth
Buying into established customer (contractor) relationships Experienced management
Availability of desirable product lines
Branch openings accretive in less 18-24 months Opportunity for at least $3 mil/branch annually Appropriate valuation
Expansion Criteria Core Markets
ACR Group | Expanding The Addressable Market
Source: Company reports, SEC filings
0 10 20 30 40 50 60
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
N um ber of B ra nch es $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 R ev enue P er B ra nc h ( $M M )
ACR Group | Key Highlights From Fiscal 3Q:07
Total revenues increased 12.0 percent to $56.0 million in the third quarter of fiscal 2007, up
from $50.0 million in the year-ago period.
Same-store sales, which excludes six branches open one year or less, increased 8.4 percent in the
third quarter of fiscal 2007 from the year-ago period.
Gross margin increased to 25.4 percent in the third quarter of fiscal 2007, up from 23.6 percent
in the year-ago period.
Operating income increased 105.1 percent to $2.0 million in the third quarter of fiscal 2007, up
from $979,000 in the year-ago period.
Net income increased 40.5 percent to $919,000 in the third quarter of fiscal 2007, up from
ACR Group | Tracking Same Store Sales
Note: Fiscal Year End is Feb. 28; All industry growth data corresponds to BRR fiscal year
*Excludes Georgia and Colorado business units affected by transition from Goodman brand equipment **Source: Air Conditioning and Refrigeration Institute; includes unitary AC and heat pump shipments Note: 3Q:07 BRR same-store sales growth excludes six branches open one year or less
FY02 FY03 FY04 FY05 FY06* 1Q:07 2Q:07
9% 9% 8%
-11% -18% -44% 4% 22% 25% 17% 12% -5% 1% 9% 21% 8% -50% -40% -30% -20% -10% 0% 10% 20% 30%
BRR Same Store Sales Growth (%) Industry Growth (%)
ACR Group | Financial Overview
Fiscal Year-End: FebruaryNine-Months Nine-Months
Ended 11/30/06 Ended 11/30/05 FY06* FY05 FY04 FY03 Revenue $194.1 $158.7 $204.3 $199.6 $174.4 $161.8
Y/Y % Growth 22.3% - 2.4% 14.5% 7.7% 4.1%
Gross Profit $49.4 $37.3 $48.3 $46.6 $38.6 $35.7
Y/Y % Growth 32.5% - 3.6% 21.0% 8.1% 6.3%
Operating Income $11.0 $4.7 $5.1 $7.3 $4.5 $2.7
Y/Y % Growth 134.3% - -30.0% 64.6% 65.5% 28.3%
Net Income $6.0 $2.7 $2.8 $4.2 $2.4 $0.5
Y/Y % Growth 123.5% - -34.6% 75.8% 363.2% NM
Diluted EPS $0.52 $0.24 $0.24 $0.38 $0.22 $0.05
Y/Y % Growth 116.7% - -36.8% 72.7% 340.0% NM
Gross Margin 25.5% 23.5% 23.7% 23.4% 22.1% 22.0%
Operating Margin 5.7% 3.0% 2.5% 3.7% 2.6% 1.7%
Net Margin 3.1% 1.7% 1.3% 2.1% 1.4% 0.3%
Shareholders Equity $27.3 $20.9 $21.1 $17.7 $13.1 $10.7
Book Value/Share $2.35 $1.85 $1.85 $1.61 $1.22 $1.00
Shares Outstanding ** 11.6 11.3 11.4 11.0 10.7 10.7
*Financial results reflect transition to Haier products from Goodman
** Shares outstanding as of the latest practicable date to the external report filing
Income Statement ($MM)
Margin Analysis (%)
ACR Group | Evaluating Catalysts For Industry Growth
Attractive Industry Fundamentals
o Installed base continues to grow as almost all residential new construction is equipped with central air-conditioning
o HVAC demand is weather driven – not a discretionary consumer item
o Replacement cycle minimizes exposure to volatility in the new housing market o Lack of price elasticity
o Increased focus on energy efficiency and indoor air quality
o Barriers to entry remain high because of capital requirements and limited availability of product lines
The 13 SEER transition
o Higher efficiency product transition should continue to favor distributors
New Product Introductions
o Introduce quality, competitively priced brands into the “value segment” of the market
Substantial (Growing) regional presence throughout the Sunbelt
o Further expand throughout the Sunbelt states and into other geographic areas with a high rate of economic growth, through both acquisitions and organic growth
