Plumbing, Heating, and Air-Conditioning Contractors: NAICS b - Plumbing: NAICS 1997

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1 IBISWorld Executive Summary Industry Report Plumbing, Heating, and Air-Conditioning Contractors: NAICS 2002 : NAICS 1997 DISCLAIMER This product has been supplied by IBISWorld Inc. ('IBISWorld') solely for use by its authorized licenses strictly in accordance with their license agreements with IBISWorld. IBISWorld makes no representation to any person with regard to the completeness or accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability which cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from the use of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Inc. The publication is sold on the basis that the purchaser agrees not to copy the material contained within it for other than the purchasers own purposes. In the event that the purchaser uses or quotes from the material in this publication - in papers, reports, or opinions prepared for any other person - it is agreed that it will be sourced to: IBISWorld

2 INDUSTRY RISK Industry Risk INDUSTRY RISK SCORE Three types of risk are recognized in our analysis. These are: risk arising from within the industry itself (structural risk), risks arising from the expected future performance of the industry (growth risk) and risk arising from forces external to the industry (external sensitivity risk). These three types of risk are evaluated and each scored separately. These scores are then amalgamated to form a composite score which represents the overall risk affecting the industry. Structual Risk Growth Risk Sensitivity Risk Overall Risk Plumbing Construction Sector US Economy Forecast Period: December 31, 2011 Composite scores range between 1-9, the higher the score the higher the risk. Sector: Construction Industry: Plumbing THREATS AND OPPORTUNITIES THREATS - Investment in non-residential structures This industry is sensitive to the cyclical fluctuations in investment into nonresidential building construction, as around 30% to 35% of annual industry revenue is derived in this market. Demand for plumbing installation services in the non-residential building market is expected to be subdued, with the value of total non-residential building activity growing by 2.3% per annum over the five years to In the short-term, there will also be significant declines in investment into the commercial and institutional building markets. OPPORTUNITIES - Environmentally friendly plumbing Of particular importance for plumbing contractors is the requirement for buildings to meet the prerequisites for water and energy efficiency. One avenue of potential expansion for this industry is through the provision of environmentally friendly plumbing services, which contribute to the protection of the environment and the conservation of water resources. Current Performance The demand for the installation of plumbing appliances and pipefitting services has been severely impacted by the collapse of the US homebuilding market during the mid-to-late 2000s, and to a lesser extent the recent deterioration in investment conditions in the commercial and industrial building markets. However, this industry generates much of its revenue from work on existing buildings and structures and the industry has been partly buoyed by ongoing demand for maintenance and repair services. The industry derived substantial impetus for expansion from the robust investment into the non-residential building markets through the mid-2000s, from the ongoing demand for emergency repair and maintenance work on existing buildings, and the steady flow of revenue derived from long-term facility management contracts on commercial and industrial premises. Copyright 2010, IBISWorld Inc. 2

3 CURRENT PERFORMANCE Plumbing industry revenue has averaged a decline of 5.0% per annum over the five years to 2010, however despite this adverse performance the annual revenue has averaged about $80.4 billion per annum, roughly the same as the average for the previous five years to December 2005 ($80.9 billion per annum). Plumbing services, one of the oldest special construction trade industries, has displayed incremental change over the long-term with technological advances generally improving the ease of installation of products and appliances. Advancements have included the introduction of lower cost and more flexible PVC pipes and fittings, modular water and gas pipe components, and standardized appliances. While the growth in construction of new housing underpins demand for residential installation and maintenance services, the industry has also been able to expand the range of services delivered to the housing market, including the installation of private water catchment tanks, solar hot water systems, waste disposal systems, hydronic heating, and the recent introduction of "green" or environmentally supportive plumbing services. The plumbing industry has also benefited from the trend towards Americans investing into larger houses with multiple bathrooms and toilets. Profit performance plunges The unprecedented cyclical contraction in the housing construction market resulted in a severe downturn in industry profitability during the late 2000s, while the onset of economic recession further tightened profit margins in the commercial property market. Industry gross operating surplus (operating profit before taxation, interest costs and depreciation) has halved since the 2006 peak and fallen by an average 12% per annum over the five years to Despite the deterioration in the profit performance in the commercial and industrial building market in recent years, profit margins have generally remained buoyant across most non-housing construction markets, partly supported by the steady flow of revenue and improved efficiencies on long term maintenance contracting. The slump in profitability has driven industry value added down by 6.5% per annum over the past five years, falling from a record peak at approximately 65% of industry revenue in 2006, to about 60% of revenue in Employee compensation (i.e. payroll costs and fringe benefit payments) has averaged a decline by 3.5% per annum over the past five years, reflecting the downward trend in industry employment. The industry has achieved some efficiency gains in the use of labor from the emergence of long term maintenance contracts over the past decade. While upward pressure on labor rates has been evident among the more heavily unionized and larger inner city firms (including additional site allowances and redundancy payments), this has been partly offset by tight wage conditions for non-unionized workers in the smaller owner-operator businesses as competitive conditions intensified with the cyclical contraction in demand in the housing market. Growth strategies of key players The leading contractors in this industry, EMCOR Group and TDIndustries, are multidiscipline firms which deliver facility management services across a range of disciplines spanning the plumbing, heating, air conditioning and mechanical services (including installation and maintenance). These firms tend to concentrate on servicing the commercial, institutional and industrial property/construction markets, and therefore have been severely impacted by the recent slump in housing investment than the industry's many smaller-scale regional firms. However, the companies have been impacted by the recent downturn in investment into the commercial and industrial building markets stemming from the meltdown of the U.S. financial sector and the onset of recessionary conditions. EMCOR Group has expanded through a wide network of branches and strategic "bolt-on" acquisitions and has also spread its facility management activities (including plumbing services) into foreign markets such as the UK, Canada and the Middle East. TDIndustries has expanded through a network of branches to deliver multi-disciplinary services (plumbing, mechanical, HVAC, and electrical services) to commercial and industrial clients across its base in Texas and into neighboring states Colorado and Arizona. Copyright 2010, IBISWorld Inc. 3

4 CURRENT PERFORMANCE Housing investment more than halved over the three years to the 2009 cyclical trough, resulting from the tightening of lending practices in the fallout from the collapse of the subprime mortgage finance market, and the onset of economic recession. While demand eroded for installation services on new buildings and on alterations to existing homes, the many small scale contractors servicing the regional housing markets continued to derive revenue from emergency repair and maintenance activities. Conversely, demand conditions escalated in the nonresidential building market during 2007 and 2008, underpinned by accelerated growth in the office, healthcare and industrial building markets, along with strong demand for maintenance of existing facilities. The onset of recession during 2009 which accompanied the drying up of global investment funds, resulted in a sharp cyclical correction in the commercial and industrial building markets (office construction down 22.1%), and subsequently weaker demand for plumbing installation services. Buoyant growth of the mid-2000s The industry maintained solid revenue growth over the mid-2000s supported by the strong levels of investment activity in the downstream building markets (particularly the recovery in nonresidential building construction), and the expansion through the provision of facilities management operations (including a range of plumbing, electrical, mechanical, air conditioning services). Industry revenue climbed to a record cyclical peak at $94.00 billion in calendar year 2006, and industry employment climbed to approximately 505,000 people in 102,500 establishments. The industry's solid performance during this period corresponded with the moderate cyclical upswing in the nonresidential building market during the mid-2000s, including robust growth in the construction of offices, industrial buildings and healthcare facilities, all of which typically have a significant plumbing and pipefitting component of construction. The housing construction market surged to a record cyclical peak in 2005, representing an unprecedented ten consecutive years of expansion, and despite the modest cyclical contraction in 2006, plumbing activity in this market remained at historically high levels. The initial downturn in housing construction during 2006 reflected the deterioration in housing affordability in response to the tightening of monetary settings and rising property values (higher mortgage interest rates and higher land prices). Growth in key downstream building markets Year Percentage New housing Percentage Home improvements Percentage Total housing Percentage Non-residential building Source: US Census Bureau Note: Growth in the value of construction Copyright 2010, IBISWorld Inc. 5

5 KEY FACTORS Revenue Revenue Growth Rate Gross Product Gross Product Growth Rate Key Factors KEY SENSITIVITIES The key sensitivities affecting the performance of the Plumbing industry include: Housing starts Description: The total number of housing starts, indicating the strength of residential housing construction. Copyright 2010, IBISWorld Inc. 6

6 OUTLOOK Gross Product Gross Product Growth Rate The performance of the Plumbing industry is set to improve considerably over the period, although competitive conditions will remain intense given the depth of the cyclical trough in the housing construction market. The pace of industry expansion will be partly contained by the subdued cyclical growth of investment into the non-residential building markets although long-term facilities management arrangements will help buoy revenue for the larger multi-disciplined contractors. The projected cyclical upswing in demand for the installation of fixtures and fittings in the new housing construction market, along with the steady flow of revenue from maintenance and repair activities, will support industry revenue growth by an average 5% per annum over the next five years to 2015, significantly exceeding the cyclical recovery in U.S. GDP growth (2.8% per annum). Despite the strong growth profile, annual industry revenue is forecast to average $81.1 billion per annum in the five years to 2015, or just 1% above the average for the previous five years to 2010 ($80.4 billion per annum). The large-scale contractors, employing economies of scale and product diversity to contest the facility management market, will continue to take an increasing share of the contract maintenance market while leaving the intensely competitive household maintenance and repair market to be contested by the many small independent contractors. One avenue of potential expansion by this industry is through the provision of environmentally friendly plumbing services, which contribute to the protection of the environment and the conservation of water resources. For example, the California Plumbing Heating Cooling Contractors (CAPHCC, which has about 40,000 members), has moved to train licensed plumbers to carry out installation and modification to plumbing appliances and piping to conserve water usage, with the initial objective to encourage the installation of water saving toilet systems into new and existing premises. The US Green Building Council currently promotes a national certification program (LEED certification) for the design, construction and operation of high performance green buildings. Of particular importance for plumbing contractors is the requirement for buildings to meet the prerequisites for water and energy efficiency. Profits to gradually recover The industry's profit performance is forecast to improve with the widening of margins in the downstream housing construction market (mainly contested by smaller plumbing contractors installing fixtures and fittings on new housing). The subdued cyclical growth in the non-residential building market, and particularly the continued contraction in demand for Copyright 2010, IBISWorld Inc. 9

7 OUTLOOK installation services in the lucrative commercial building market early in the period, will partly contain industry profitability although revenue will remain stable on long term maintenance and repair contracts. Industry gross operating surplus (i.e. operating profit before the deduction of tax, interest and depreciation), is forecast to expand by an average 10% per annum over the next five years, and climb from currently about 18% of revenue, to total 23% of revenue by The smaller firms servicing the installation of bathroom and kitchen fixtures and fittings in new homes may record profit growth of exceeding 15% per annum, but this represents a climb from the current deep cyclical trough that has seen profitability drop to around half the level of the mid-2000s. Overall material input prices will be contained over the coming cycle as reasonably low inflationary pressures are projected to prevail. The stronger profit performance will underpin growth in industry revenue averaging 6% per annum over the five years to 2015, outpacing the projected growth in industry revenue and climbing as a share of revenue from currently around 60%, to reach 63% of revenue by the end of the period. Employee compensation is forecast to average solid growth by 4% per annum over the next five years, reflecting the growth by 2.5% per annum in total employment, and solid growth in real unit labor costs stemming from skilled labor shortfalls. This industry is prone to bouts of labor shortages during cyclical recovery phases as apprenticeship training intake is typically scaled back during declines in the building cycle which results in shortages of adequately skilled labor during the subsequent upswing in demand. Other factors can contribute to labor shortages, including the physical nature of plumbing work which results in a high attrition rate as older trades people leave the industry to avoid physical ailments, and the tendency for recently trained labor to establish their own businesses. Construction market trends The cyclical recovery projected in the housing construction market over the next five years will stimulate demand for the installation of new sanitary equipment, gas and water facilities, and is likely to benefit the many small-scale contractors that focus on regional housing markets. Total housing construction is projected to average robust growth of 12% per annum over the next five years to 2015, including resurgence by 16.6% per annum in new house construction, and growth by 5.1% per annum in alterations, additions and repairs to existing housing (i.e. home improvements). The demand for plumbing installation services in the non-residential building market is expected to be subdued, with the value of total non-residential building activity growing by 2% per annum over the five years to 2015, including further declines in the commercial and institutional building markets over the short term. Housing market recovery to underpin plumbing demand The industry's performance is forecast to rebound strongly in the short term corresponding with the cyclical recovery in the housing construction market and the pace of expansion will strengthen towards the middle of the period with the eventual upswing in demand from the non-residential building market. The value of new housing construction is projected to climb by around 75% over the next three years to 2013, with commensurate growth in the number of housing starts to 1,035,000 units, however this market is recovering from an extremely deep cyclical trough and the level of activity will remain considerably below that of the mid-2000s cyclical peak. The number of new housing starts peaked at a record 2,068,300 units in 2005 and the underlying long term demand for housing indicates starts of around 1,700,000 per annum. Within this context, the demand for plumbing installation services on new housing will surge from early in the period and support a solid recovery in industry revenue, but demand for installation of fixtures and fittings will remain well below the record levels of the mid-2000s. Demand for plumbing installation services will continue to deteriorate in the commercial and industrial building markets early in the period although investment conditions are expected to remain stable in the institutional building market due to the injection of fiscal stimulus into educational and healthcare facilities. The value of non-residential building construction will fall to a moderate cyclical trough in 2011 before gradually recovering to grow by 2% to 3% per annum over the two years to 2013, as the improved growth conditions in the US economy support a moderate cyclical recovery in the demand Copyright 2010, IBISWorld Inc. 10

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