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 Homeowners
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 *Company estimates
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 prebuy 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 nextgeneration 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. Source: Environmental Protection Agency
ACR Group The Installed Base Continues To Increase # New One-Family Houses with AC % of New One Family Houses With AC # of New One-Family Homes With AC 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1975 1985 1995 2000 2001 2002 2003 2004 2005 100% 80% 60% 40% 20% 0% AC Penetration Source: US Census Bureau; Energy Information Administration (EIA)
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; 13 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 Core Markets Expansion Criteria 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 $3 mil/branch annually Appropriate valuation
ACR Group Expanding The Addressable Market Branch Locations Revenue Per Branch ($MM) Number of Branches 60 50 40 30 20 10 0 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Revenue Per Branch ($MM) Source: Company reports, SEC filings
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 $654,000 in the year-ago period.
ACR Group Tracking Same Store Sales BRR Same Store Sales Growth (%) Industry Growth (%) 30% 20% 10% 0% -10% -20% -30% -40% -50% 25% 17% 21% 22% 9% 8% 9% 12% 9% 8% 4% 1% -5% -11% -18% -44% FY02 FY03 FY04 FY05 FY06* 1Q:07 2Q:07 Note: Fiscal Year End is Feb. 28; All industry growth data corresponds to BRR fiscal year *Excludes Georgia and Colorado business units affected by transition from Goodman brand equipment **Source: Air Conditioning and Refrigeration Institute; includes unitary AC and heat pump shipments Note: 3Q:07 BRR same-store sales growth excludes six branches open one year or less 3Q:07
ACR Group Financial Overview Income Statement ($MM) Fiscal Year-End: February Nine-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 $0.05 Y/Y % Growth 116.7% - -36.8% 72.7% 340.0% NM Margin Analysis (%) Gross Margin 25.5% 23.5% 23.7% 23.4% 22.1% 22.0% Operating Margin 5.7% 3.0% 2.5% 3.7% 2.6% 1.7% Net Margin 3.1% 1.7% 1.3% 2.1% 1.4% 0.3% Balance Sheet ($MM, Except Per Share Data) 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
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 Continue to leverage strong dealer & contractor relationships