Kelso Industries CEO on building a $1.2 billion commercial HVAC business

Roughly five years ago, Utah-based Kelso Industries was born through a single acquisition. Today, the company operates a portfolio of commercial mechanical, plumbing, and electrical businesses in over two-dozen locations across the U.S., employs 3,500 people, and generates $1.2 billion in annualized revenue. 

I sat down with CEO Steve Carroll for a candid chat about the company’s backstory, its strategy, what critics overlook about the commercial market, and more. Below is our conversation, lightly edited for clarity. 

The early days

Can you take me through the events leading up to Kelso’s genesis? 

A friend of mine had just started a pest control business and was knocking doors. I was like, ‘Dude, let me help you.’ I had some ideas — Facebook ads, Google Maps, that kind of stuff. By the third month, we had enough leads for him to manage them full-time. And I wanted to take that idea to HVAC. 

My idea was to buy an HVAC business, keep my job, and do marketing while an operator ran the business. But during the closing process on that first deal, the general manager quit, and the office manager wanted a $40,000 raise — while revenue was tanking. So I said, ‘I don’t think this is going to work.’

So what happened?

There’s too much risk on one employee. I was offering [the GM] a chance to become an owner with me, but he still quit. And that’s when I realized I needed to buy a bigger business. So I partnered with my childhood friend — we met in fourth grade at Kelso Elementary School — to launch Kelso. 

The bigger business we found (that we could afford) was commercial. Even at the time, in 2020, residential businesses were trading at too high a multiple — we just couldn’t afford it. So we started with commercial out of necessity, and we’ve stayed there ever since.  

We partnered with a PE group out of Utah — Peterson Partners — pretty early, and did another deal with Paceline Equity in 2023.

State of play

What does Kelso’s business mix look like today?

We think of it in three segments. The first is industrial, which is about a third to 40 percent of our business. That includes data centers, any kind of manufacturing, things like that. And that’s growing a lot. 

The other part is institutional, which is also about a third. That’s hospitals, schools, governments — anything where taxpayer dollars are involved. That’s a nice part of our business, but we don’t want to overindex on it. 

And the third is commercial, which is everything else that’s not residential — gyms, movie theaters, restaurants. 

We’re trying to build a full-service MEP solution. So over time, we partner with electricians, plumbers, etcetera, so clients can put one phone call in, and we take care of it for them — they don’t have to hire a bunch of companies. 

People give commercial a lot of crap, but you guys have obviously figured it out. Why is that? Is everyone missing something?

Well, to be honest, it’s a hard market because you don’t get paid as fast. So, your working capital needs are much more difficult. We have hundreds of millions of accounts receivable at any given point, and we have vendors who want to be paid fast. We have employees whom we have to pay every week. We have bonding. Those are the reasons why investors don’t want to get into our space. 

On the other hand, what I feel is great about it is that once you get to a certain size, you mitigate a lot of that risk. So a new entrant is taking on massive risk, but at a certain point, our business becomes more like the S&P 500, instead of a business where one job could take it down. 

We’ve actively managed the end markets and geographies that we serve. We never overindex in any of those areas where we could have geographic risk, project risk, customer risk, or vendor risk. For us, it’s an amazing time to be executing on this model because we’re not one company in one city. We’re one organization, but if one city has an issue with its economy, we’re in 29 others. 

So it’s hard for new entrants, but I’d say to an investor that there’s a point in this business where it’s as good or better than residential, because I can grow at a rate and take market share that a residential company would have a hard time keeping up with.

Can you elaborate on that?

I mean, a good residential company does $10 or $15 million in revenue. But that’s a small commercial business. I’m focused on buying $20 to $200 million revenue businesses, which are scary for an investor because they usually have customer concentration, bonding issues, all those things. 

But when they join Kelso, they become part of the hundreds of diversified elements of our business. So I think there’s a massive moat for people getting in. I also don’t usually compete on deals anywhere near the [residential] volume. There aren’t that many competitors, on average, that we’re dealing with.

Is there anything you’re doing, operationally, to ‘sturdy’ the business beyond just pure scale?

Focusing on service. Similar to residential, we have maintenance programs and service programs. We’re building a national call center and service offering to pair with all of our existing markets, which is driving a ton of opportunity. 

We basically took one of our service companies and said, “What if we planted something like this all over the U.S.? What would our service business be like?” And it’s working really well. 

It’s a little early, but I think it’s going to grow our mix of business, because we’ll do more owner-direct. We love our GC relationships, which are about 60 percent of the business — the other 40 percent is owners calling us directly — but we think it’d be a better mix for that to be more like 50/50 in the long run.

Looking ahead

What are some of the big forces driving commercial’s growth over the medium- to long-term?

Definitely data centers. Two years ago, we were basically doing no data centers, and now we’re doing hundreds of millions and pricing billions in just mechanical. The demand there is kind of insane. 

There are new technologies, new efficiencies. In the refrigeration space, there’s critical CO2 that we benefit from. A lot of grocery stores are upgrading their systems, and we specialize in that. It’s also pretty exciting to see everything going on with liquid-to-chip cooling.

The other thing that’s very unique is prefabrication. We have a massive pre-fab facility in South Carolina with millions of dollars of robotic equipment. There’s a ton of value in offering customers the ability to make any kind of project in an environment where there are no weather issues. We can manage our labor and scale up if we need to to build parts of a project more quickly. So modularization is a really big demand driver that we’re investing in, and I’m really excited about.

Thoughts on these companies in the public market? Will I be able to buy stock in Kelso at some point?

The public equities in our space have done insanely well in the last year and a half, two years. Comfort Systems is kind of the big brother that I want to be like someday. Every day I look, their stock is going up and to the right. That would be an amazing outcome for us. But a lot of the players in our space have done very well.

Someday, we’ll have to be a public company to realize all of the value. But it’s amazing to see how well all of our competitors are doing.