Construction funk continues
The ongoing slump in residential construction may be spreading to the commercial building market, meaning tough times could continue for construction supplies distributors
By Brad Perriello, Associate Editor -- Industrial Distribution, 10/1/2008 2:00:00 AM EDT
The prolonged downturn in the construction industry posed great challenges for building materials distributors during 2007. As 2008 draws to a close, the slump continues to bedevil distributors large and small—and unsettling news from the commercial construction sector could make things even worse.
Early last month, the U.S. Commerce Dept. reported that spending on residential construction fell to its lowest point in more than seven years and total private construction spending dropped to its lowest level since 2004.
The bad news was made worse by a slight dip in private, non-residential spending—once a bright spot for distributors selling to commercial construction outfits—which slipped 0.7 percent in July, its first decline since a 1.2 percent drop in December 2007. But the year-to-date spend in the commercial sector rose 16 percent compared with last year.
Another positive aspect of the Commerce Dept. report was an uptick in municipal construction spending. State and local government spending rose 1.2 percent, to a record high, and federal construction spending jumped 3.9 percent for the month, also a record.
Byron Potter, president and CEO of D.W. Distribution Inc. in DeSoto, Texas, tells Industrial Distribution that the mood in the Lone Star State is optimistic despite the downturn. D.W. Distribution, which also fabricates millwork, doors and stairs, serves the Texas, Oklahoma, Arkansas, Louisiana, and New Mexico construction markets from its three Texas branches.
“Construction in Texas has sort of hit some head winds in August and now in early September. However, we just returned from our private Fall Show in Marble Falls [Texas] and I would have to say the attitude was confident and upbeat,” Potter explains. “Of course, these are our top 100 customers and many are survivors of the previous Texas 'depression' in '87 to '91. Our sales with this group are up about 15 percent year-to-date.”
On the national front, however, it's a different tale, as sales are down by the same amount, he adds.
“The national accounts are the ones that appear to be suffering the most pain,” Potter notes. “These folks were doing well serving the production builder, but of course, that business is off significantly.”
D.W. Distribution branched out into fabrication in a move its CEO says has helped it cope with the slump.
“We opened a new door pre-hanging operation a couple of years ago and that has helped us weather the storm so far. Even though our normal business is probably down 25 percent, our door unit business has been able to offset a lot of this downturn,” Potter says. “Additionally, we are also in the roofing business. Our region had a lot of spring and early summer hail storms that damaged a lot of roofs, [so] we are benefiting from the sale of roofing materials.”
And should the forecast dip in commercial construction come true, Potter adds, D.W. Distribution will be insulated from its effects.
“Commercial construction is finally slowing down in the region, compared with earlier in the year, [but] our business does not depend on this segment,” he explains.
As for the future, the company expects sales to stay flat over the short term and slowly improve thereafter.
“Our current outlook is that we will see the level of sales we are currently experiencing, probably through the winter. I would expect a slowly improving market starting in March [or] April. I don't think we'll see the sort of robust sales we've become accustomed to in our area until late 2009 or spring 2010,” Potter tells ID. “We're hoping for the best but preparing for tough sledding … keeping our receivables in shape, our inventory trim and our pencils sharp.”
For Seeta Lochan, corporate administration manager for Marjam Supply Co. of Farmingdale, N.Y., the commercial construction slide could prove to be worse news. The building materials distributor has 15 branches in New York, New Jersey, Massachusetts, Connecticut, New Hampshire, Pennsylvania, Delaware and Maryland.
“We have a mix of commercial and residential. No branch is strictly residential,” Lochan explains. “We've taken some hits in New Hampshire, [but] we're lucky regarding commercial jobs in New York and New Jersey.”
The numbers tell the story
For larger outfits like Wolseley plc, which over the summer saw its stock plummet to a seven-year low, commercial sales can't begin to stanch the bleeding from evaporating sales to the residential market. Profits for the 11 months ending in June plummeted 28 percent for the British distributor, while revenues rose a mere 1 percent during the period.
That led to mass layoffs at Wolseley, which has cut 10 percent—or 10,000 workers—from its workforce since the beginning of 2007.
Other large distributors barely kept their heads above water. Building Materials Holding Corp. reported second-quarter sales of $385 million, down 41 percent, and posted a net loss of $31.9 million.
The San Francisco-based distributor also narrowly avoided violating its lending agreements with a temporary, $60 million waiver from creditors and was forced to shutter operations in Florida, California and Arizona—three areas that have been especially hard-hit by the downturn.
It's a similar tale for BMHC competitor Huttig Building Products, which also closed down some operations after a second-quarter sales decline of 18.4 percent—to $195.4 million—led to a net loss of $2.5 million. The St. Louis-based distributor filed plans with the federal Securities and Exchange Commission indicating that it will close branches in Tennessee and California during the third quarter. During the first quarter, Huttig shuttered distribution centers in Kansas City, Mo., and Greensburg, Pa., and consolidated its headquarters.
“People always ask me, 'Is wholesale distribution doomed?' and my answer is always that the service that wholesale distribution provides today—those services will always need to be there,” CEO Jon Vrabely told the Home Channel News Web site. “The issue is: Who is going to own them?”
For Atlanta-based BlueLinx, the second quarter was a mixed bag; revenues fell 22.9 percent to $834.7 million, but the Atlanta-based distributor managed to eke out a net profit of $6.6 million. The secret? Reducing operating expenses and increasing gross margins, chairman and interim CEO Howard Cohen told analysts on a conference call.
Other distributors turned to a mixture of closures and acquisitions to cope with the slump. ProBuild Holdings Inc. shuttered three of its 13 stores in the greater New York City area, but also acquired Buck Building Centers Inc. of Racine, Wis. Since May 2007, ProBuild has acquired 10 companies, including HD Supply's lumber business late last year.
Some weren't as fortunate. Columbia, S.C.-based Boozer Lumber closed its doors, after a last-ditch attempt to survive via a 10 percent staff cut failed to offset a $4 million investment in improvements during the boom years of 2005 and 2006.
Yard Lumber & Fence Supply, a building materials distributor based in Modesto, Calif., also closed after enacting a major layoff, going from 70 workers to 20 last year.
The outlook
F. Barry Lawrence, director of the Supply Chain Systems Laboratory at Texas A&M University, says the current slump isn't likely to persist after 2009, because it's primarily driven by the legal issues surrounding the sub-prime mortgage crisis.
“There's plenty of market and plenty of capital,” Lawrence tells ID. “Organizations are nervous about investing because of the legal issues.”
Factor in the impending retirement of the “Baby Boom” generation, he adds, and the equation starts to look substantially rosier.
“The retirement of the Baby Boomers is being delayed [because of their uncertainty about the economy],” Lawrence explains. “Once they get confident about the economy, they will retire and go from being investors to net consumers. We're going to wind up with a very large consumer economy in 2011 and 2012—our challenge then will be human resources.”
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