Volume 10, Issue 3 - March 2009

trend tracker

A Glimpse into the Future
Bright Days are Ahead
by Michael Collins

When there is nothing but bad news in the present, it is natural to turn our attention to the future. Fortunately, the long-term future of the door and window industry remains as bright as it was prior to and during the housing bubble and long before the housing gold rush became the bailout rush. The National Association of Home Builders estimates that roughly 10 million more households will be formed in the next ten years than were formed in the last decade. This additional demand, combined with the decrease in construction by home builders and continuing immigration into this country, will help soak up the excess supply of homes on the market. With equilibrium re-established, homes will again become the sure and steady investments that they have been in the past.

Acquisitions Will Continue
Another trend we believe will predominate in the future is the acquisition of smaller companies by larger ones. Smaller companies often come to serve a specific niche very well, creating products that could drive additional sales if offered throughout a larger competitorís distribution channels. Also, smaller companies typically give excellent customer service and enjoy a strong network of customer relationships that would be almost impossible for a new market entrant to replicate. An additional benefit of consolidation is achieving the financial stability to weather downturns like the current one. Another key factor driving consolidation is the average age of door and window company executives. As these company owners near retirement, many will realize they have no succession plans in place. Many of these companies will be sold to a competitor.

Financing will Remain Tight
This downturn will also mark the beginning of a change in financing strategies. Periods of over-investment and excess are always followed by financial hangovers where credit is tight. Today, only the most financially sound homeowners and companies are able to borrow money freely. This more prudent extension and use of credit will continue over the next several years. In the near term, numerous companies that would have qualified for bank debt in the past will be forced to turn to minority equity sales, mezzanine debt and other strategies in order to meet their financing needs.

International Competition and Plant Expansions Slow Down
International competition has fallen out of the spotlight with the continuing slowness in the market. Companies have narrowed their focus to their own geographic market and do not seem to be making long-term plans to address competition from low-wage countries. Never fear, though, because the market will make those plans for any companies that fail to do so themselves. The fact is that in the future, the bottom 5 to 10 percent of the market that is the most commodity-oriented will be produced overseas rather than in this country. At the very least, components will be brought to the United States as kits for final fabrication and glazing, as is happening in the patio door and sunroom industries.

Over the next several years, plant expansion will be much slower than in the past. With so many facilities and so much equipment becoming available through bankruptcies, it will be some time before large numbers of manufacturers will be exuberant enough to expand using large greenfield facilities. While it is painful to see even a competitor shut down altogether and close a plant, there is a certain wisdom to the invisible hand that moves through the market deciding which companies will survive and which will not. While there will be exceptions, it will generally be the least efficient manufacturing facilities that are closed down. As a result of plant closings, the overall door and window manufacturing stock in this country will emerge stronger than ever.

The best news about the future is that operating in an industry where companies without pricing or fiscal discipline are gone, lending decisions are made prudently, innovation is a primary area of focus, excess capacity has been rationalized and companies have adjusted to their lowest-margin products being produced or sourced overseas is more profitable. And itís a lot more fun.

Michael Collins
is with Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. Mr. Collinsí opinions are solely his own and do not necessarily reflect the views of†this magazine.

DWM
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