Volume 48, Issue 1 - January/February 2009

The Perfect Storm
Investment Bank VP Gives Insight to Cause of Financial Crisis

Are you scratching your head wondering how our country got in the financial mess that it’s in? Michael Collins, vice president, building products group at investment bank Jordan, Knauff & Company, talked with Shelter to help explain this financial crisis and gave some insight on how he believes distributors and their suppliers alike can better position themselves in this “Perfect Storm.”

“People took for granted the fact that home prices have always gone up historically, and they tried to use too much leverage in borrowing to take advantage of home price appreciation in parts of the country where that appreciation was the strongest, like California and Florida,” explained Collins. “But generally, there was borrowing on the part of people who just couldn’t afford to buy homes on the idea that they would just keep going up in value and they didn’t.” Collins also said there was too much of a separation between the mortgage brokers who were initiating the mortgages, and the banks who were actually lending the money. 

“The mortgage brokers were making money and didn’t care if the mortgages ever got paid back because they got their commissions one way or the other,” Collins said. “Then, the banks just let them do it because they were packaging loans up and selling them off through investments created on Wall Street. It’s the people who bought those packaged-up mortgages that are left holding the bad debt now, and it’s raining down on everybody.”

Burning Up the Phone Lines
“It’s easy to be in any industry when the industry is hot. But any time the industry goes cold or there is a problem, some groups will be proactive and go out and try to win new business and other groups will try to ignore the problem and batten down the hatches and gut their way through it. [The latter groups] will go out of business.”

Collins says that companies that had too much debt on their books, when hitting a slow time, can be forced to close the company simply because of their inability to service the debt.

Collins said it’s the companies that have maintained reasonable amounts of debt and are super proactive about sales in this environment that have the chance to really grow their businesses when the recovery takes hold. “They have the chance to really go out and take business and take market share even if it doesn’t result in huge sales right now,” he said. “If I steal a customer from you, and that customer is only doing a quarter of the business that they used to, it won’t be a lot of revenue now. When buying from me returns to normal, though, that’s when I’ll get the pop in sales.” 

He said it’s more about building the customer base and taking market share.

“It’s that way in this industry, and it was that way when I was an investment advisor,” he said. “There were guys who had an excuse for every day of the year. There was a reason not to call people. ‘Oh, it’s summertime, everyone is on vacation. Oh, it’s tax season—boy, you can’t call them during tax season. Oh it’s the holidays.’ There’s always a reason not to call customers.” 

He explained that the companies that are going to do well are the ones that are not going to accept any excuses not to call customers and get out and try and win business. “You know, not every company I talk to is doing poorly right now,” Collins said. “Some of them are doing okay. Some of them are flat or even up a little bit from last year because they are in a certain niche and are really exploiting that niche.”

Area to Focus On
While Collins didn’t divulge any company names or tell what their niches are, he did tell what areas he believes distributors would be smart to focus on.“

The really easy one is green products,” Collins said. “That doesn’t necessarily involve going out and reinventing their supplier base to companies that are ultra green. It’s more a matter of talking to the companies to which they are currently distributing and saying, ‘Hey we want to prepare a green pitch around your products and what ways are your products green?’” Collins cautioned companies to avoid greenwashing, or claiming a product is “green” because it has one or a few minor green aspects.

Collins also said that he likes the idea of aging-in-place products, but he hasn’t done too much research in that area. “You have this huge bulk of baby boomers coming through the system and—whether it is cars or fast food or this or that—they have caused an increase in every part the market that they have participated in,” he explained.

Collins’ Mantra
Collins said that he has a mantra about the market’s current financial woes.

“We as a firm selected the window and door industry for a number of reasons that include the fact that it’s permanent. It’s not going to be competed away to China. It is a large and growing industry. It’s viable and has a lot of demographic forces behind it. From future household growth and the aging in the housing stock, there are tens of millions of homes out there that are at the right age to need upgrades to all their various building products—everything on the exterior, like windows, doors, roofing, siding. What the market is becoming right now, in my opinion, is a compressed spring because you have demand that is there, and the homeowner knows they need new windows, they need new doors, but they think, ‘We’ll replace them next year when things pick up a little bit, and we feel a little bit more confident.’” Increased availability of home equity loans will help as well.

More Consolidations
Sometimes weathering the storm can mean that companies will consolidate. 

“We are certainly still hearing from companies that are interested in being sold to a larger company,” Collins explained. “A smaller manufacturer may be interested in being sold to a larger manufacturer because it will be easier for them to weather the storm with a better balance sheet or better distribution networks behind them.” 

How Long Will the Recession Last?
Michael Collins, vice president, building products group at investment firm Jordan, Knauff & Company, says that he looks for consensus among door and window manufacturers when trying to gauge how long this economic downturn will last. “I had the occasion to survey about 100 window and door manufacturers (which will be a recorded presentation), and in the response to the question, “How long do you think this will last?” the consensus was late ’09 things will be starting to feel better, and by early 2010, there would be clear signs of recovery. I was encouraged to see that,” Collins said.

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