When the Chinese Year of the Dog came to an end on Feb. 17, 2007, some pro dealers looked at their 2006 sales figures and saw an apt comparison. Sagging lumber prices and dwindling housing starts had a negative effect on many dealers’ revenues. But overall pro sales for the industry’s top 350 players, according to HCN’s annual survey, grew by 9.0 percent, to $55.98 billion.
Although some dealers posted double-digit declines, others were able to break even or grow their business through the downturn. Of the 350 dealers on the list, 119 reported revenue increases, 77 experienced declines and 154 companies are listed with flat sales.
In terms of rankings, Pro-Build, Stock Building Supply, 84 Lumber, BMHC and ABC Supply still occupy the first five positions among lumber and building material dealers. Several of the Big Five continued making acquisitions through 2006, which helped boost their revenues. Altogether, they accounted for 35 percent of the Top 350 sales.
One of the businesses acquired was Rowley Building Products, a 10-unit chain of lumberyards in New York’s Hudson Valley. Rowley’s owners decided to join Strober, a division of Pro-Build, when they noticed national builders moving into the area. But by the time the deal was finished, in July 2006, single-family permits in the New York, New Jersey region were on track for their weakest year since 1996.
“[Strober] has been around awhile, and they understand the cyclical nature of the business,” co-owner Brian Rivenburgh told HCN at the time.
Most of the pro dealers on the Top 350 list have been through housing downturns before, the last one beginning in 1995 and lasting three years. But this downturn is different, with production builders pulling back on the reins quicker than anyone can remember.
“Literally, in early July, it was just as though somebody turned off the faucet,” said Builders FirstSource CEO Floyd Sherman, speaking to a group of analysts last October.
Builders FirstSource showed a decline of 4.2 percent in sales last year, despite expanded manufacturing capacity in Greenville, S.C.; a new lumberyard in Lake City, Fla.; and an acquisition, Freeport Lumber, in the Florida Panhandle.
Florida dealers listed on HCN’s Top 350 scorecard showed a pattern of similar results, with 14 out of 18 companies reporting sales that were flat or down for the year. But the story behind the numbers is one of robust sales in the first half of 2006 followed by steady declines in the last two quarters.
“By the end of the year, many of our dealers had [experienced] a solid year,” explained Bill Tucker, president of the Florida Building Material Association.
Of course, 2007 is another story. “It continues to fall off the roof,” Tucker said. “I’ve spoken to dealers whose sales are off by 40 to 50 percent.”
One of the bright spots on the building landscape—commercial construction—is doing well in Florida, according to Tucker. Dealers across the country are turning in similar reports. O.C. Cluss, a nine-unit pro dealer based in Uniontown, Pa., acquired an Ohio truss manufacturer last year that makes, among other products, steel trusses used in commercial construction. Other Cluss acquisitions in the past two years include a glazing operation and a wholesale plumbing supply company, both of which serve the light commercial market.
O.C. Cluss reported a 30 percent rise in sales in 2006, from $85 million to $110 million.
Even the big guys, the ones who grew more muscle during the production home cycle boom, are turning toward commercial work now that times are lean. BMHC’s construction services division is “pursuing limited commercial construction work where it makes good business sense to do so,” according to SelectBuild president and CEO Mike Mahre.
Although the first half of 2006 was a busy time for acquisitions, M&A activity tapered off toward the end of the year as the outlook grew dim. Stock Building Supply announced employee layoffs in June and November, and the other major LBM players quietly reduced their work forces. Pro dealers who had relied on tract home builders for revenue began looking at multi-family housing, the remodeling contractor, and in some cases, the consumer.
Chip Mortimer, president of Mortimer Lumber in Port Huron, Mich., served home builders from his four locations in southeastern Michigan during the boom days. But with single-family building permits in the Detroit metropolitan area down by 44 percent this year, Mortimer calls his housing market “the worst place to be right now.”
Yet business is holding steady at this $25 million chain, which has shifted its customer mix by redirecting advertising dollars and beefing up its kitchen cabinet and decking division. “We never abandoned our remodelers and our consumers, so business is still strong,” Mortimer said. “The customer count and the transactions are just different.”
Dealers also turned to multi-family housing as single-family starts dried up. Although the condo market has weakened considerably, there are still pockets of intense multi-family building activity in some urban centers. Condo and apartment projects are going up all over downtown Seattle and Bellevue, Wash., some with commercial mixed in, all fed by the job growth in those cities.
In San Jose, Calif., ORCO Construction Supply store manager Mark Tabaldi said his sales figures are running 12 percent to 15 percent higher than last year’s. He attributes the growth to commercial and multi-family construction in the Bay Area.
“Everybody is going up,” Tabaldi said, referring to high-rise residential projects like those being built next to a Bart station near ORCO’s corporate headquarters in Livermore, Calif. “There’s a lot more hardware in these kind of projects, and the order is always pretty big,” he explained. Threaded rods that go between the floors of an apartment building—commonly known as a “hold down system”—can add up to $50,000 for a large project, according to Tabaldi, who isn’t mourning the slowdown in single-family construction.
Hardware sales aren’t going to lift the LBM industry out of the doldrums, however. Higher lumber prices will help put the industry back on track, and builders breaking ground on single-family housing projects will keep it there. Unfortunately, the Chinese Zodiac offers little guidance on either scenario.
The National Association of Home Builders (NAHB) just released its mid-year housing outlook, and it wasn’t very pretty: further declines in 2007, with a “trough” or bottoming-out at the end of the fourth quarter.
“Is the ball still rolling downhill? I think it is,” said NAHB chief economist David Seiders on July 25, speaking at a NAHB teleconference.
Seiders predicted a 23 percent decline in single-family housing starts for 2007, culminating in 1.1 million units, the lowest level in 10 years. Single-family housing starts will rise next year, but only by 2 percent, according to his forecast.
“We’re looking at a fairly slow climb out of this hole,” Seiders said.
On the commodities front, lumber prices will make a leisurely ascent, according to Paul Jannke, senior vp-wood products and timber information for RISI. “It’s going to be awhile before prices go back up again,” Jannke said. “Times are going to be tough over the next couple of months.”
Given the past seven months, that’s saying something. RISI’s composite index shows that the price of framing lumber, on average, is down 18 percent in 2007, year to date. The average price of panels (plywood and OSB) through July is 15 percent lower than last year.
The combination of lumber deflation and slowed building activity continues to pack a double punch. “Some of our members’ [sales] are off by 40 to 50 percent,” said Rick Roberts, a Northern California dealer who serves as president of the Lumber Association of California and Nevada. “Plus, average commodity prices are significantly below last year’s. Even if you’re doing the same volume [of business], it’s worth less.”
California was hit especially hard by the downturn, with single-family building permits down almost 31 percent in 2006. This trend has continued through 2007, with these permits down by nearly 33 percent during the first five months. Although this obviously wasn’t good for California’s LBM dealers, it spelled really bad news for the nation’s largest production builders who, according to a Credit Suisse analysis, took 32 percent of their profits in 2005 from one state: California.
Seeing the light
Some parts of the country, like Atlanta and the Carolinas, managed to ride the building boom almost to the end of 2006. Robert Bowden, headquartered in Marietta, Ga., started preparing for a slowdown in early September based on what was happening in other parts of the country.
“The fact that we continued to have record-breaking sales months through December kept us somewhat off balance,” said company president Steve Cole. But the three-unit dealer moved ahead with its restructuring plans, which increased the number of metrics and accountability at all levels of the organization.
The ball dropped toward the end of December, when Atlanta’s production builders started canceling land deals, pulling back on housing starts and reducing their work force.
Robert Bowden finished the year with $145.4 million in sales, an 18.2 percent jump in revenues. Housing starts are “way off” this year, Cole said, so the company is now concentrating on operational efficiency, better penetration of existing customers and expanding its geography.
“We’ve created the ability to deliver outside our traditional market area into some of the mountain and lake resort areas of North Carolina, South Carolina and Georgia,” Cole explained.
Matt Magor, president of Big C Lumber in Granger, Ind., says that the downturn has been rough on some of Big C’s competitors in northern Indiana and southern Michigan, and several have contacted Magor to see if he’s interested in purchasing them. But 15 stores and one truss plant is just the right size for Big C, which sold $97 million of building materials in 2006.
“We’re concentrating on growing our sphere of influence without necessarily investing in bricks and mortar,” he said. “We can serve the market from where we are, without [acquiring] more real estate.”
Most of Big C’s customers are local builders who typically build 10 or 20 homes a year. They’ve gotten rid of their spec inventory by now, Magor said, and are proceeding cautiously with future projects. Builder and dealer alike are changing the way they do business.
“The ones who are better managed are the ones who are now seeing the light at the end of the tunnel,” Magor said.