2020 Building Products Outlook: Interview with Mitch Hires, CEO of Construction Resources

What are some of the broader trends you are seeing in the building products market for the Southeast?
We are seeing improvement in our outlook for single-family housing in 2020. At mid-year 2019, we expected the YoY single-family market to be slightly down in 2020, but now we believe that we will experience a modest increase in YoY single family starts.

In addition, Construction Resources (CR) is bullish on the Remodel Market through 2022 with the strongest growth for our CR Remodel Products stemming from our Florida markets. The overall multi-family market will soften, but we anticipate that CR’s multi-family market in the Southeast will remain healthy. Finally, we are forecasting continued strength in our commercial markets with a focus on the healthcare segment.

What are some of the tailwinds you see coming in the industry?
The favorable interest rate environment should continue in 2020. This, coupled with an undersupply of homes, should create positive market conditions. We anticipate continued pent up demand in entry-level housing to drive increased volume across all of our business units. At Construction Resources, our commitment to CR Design Centers with our design services model should partner well with the projections for substantial growth in the Remodel segment.

What are some of the headwinds you see coming in the industry?
The primary headwind we see today is a continued housing shortage due to lack of developed land, stringent lending requirements and continued labor shortages. In addition, we continue to incur price increases from our vendor partners which will impact builder relations as we pass these cost increases on to our builder customers.

What, in your opinion, are some of the largest impacts that tariffs have had on the industry?
The USTR 301 tariffs have been absorbed over time and are now built into the current cost structure of the affected products. In many cases, production of those products has been transitioned to domestic or non-China sourcing. The tariff cost has been passed on to the builder and end-user in the form of a more expensive home, condo, apartment, etc.

On the other hand, the Countervailing and Anti-Dumping tariffs were much more impactful and a catalyst for substantial change in many construction supply businesses across the country. CR experienced substantial disruption in its supply chain for both countertops and cabinets for our multi-family segment due to extraordinarily high punitive Anti-Dumping tariffs. In short, the tariff landscape created tremendous volatility in our supply chain for multi-family countertops and cabinets and as a result, we will be focused on meeting demand in all of our domestic facilities through increased automation and insuring a stable supply chain across all of our business units.

How have you seen your competitors navigate the current tariff environment?
Several competitors in multi-family countertops and cabinets have exited their businesses due to tariff liability. Other more financially stable competitors have adjusted and secured new supply chains, which included a ramp up in both domestic resources and manufacturing capacity. In other products, competitors have passed on tariff costs through price increases to the builder, developer, general contractor, or end user.

How has the building products industry changed over the last year?
As expected, the pivot to entry-level housing has driven a mix shift in the building products industry. There is more focus today on locating price competitive options to fit into this accelerating market. Also, we continue to see building products companies continue to consolidate in search of growth into new markets and additional product categories.

Finally, due to the tariff landscape, more internal emphasis is being spent on fully prospecting new sourcing opportunities and thoroughly vetting the supply chain.

What are you seeing as some of the faster growing product categories within building products?
Due to our multi-product offerings, CR is experiencing growth in various product categories. In our Surfaces business, large format Porcelain slabs are becoming more prevalent for vertical (showers) and horizontal countertop applications.

In Appliances, we continue to see the transition to Smart Home technology as a significant part of our appliance packages and in our Specialty Products division, we have experienced substantial growth in electronic deadbolts for single-family builder applications.

Today, we have a more educated building products consumer and as a result, growth trends by product category occur at a more rapid rate than in years past.

How do you see the economy performing in the markets where you are active?
Entering 2020, Construction Resources continues to have a positive outlook on the markets that we serve. We feel strongly that the Southeast provides favorable conditions relative to the rest of the U.S. and we continue to be excited about our latest acquisition of United Materials and its 4 locations in Florida. Atlanta, and its surrounding areas in Georgia, remain healthy and we will continue our organic growth into the neighboring North and South Carolina markets.

Company Outlook:

What are your goals for the company this year?
In 2020 we are focused on 10% plus revenue growth while maximizing earnings with a continued focus on safety. Completing the integration of the United Materials (UMI) business units will be crucial for our ongoing success as we plan to open another UMI location and continue brand consolidation across all CR geographies.

What are the biggest opportunities for 2020?
We see multiple opportunities for 2020.

• Growth and expansion of our UMI Surfaces Distribution business.
• Capitalizing on the synergistic CR product offerings through bundled cross selling to our existing customer base.
• Vertical integration of the UMI supply chain into our countertop fabrication facilities.
• Securing high margin growth opportunities in the expanding Remodel market.
• Acquisition of complimentary business units with the right fit into our CR growth plan.

What attracted you most to your recent acquisition of UMI?
What attracted me most to the UMI acquisition were the growth opportunities and the existing management team. Don DiNorcia and his team ran a great business and we are excited to have them become a part of the Construction Resources family. Also, the opportunity for geographic expansion as well the sourcing synergies for vertical integration into our existing countertop fabrication facilities were very appealing.

Do you plan to do additional add-on acquisitions? If so, what types of businesses are you looking for?
We are always searching for add-on opportunities. In 2020, our focus will be on expanding our surfaces distribution business in Florida and possible expansion into other neighboring geographies. The right fit and culture are both very important to our go-forward acquisition strategy.

Within the product portfolio, where are you seeing the most growth?
We are seeing the most growth in our natural stone and quartz slab Surfaces Distribution Division through our UMI locations as well as glass & mirror in Atlanta and our South Carolina markets. We experienced substantial growth last year within our Appliance segment in our Atlanta market and expect this trend to continue in 2020.

How are you seeing the outlook for production and custom builders in 2020?
CR experienced modest growth with its national builder base in the second half of 2019 and we expect this trend to continue in 2020. The continued pivot to entry-level homes will lead to permit growth in this category but the actual dollar opportunity with national builders will not increase at the same rate as permit activity due to smaller footprints and diminished finishes.

Where do you see sales trending in the next 12 months?
On a consolidated basis, CR expects YoY Sales to increase from 2019 to 2020. We are planning for continued growth in our Surfaces Distribution business as well as our Specialties division primarily driven by garage doors and glass & mirror. We expect the remodel market to drive increases in appliances and countertops.

What is the current pricing environment with your business?
CR reviews its pricing strategies quarterly. In 2020, we will continue to receive pressure from our national builder base to internally absorb price increases from our manufacturers and suppliers. We work closely with our vendors to obtain the best pricing in our respective product categories and are committed to providing competitive pricing to our long-term valued customers.

What have you found to be the hardest positions to hire for?
Our business is complex due to our turn-key multi-product offerings. As we focus more on consolidation, it is difficult to find senior management with global experience across a broad range of products as well as having a background working within single family, multi-family, and commercial segments. In addition, we continue to struggle locating younger talented team members with strong technical skills including CAD technicians, machine operators and installation management. Construction Resources is hiring in 2020!

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