Building Products Outlook COVID-19 Edition – Interview with Mitch Hires, CEO of Construction Resources
What were the first indications that COVID-19 was going to have an impact on CR?
In mid-February, we became aware of potential delays from a couple of our Chinese suppliers due to labor shortages, which stemmed from travel and quarantine restrictions occurring in China following the Lunar holiday. By mid-March we experienced similar delays from our Italian surfaces suppliers due to the Italian government ordered shutdown of all manufacturing businesses. These early indicators pointed to potential significant supply chain disruptions if COVID-19 continued to spread globally. From a revenue standpoint, because we operate in the Southeastern US, we did not experience revenue impact until April. Even then, the declines were gradual as we had not experienced a complete shut down as of this time.
Once you realized that the virus was not going to be contained to Asia and was likely to spread to the U.S., how did the management team proceed?
Having lived through the 2008-2009 recession, which was housing driven, we knew what we had to do. In the second week of March, our senior management team assembled and created a 3-Level financial contingency plan as well as a daily crisis management schedule. The plan included multiple cost controls focused on cash preservation. In addition, we developed and distributed COVID-19 safety protocols across the organization including temperature checks for every employee before they arrived at work every day. We operate multiple fabrication, manufacturing and distribution facilities in 5 Southeastern states and the safety of our employees and customers was our top priority.
How have you seen Covid affect your supply chain?
We have been very fortunate with our supply chain year-to-date. Both our Asian and European suppliers experienced early delays but have normalized over the past few weeks. Our most significant disruption occurred in the appliance division of our business as we have encountered significant shortages across the appliance industry, but are expecting improvement in August. Most of our domestic partners in multiple product categories have been able to meet our demand, but part of the credit goes to our sourcing team’s strategically placed orders at the beginning of the crisis.
What was the low point for sales over the last two months? What were sales last week? What does next months’ sales picture look like?
Through Q1, we were up 6% vs. prior year, which included a slowdown in the last three weeks of March. Our low point in the last two months was 20% below prior year for the month of May. This included the previously planned closure of one underperforming business unit, which contributed to the negative variance. Sales are trending positive and our Open Order volume continues to grow with last week’s incoming orders approximately 7% below Pre-Covid volume. We are forecasting a 12% negative variance to prior year for July with upside potential if the current virus spike does not prevent access to our Design Centers and Showrooms. The primary driver of this variance is our multi-family appliance apartment management business, which has been significantly impacted by Covid-19.
How have you seen Covid affect your customers/end markets?
The building industry in the Southeast has weathered the pandemic better than most other markets across the country. Within the Southeast, the Florida market softened at the end of April and beginning of May as showrooms were closed due to entire cities and counties mandating a shelter-in-place policy. In Atlanta and Georgia more generally, there was never a complete shut down, so while traffic slowed at times, it was never shut off. We also witnessed a slowing of starts in the new, single-family construction market with multiple national and large regional builders hitting pause on new speculative inventory. In the past few weeks, as new home sales improved, we have experienced an increase in starts in our markets which bodes well for our future opportunities. In addition, our multi-family segment had a full pipeline and these projects are continuing towards completion. We do expect multi-family starts to trend negative over the next two years and our appliance replacement business that services apartment buildings has been significantly impacted as building managers and tenants have been reluctant to allow outside vendors into their buildings. Once this opens back up, there should be pent up demand as the deferred replacement cycle catches up. Finally, our commercial sector remains strong with a backlog of work in healthcare, education, office, and hospitality.
How has Covid impacted demand within your different business units? Are there certain products that are selling better than others?
Surprisingly, Covid has prompted a strong resurgence in home improvement by the consumer. This pivot to remodel has led to improved order volumes and a more profitable margin profile in a number of our products including countertops, slab distribution and appliances. In addition, low existing and new home inventory, coupled with the recent increased release of single-family starts, is driving improved performance in our fireplace, garage door and glass & mirror businesses.
What is the operating status of your facilities? How much of the workforce have you brought back?
During March and April, we unfortunately furloughed and laid off 20% of our staff across multiple business units due to decreased order volume. In June, we brought back several furloughed employees but we are taking a wait and see approach on the rest of the laid off workers as re-surging Covid cases may soften demand over the coming months. Although we had to reduce staff, we were never forced to completely shut down our manufacturing and distribution facilities. We continue to monitor the COVID situation as testing delays are occurring in the Southeast and the safety of our employees remains our top priority.
Much of your business is done through showrooms. How has that been impacted by Covid?
Fortunately, Construction was deemed essential in our primary markets. During March and April, we allowed limited access to our Showrooms and Design Centers with the majority being open by appointment only. As the shelter-in-place orders were lifted and parts of the economy opened, all of our Design Centers and Showrooms returned to normal operations with strict Covid safety protocols in place. The traffic in our Design Centers and Showrooms has continued to increase over the past 60 days. This increase is a leading indicator to future projects as many selections are made 30-90 days in advance of execution and install.
What does the demand picture look like going forward and how are you modeling that? When do you think demand in your business will return to pre-Covid levels?
The current and go forward demand picture for the balance of 2020 looks positive for now. If the economy stabilizes and a resurgence of the virus is avoided, we expect a number of our business units to get back to pre-Covid levels by the end of Q3. If we experience severe Covid spikes or a strong second wave, these expectations would diminish. Currently, we have a conservative model focused on minimal growth but enhanced cost controls resulting in improved bottom line performance.
How will the business operate differently going forward?
During the current crisis, we took the opportunity to evaluate certain divisions, branches, and roles as to whether or not they were critical to the business, and if not, reduced or eliminated them to create a more flexible cost structure. We have been pleasantly surprised with our ability to effectively work remotely. I expect teleworking and video conferencing to become a larger part of our normal operations moving forward. In addition, we have elevated our safety, communication, and employee wellness policies with more focus on providing a sanitized healthy environment for our employees and customers.
What were some lessons or insights you gathered over the past few months that will stay with you going forward?
As the crisis surrounding the pandemic began, we immediately reflected on the Great Recession of 2008-2009 during which period housing was a major contributor. Throughout that time, delayed decisions resulted in poor results. As I mentioned earlier, we developed a 3-Level pandemic contingency plan during the second week of March and expected implementation over a 4-6-month period. As we witnessed the rapid changes in the market, we quickly expedited critical decisions and implemented all 3 phases in the first 4 weeks. This type of decisive strategic planning, rooted in accurate data, will improve future performance at Construction Resources. Furthermore, and as a part of this planning, improved cost controls and resource utilization enhanced our ability to right-size our business. Examples of these actions were furloughs, permanent headcount reductions, abatement of rent on closed showrooms, different commission structures, reduced T&E as well as office supplies and fees for using credit cards. Maintaining these efficiencies will lead to new future opportunities resulting in a more profitable and successful company.
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