Building Products Outlook: Interview with Mitch Hires

Industry Outlook:
What are some of the broader trends you are seeing in the building products market?
We expect the Atlanta new single-family market to be flat YoY in 2019, while seeing increases across the remodel segment through 2021. Additionally, we expect multi-family to soften through 2021 but remain healthy in our primary markets (Southeast). Our commercial market will continue to display growth primarily surrounding the healthcare segment and lastly, we are seeing single-family builders pivot to focus on entry-level housing.

What are some of the tailwinds you see coming in the industry?
As the economy remains healthy, we continue to see strong pent up demand in the entry-level home market. We expect to see a better labor situation across the building industry due to market softening which should help stabilize a portion of the wage inflation we have been forced to absorb over the last two years. A more stable labor force will lead to better adherence to builder schedules allowing supplier trades, such as Construction Resources (CR), to improve revenue forecasting and better manage cost. There is also an opportunity to leverage technology with builders. We see an opportunity to increase market share and become a vital part of the builder’s day-to-day operations through implementing sophisticated technology that keeps us aligned.

What are some of the headwinds you see coming in the industry?
The primary headwind we see today is the continued uncertainty of material cost due to pending tariffs. Due to a wave of post-tariff price increases being forced on builders, we expect to see a portion of products to potentially be value-engineered on a go-forward basis. This can result in not only reduced revenue due to the sale of lower priced products, but also you run the risk of losing business due to a supplier’s refusal to meet new price demands from the builder.

How has the building products industry changed since the last downturn?
The builder market in Atlanta and the southeast was very fragmented prior to, during, and immediately following, the last downturn. National production builders did not dominate the market. Instead, the primary builder market was comprised of smaller, privately held regional and custom builders. Since the downturn, our market has experienced an influx of national builders, as well as rapid consolidation of existing national production builders (plus acquisitions of larger regional builders by the national companies). Additionally, due to more stringent banking requirements, multiple well-known builders in the Atlanta market turned to institutional or private equity partners post downturn resulting in better-capitalized businesses.

In the same light, building products companies went through similar changes with consolidation and acquisition becoming a common theme post downturn. The result has been the formation of larger building products suppliers such as Construction Resources.

Lastly, due to the more stringent banking requirements, access to capital has become more challenging to the average builder. These new lending policies have in some cases, resulted in an undersupply of homes in the Atlanta and the southeastern market over the past two years. If the market does soften, we do not expect to see anything close to the correction we experienced from 2008-2010.

How do you see the economy performing in the markets where you are active?
We are very bullish on the markets we are active in. If you are in the Construction Supply Industry, we feel the Southeast is the place to be, and it should outperform the balance of the country over the next few years. Strong economic fundamentals, job growth, continued population increase, and affordable housing are the basis for those beliefs. If you are in the Southeast, Atlanta is the primary player. Again, we feel Atlanta will outperform most Southeastern markets excluding parts of Florida. Fortunately, we operate in multiple Florida markets as well.

Company Outlook:

What are your goals for the company this year?
We are laser focused on continuing to grow in excess of 10% on revenue as well as focus on cross selling initiatives, along with integrating the various legacy businesses. Additionally, we’d like to complete the Construction Resources Brand Consolidation and continue to develop and implement strategies which will set the stage for continued Revenue and EBITDA growth in 2020.

What are the biggest opportunities for 2019?
We see a few big opportunities for 2019:

• As mentioned, bundled product offerings through cross-selling.
• Executing and capitalizing on the existing CR multi-family cabinet and countertop sales pipeline in the new post-tariff landscape.
• Initiating plans to expand high margin product offerings in our secondary markets, which includes the Carolinas and the panhandle of Florida.
• Atlanta is the #1 market in the US for new institutional rental homes. We have opportunities with most of these builders to provide multiple products.
• Acquire complimentary businesses to expand our presence in Florida and the Carolinas

Within the product portfolio, where are you seeing the most growth?
We are seeing the most growth within Countertops in all of our markets as well as within Glass & Mirror Products. We will continue to focus on Countertop expansion in 2019 and given the steady growth in Atlanta coupled with substantial growth in secondary markets like South Carolina, our Glass & Mirror Products are poised for continued success.

How are you seeing the outlook for production and custom builders in 2019?
We expect most of the national and production builders to be flat from a permit standpoint in 2019. In addition, we continue to see a pivot to entry-level homes with a smaller footprint 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 2018 to 2019. A portion of this is due to an increase in our multi-family cabinet and countertop business. Additionally, our countertops and specialties division should see improvement due to an increase in revenue from our secondary markets as well as an increase in remodel revenue from our design centers.

What is the current pricing environment with your business?
CR remains the pricing leader in most of its product categories. We pride ourselves on value-added service and have always charged accordingly. Recently, CR has been facing pricing pressures from national production builders shifting to more entry-level homes or townhouse applications. We continue to receive requests for pricing reductions from multiple builders and remain in constant negotiations. Currently, we are trying to take advantage of the new post-tariff landscape in multi-family cabinets and countertops. Multiple competitors have left the market due to tariff liability.

What have you found to be the hardest positions to hire for?
CAD technicians, CNC machine operators, and qualified, experienced craftsmen in the countertop business as well as qualified turn-key Installation Management and Installation Personnel are always tough. If you know anyone who fits the mold, we’re hiring.