Home Improvement Outlook COVID-19 Edition – Interview with Scott White, CEO of Edsal
What were the first indications that COVID-19 was going to have an impact on Edsal?
We started to become concerned right around the Chinese New Year. We have a supply arrangement with a large manufacturer just outside Shanghai, China that produces many of our specialty parts and we noticed that they weren’t shipping products, as promised, after they returned to work post Chinese New Year. Soon thereafter, we realized that our China supplier wasn’t operating, which is when we got the notion that something significant was going on outside the public eye. Originally, we were hoping that this would be a temporary supply chain issue, so we acted quickly to think through how we would operate and leverage our U.S. manufacturing capabilities to offset a slow-down in our China supply chain. Over a two-week period in February, we ramped up our production capacity in the U.S. to offset the supply chain disruption in China and keep up with the demand requirements of our customers.
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?
We approached our thinking by dividing our go-forward plan into three categories. First and foremost, we asked ourselves, how do we protect our employees? Their health, safety and confidence with Edsal was the most important factor in our virus response planning. Next, we thought through how we could protect and maintain our customer relationships, and third, how do we protect our investors? In the beginning, we were heavily focused on communicating with and protecting our employees. We wanted to make sure they weren’t traveling to customers and vendors, and we focused on creating a safe environment for those employees working in our facilities. To that end, we put in additional daily cleaning, slowed production lines down to allow appropriate social separation and followed the CDC guidelines. Our employees recognized our commitment and remained committed to our operation.
We then wanted to get a better sense of what our customers were seeing in terms of store traffic and demand. We over-communicated with our customers during this period to understand their inventory levels and expected demand, so that we could adjust accordingly. Our expectation was that demand was going to take a significant hit as the virus spread to the U.S., and we operated under that assumption to protect the business.
Finally, we put in place the necessary steps to conserve cash and protect the business by stopping all unnecessary capital spending, improving our receivable days and extending our payable timelines. We were also incredibly tight around inventory purchases given our long supply chain. We extended rent payments on our facilities and, eventually, we put a fair number of people on furlough to manage our labor footprint and costs to match demand. We also put together a dynamic and effective 13-week cash flow forecast, which really helped us understand what risks were around the corner and the adjustments that needed to take place.
Despite forecasting a weaker demand picture, Edsal has actually held up quite well. Can you talk more about that?
Our demand story has been surprisingly good. In late March, state and local governments deemed hardware stores and their suppliers essential businesses, which allowed us to keep our retail shelving business open. This presented a communication challenge as we explained to our employees and unions that we were authorized to operate despite the state lockdown orders at most facilities, and that we needed a reliable labor force to meet demand with our largest customers.
As anticipated, our industrial/non-retail business saw a sharp falloff in demand, and we quickly acted to preserve cash by shutting down most of the business unit. Fortunately, the industrial operation is only 15% to 20% of the business.
At the same time, our retail business in the home improvement channel skyrocketed and demand for our basic steel shelving products increased by 50% or more from last year in some weeks in April, May and June. This caught us by surprise, and, at the time, we were still battling significant supply chain issues caused by the pandemic. Fortunately, Edsal is an incredibly nimble organization. In early April, we were able to shift from sourcing shelving components from Asia to making those components at our domestic manufacturing facilities and leveraging our supply and distribution footprint to get product to our customers. By the end of May, we ramped up domestic manufacturing by almost 60%, which allowed Edsal to grow sales in the retail shelving segment while working through the pandemic.
How have you seen COVID-19 affect your supply chain?
As mentioned, we experienced a supply shutdown from our Chinese partners at the start of the year. We have thought for some time now that we shouldn’t be anchored so heavily in one country or with one or two international suppliers, and the crisis brought this risk to light. Since the onset of the crisis, we have shifted portions of our component sourcing to other Asian markets or in-house domestic manufacturing to fulfill demand. Currently, we are looking at several other options in the U.S. and Mexico that will allow us to keep our costs under control, enhance our speed to market, and mitigate our supply risk, all of which have been big differentiators for us from our foreign competition.
What was the low point for sales over the last three months? What does the sales picture look like over the next few months?
In April, demand for our industrial products went to near zero as most of our industrial distributors and customers shut down operations and/or stopped ordering from us. As mentioned earlier, however, demand from our retail customers has remained high throughout the pandemic. At our low point during the crisis, Edsal’s overall sales were flat to 5% below the same period last year. By late May, however, the company’s total sales revenues were trending at 10% to 15% above 2019 driven by the surge in demand from our retail customers. We expect this trend to continue over the next few months. The company’s biggest challenge right now is not demand. It’s keeping our labor force intact, minimizing Covid-related costs and increasing our production capacity to keep up with customer orders. We know this is a high-class problem in these challenging times and we attack it every day. The company’s operations team has done an outstanding job of increasing production with a limited labor force under the social distancing and sanitation guidelines issued by the CDC.
How has Edsal been able to differentiate itself from its competition during the crisis?
Edsal operates in a competitive marketplace with Asian competitors and domestic distributors that source finished goods from Asia. When you go head-to-head with Asian competitors, you have to provide value for your customers beyond price, and Edsal is doing just that during the crisis. The three unique items that we bring to our customers are our innovation pipeline, domestic manufacturing capacity and our nationwide distribution footprint. When supplies of shelving in the home improvement channel ran low in April and May, we were able to substitute new shelving designs to keep garage storage products in stock at our customers. At the same time, we are the only steel shelving supplier that operates both an international supply chain and domestic manufacturing. So, when the Asian supply chain got backed up during the crisis and customers saw unexpected demand in the category, we had the ability to move shelving production into our U.S. facilities to fill orders. This was critical for our biggest customers and should pay future dividends for Edsal in stronger customer relationships as the marketplace adjusts to a new normal.
What is the operating status of your facilities today? How much of the workforce have you brought back?
At this point, all our facilities are operating. Demand in our industrial business units remains soft but improving, and our industrial operations in Pennsylvania, Tennessee and California are still operating on a partial schedule. Wherever possible, we are using the excess labor capacity in our industrial operations to help manage the surge in retail demand from the home improvement channel. Prior to the crisis, Edsal employed about 815 team members in our 12 facilities. Before we were established as a essential business, we were forced to furlough about 200 employees for about 10 days. We brought back most of those employees in late April and early May to service the increased demand for retail shelving. As of today, Edsal is operating with about 660 employees, and we are actively hiring new employees at one of our locations.
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?
Our demand forecast looks strong. During the lockdown period, it seems as if a lot of our end-use consumers were checking off long-avoided garage organization and cleanup project, so we’ve benefitted from that. We expect demand to remain healthy for the foreseeable future. Retailer inventory levels, in store and distribution centers, are much lower than usual and we expect to see multiple inventory replenishment orders over the course of the summer and early fall. There is a seasonal cycle to our business, and our sales are typically highest in the November through February period. We run a lot of business through Black Friday events in late November, and several of our customers run winter storage events In January and February. As a result, we will be very busy on the retail side of the business through February.
We will also be launching one of our most significant new products on Black Friday. As we’ve managed the business through the pandemic both operationally and economically, we haven’t taken our foot off the pedal on innovation and new product development, and we believe that our product line-up is in very good shape for 2021.
How will the business operate differently going forward?
As they say, Never let a good crisis go to waste, and we have not. While there is nothing good about the Covid-19 crisis, the sense of urgency around the business over the past 12 weeks convinced us to accelerate a series of operational changes that we had contemplated for some time. We focused on initiatives around consolidating the company’s industrial operations and overall manufacturing footprint, analyzing our product lines to trim down our SKU count and increasing labor productivity.
In a normal operating environment, these changes would take 6 to 12 months to fully implement. As a result of the pandemic, we are planning to complete most of these operational improvements by October of 2020. These changes will make Edsal a stronger business and will allow us to improve product quality and customer service for our customers.
I think we will realize benefit from these operational initiatives as we move into the back half of 2020 and into early 2021 from both a cost structure perspective and our ability to focus our production capabilities on our fastest moving and higher margin products.
What were some lessons or insights you gathered over the past few months that will stay with you going forward?
As basic as it sounds, communication played a pivotal role through the crisis and I can’t emphasize enough the importance of constant communication at all levels of the organization. We had calls in the morning, afternoon and evening, every day, between our sales team, who focused on understanding customer dynamics in the field, and our operations team, who flexed manufacturing and sourcing with demand, and our financing team, who focused on building and maintaining liquidity throughout the crisis. Being in sync allowed us to understand how supply was moving and where our demand was going to be in real time. Communication with our employees was vital in helping them understand the safety steps we were taking and explaining why it was safe to come into work and how we were taking care of them. Communication at all levels helped us take advantage of the breadth of experience that we have at the company and not operate in a bubble.
We plan to continue with this broader level of communication going forward.
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